Four financial planning opportunities to take advantage of in 2020.

• Author: Westley, Robert A.
• Position: PERSONAL FINANCIAL PLANNING

High-net-worth individual taxpayers must navigate today's environment of rapidly changing tax laws, significant gift and estate tax exclusions, low interest rates, low marginal income tax rates, and volatile financial markets. Furthermore, the economic effects of the COVID-19 pandemic and the political uncertainty of the 2020 U.S. presidential election amplify the necessity for high-net-worth individuals to plan for their wealth in a thoughtful and opportune manner.

The tax-efficient accumulation, preservation, drawdown, and transfer of wealth are critical components of a sound wealth plan. Given the overlapping nature of tax laws and wealth planning, tax professionals, through tax-compliance engagements, have a unique understanding of their clients' overall financial situation and ought to be at the forefront of the personal financial planning process.

Many tax professionals who have focused on ensuring a smooth and timely tax-compliance process may have overlooked planning opportunities along the way. Tax advisers can add value to their compliance engagements by taking stock of the financial landscape and offering strategic and tactical planning advice to their clients.

This column illustrates four timely financial planning strategies that tax professionals ought to contemplate for their high-net-worth individual tax clients.

Lifetime gifting

Current transfer tax landscape

The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, doubled the federal estate, gift, and generation-skipping transfer (GST) tax exemptions to $10,000,000 (indexed for inflation) per person beginning Jan. 1, 2018. The increased basic exclusion amounts are scheduled to sunset effective Jan. 1, 2026, reverting to the prior exemption of $5,000,000 (indexed for inflation) per person. Moreover, depending upon the outcome of this year's election, the increased basic exclusion amounts could decline sooner. In either case, this could pose a use-it-or-lose-it scenario for high-net-worth individual taxpayers.

Anti-clawback regulations

On Nov. 22, 2019, the IRS, in T.D. 9884, finalized regulations confirming that the benefit of the temporarily increased gift and estate tax basic exclusion amount will not be clawed back for taxpayers who die after 2025. Therefore, if a client gifts the full $10,000,000 exclusion amount and dies after the basic exclusion amount reverts to a lower amount, the incremental gifted exclusion will not be clawed back into the client's taxable estate. As a result, individuals who currently take advantage of the increased gift and estate tax exclusion amounts will not be unfavorably affected after Dec. 31, 2025, or sooner if there is a change in legislation.

Since the benefit of the increased exclusion amount is a use-it-or-lose-it proposition, it is important to encourage clients to consider planning now.

To lock in the benefit, clients must either make taxable transfers sheltered by the TCJA's increased exclusion amount or die before the increased exclusion amount reverts. Since dying is not optimal, assist your clients in evaluating gifting strategies.

In assessing the appropriateness of making sizable lifetime gifts, first, help your clients calculate whether they can manage to irrevocably part with their assets. Leverage conversations with clients and knowledge of their tax returns to estimate the amount of financial capital needed to sustain their required lifestyles for their lifetimes and quantify the amount of excess capital they can afford to give away.

Spousal lifetime access trusts

The wealth-transfer planning paradigm varies considerably by each client's set of facts and circumstances. A spousal limited access trust (SLAT) might be an alluring option for married couples who wish to take advantage of the increased exclusion amount but also need the financial security of having a certain degree of access to the assets in the future.

A SLAT is a type of irrevocable trust created by one spouse for the benefit of the other spouse. The donor spouse uses his or her lifetime gift tax exclusion to make a gift of separate property to a trust for the benefit of his or her spouse. The donor spouse irrevocably parts with the assets transferred to the trust, while the beneficiary spouse maintains some...