The final weeks of 2021 are a golden opportunity for advisors to engage in tax and estate planning with their high-net-worth clients, but the window to make big money moves may be closing.

There are three reasons that this may be the best opportunity for tax and estate planning, said Jason Cain, senior managing director and chief wealth strategist of Massachusetts-based Boston Private.

“We can help our clients avoid taxes and use all the tools in our tool box to preserve their wealth for generations to come,” said Cain. “All three of these reasons are nothing new. Your clients aren’t really evading taxes any more than someone who is taking a standard deduction. But we should avail ourselves of all the laws and benefits created for us.”

Rising Exemptions
The lifetime gift and estate tax exemption is rising to $11.85 million next year, said Cain, but there is a lot of speculation that Congress will act to cut the exemption, and in any case, the current law will cut it by nearly half at the end of 2025.

“You now, for a short period, have significant families for whom the estate taxes are no longer an issue,” said Cain. “So if I have a family with $50 million, the total exemption is $23.5 million for a married couple and that will drop to $12 million in 2026—meaning in 2026 they would be looking at around $1.5 million in potential federal estate tax. The interesting thing is that so many people think they need to give away assets to start using that exemption now.”

There are structures, like the spousal lifetime access trust (SLAT), that can make use of the exemption now while retaining the assets.

A SLAT typically names a spouse and sometimes other family members as income beneficiaries of the trust, with the remainder going to other beneficiaries like children or grandchildren.

“Say I am married, 53 years old with 34 more years of life expectancy, and I have $11.7 million,” said Cain. “If I put that $11.7 million in a SLAT today using my lifetime exemption and it grows to $40 million over time, that $40 million is outside of my estate and also protected from creditors—and my spouse has immediate access to that trust as a discretionary beneficiary, enabling indirect access for myself.”

Using a trust in this manner locks in the exemption before it is reduced in 2026 or sooner by an act of Congress.

Declining Asset Values
“If I have [an] $11.7 million exemption and [there is] a dislocation in the market that I think is going to come back to normal levels of growth in the future, then putting in $11.7 million now before my assets normalize back to $15 million becomes an enormous advantage,” said Cain.

That means, he said, it might be a good time to consider a SLAT or a similar trust structure if markets swoon in December. But because different assets usually decline at different times and rarely in tandem, there’s almost always something worth considering for placement in a trust.

Declining asset values are particularly relevant to high-net-worth clients.

“This is a big opportunity for closely held business owners, investors in real estate and investors in hard-to-value assets,” said Cain. “In some cases, the valuation of these assets can be significantly reduced because there is no publicly [traded] market for them. So think about minority stakes in businesses and other investments where you’re not going to be transferring control. Also, if I own a closely held business and my sales are going up and I’m thinking about hiring more employees or expanding, and private equity funds are sniffing around—it’s a fantastic time to consider a trust because I can transfer the ownership stake, have it grow and mature in a trust and it would never be subject to estate taxes.”

Low Intra-Family Lending Rates
With interest rates remaining close to their historic lows, the intra-family lending rate has hovered near 1%, said Cain.

“Families can now shift opportunities down to their children or grandchildren with trusts by funding the trust with a low-interest-rate loan,” said Cain. “This would not only be estate-tax exempt, but also exempt from an income tax perspective. Fund the trust with a low-interest-rate loan, and use it as an interest-rate arbitrage opportunity. The trust can then invest in an asset that earns 7% or 10% or 15% and only has to pay 1% back to the senior generation of the family.”

The concept is no different from using a securities portfolio to secure a loan from a bank or other entity, and then investing those lent dollars to earn a return higher than the interest rate on the loan—but using an intra-family loan to fund a trust leverages the assets down to junior generations in a family.

Cain said that Boston Private has been using intra-family lending to fund trusts for 30 years.

“The opportunity remains very attractive, but it was even more attractive last summer when the intra-family rate went below 50 basis points,” he said. “Prior to that the lowest it had ever been was at 85 basis points.

“This trifecta creates a unique and distinct opportunity: We have the high exemption, valuation discounts in some passive and active investments, and very low interest rates. With proper planning, families can shift their assets to the next generation in an ongoing, continuous wealth-creation event.”