4. Capital Gains Bunching: Like bunching for charitable giving, this involves strategically selling assets so that total net gain realized is close to but below a $1 million tax threshold. By doing this, a client would not trigger a higher 39.6% tax rate. This strategy could be facilitated year-over-year to minimize taxes.
5. Hold assets longer: The tax code is constantly evolving. Those who do not intend to realize any significant gains in the coming years could wait to see what happens under a future administration. Just as the current administration desires to implement these tax changes and unwind the TCJA, we could see the same happen for the American Families Plan under a future administration. Of course, this is a big unknown, but deferring the realization of gains may be at least a partial strategy worth considering if it works out for a client's situation.
Changes To The Step-Up And Realization Of Capital Gains At Death
If the step-up is eliminated, gifting assets during life becomes much more appealing because it removes future growth from a client’s estate. The best options are those that create flexibility and liquidity, which include the following:
• Grantor trusts allowing for post-execution planning—such as swapping assets, borrowing, and loaning.
• Irrevocable trusts that create flexibility for gifting to a charity
• Spousal lifetime access trusts allowing spouses to irrevocably gift assets to each other, which uses the temporarily high gift tax exemption amounts today while also giving each spouse indirect access to the assets through their spouse.
• Life insurance held in an irrevocable trust creates liquidity for paying taxes and is income tax-free at death, while also remaining outside an estate for tax purposes.
• Gifting low-basis assets to charity or within a charitable remainder trust (CRT) allowing for removal from the estate and creating a tax deduction (can be used to diversify from concentrated positions). The CRT also creates an income stream for life or up to 20-years.
• Valuation discounts that leverage gifting above the estate tax exemption amount.
While none of the above strategies is a silver bullet by itself, using them in some combination could result in benefits for clients. Ultimately, none of the proposals are law and any that become law will undoubtably look different in their final form. As a result, no strategy should be implemented without significant discussion and planning. However, planning ahead will be critical because all of the above strategies take time to design and implement. As noted, we could see these proposed tax law changes implemented in an end-of-year budget plan, which would leave little time to implement strategies from scratch.
Jeremiah Barlow, J.D., is head of family wealth services for Mercer Advisors.