With a Biden victory now made electorally official, full attention can turn to the remaining Senate races and the road ahead. While the outcome of the seat runoff elections in Georgia will not be determined for several weeks, this much is clear: tax increases are an assumed part of every scenario. The unprecedented debt that is piling up because of pandemic relief, economic stimulus and a vote to raise the debt ceiling point to the same election-agnostic reality: higher taxes. So how should we best position clients to navigate the likeliest aspects of new tax policy?

Forecast Tax Changes
First, which taxes are the most likely to go up? Assuming the continuation of a divided legislature, an increase in corporate income taxes, a modest increase in the highest individual income tax rates, and modification to the estate and gift tax regime will be the most palatable to both parties. The burden of these increases will be largely borne by individuals who must contend with both personal and corporate taxes, the highest income earners, and people who have an estate tax exposure.

Advisors have an opportunity to counsel clients and pursue strategies that mitigate for these regulatory adjustments in the year to come. Though it may already be too late for asset valuations and trust execution, some immediate remedies exist including prefunding insurance trusts, gifting real estate, using existing trusts and forgiving outstanding notes. Each of these actions can be done unilaterally and without prior outside expert opinions.

Consider Tools And Strategies For Mitigation
In 2021 and beyond, tax strategies should place a premium on minimizing recognition events at both the corporate and individual levels. Corporations, particularly those that are comparatively small and nimble, will have several opportunities in this regard. Creating individual or small group defined benefit plans can be the first step. While pension plans may seem to be a dated concept, they can have tremendous advantages. For example, the funding levels for a defined benefit plan—potentially, more than $200,000—are significantly higher than a SEP IRA, which maxes out at $57,000. Defined benefit plans also represent an expense that the company can use to decrease its corporate tax exposure. Reducing the income recognition can thus serve as a significant tax avoidance strategy for both individuals and corporations.

Deferred compensation (DC) plans are another tool that corporations can use to limit the recognition events of certain employees. DC plans allow an employee to defer income to a later point in time when they expect to have a lower marginal income tax rate. The employee will take more of their pay home, often with additional income earned from investment of the compensation that has been deferred. Corporations can avoid unwanted income from invested deferred compensation by utilizing a life insurance policy for the investment vehicle. This will allow the employee to invest and direct the funds, while maintaining tax deferral for the corporation.

Tax strategies also exist with respect to a client’s individual portfolio. An after-tax, real return focus, like the use of private placement insurance, can drive better results and meaningful increase tax alpha. Private placement insurance creates a tax-deferred (or tax-free) ecosystem in which to invest. The client undergoes underwriting like registered insurance policies, and then selects an allocation focused on the least efficient tax positions for the tax protection of the insurance. In addition to standard insurance dedicated funds (IDFs) and variable investment trusts (VITs), clients can also utilize a separately managed account (SMA) to create a more tailored execution of an investment policy statement. By locating the less tax efficient assets in the insurance policy, one can increase the after-tax return.

As Benjamin Franklin famously quipped, taxes are one of few certainties in life. And over the next four years, we can be reasonably certain that taxes will be going up for UHNW individuals and corporations. Proactive planning and strategic conversations—even in the next final weeks of 2020—will prepare individuals for strong positioning in the years to come.

David O’Leary is senior vice president of Rockefeller Capital Management.

To read more stories , click here