While the presidential election is still several months away, the political risk of a potential “blue wave”—with both the executive and legislative branches being turned over to the Democrats — is large enough to begin looking into tax efficient strategies now. For financial advisors, ignoring the possibility of sweeping changes to the tax law is like a pilot ignoring a major storm brewing in the destination city—there’s no need to change course just yet, but it would be prudent to look into alternate airports just in case to ensure a safe landing.

The Democratic candidates for president have been largely consistent in calling for a repeal of the personal tax reduction in the Tax Cut and Jobs Act (TCJA), increasing individual and corporate taxes as well as taxing capital gains and dividends as ordinary income. Some have also called for a new wealth tax. And while changes to the estate tax under TCJA are set to expire in 2025, it would be foolish to think that a Democratic sweep wouldn’t immediately advance the sunset date or reduce today’s generous exclusions.

Implementing a major tax plan can take several months, and some financial advisors appear to have their heads in the sand about what could be coming. By August 2020, advisors should already have discussed tax options with high-net-worth clients so that, should a change in strategy be necessary, everything is ready to go.

Here are the steps that advisors and their clients can take in the next few months to ensure they have time to execute necessary changes later:
• Look into options to maximize any transfers that take advantage of tax exclusion and be ready to pull the trigger.
• Consider private placement life insurance annuities to reduce or eliminate taxation of investment income.
• For assets currently in a trust, discuss whether it makes sense to sell these assets now, at current tax levels, rather than risk higher tax rates in the near future.
• Rethink C corporations for new ventures and personal investments given the possibility of corporate tax rates going up to 35% in 2021.

Income earned within a life insurance policy is exempt from federal income tax as well as state and local taxes. For families with $10 million in assets or more, insurance-dedicated funds (IDFs) or separate managed accounts (SMAs) within a life insurance policy and annuities offer a way to maximize the tax-efficiency of investments.

For example, a registered investment advisor (RIA) managing a $25 million portfolio that could be taxed at higher rates in 2021 can use an SMA that, assuming a 10% annual yield, would allow that yield to grow tax-free inside a life insurance policy or annuity.

Where life insurance is part of the planning, advisors should begin the process and line up capacity now. The underwriting process for a new policy (including a health check and other requirements) can take three to six months. It also takes time to engage with the private placement market to look into what options are available and maximize one’s ability to get life insurance coverage in the future.

2020 is already off to a fast start. Advisors should reach out to clients and prepare them for potential changes to tax rates. It’s not about pushing any products—it’s about managing risk. These issues provide a great opportunity to connect with clients to outline different solutions and the associated timelines (working backwards from Inauguration Day in January 2021) to ensure that regardless of what happens in the election, they’ll have a safe—and smooth—landing.

Perry Lerner is co-founder and CEO of Crown Global Insurance Group LLC.