With infrastructure and spending bills still in negotiation, and the future of tax rules still up in the air, advisors and investors may feel caught in planning limbo.

They can, however, be certain of one thing, said Jody King, vice president and director of wealth planning at Boston-based Fiduciary Trust: Taxes are likely to eventually increase for almost everyone.

“Even though we don’t have that good of an idea of what will eventually happen, my theory is that we should always be proactive with respect to at least the discussion of taxes,” said King. “I want my clients to hear about this from me and not from someone else.”

While everyone waits for clarity on tax policy, advisors may find that their clients are willing to make some moves now to prepare for higher taxes, she said, and they should be ready to make changes should tax law change.

But existing tax law is reason enough to revisit clients’ plans. King noted that the generous $11.7 million lifetime gift and estate tax exemption sunsets at the end of 2025 if Congress doesn’t act before that.

“With that in mind, it’s worth having a conversation about gifting and ask the client, ‘Are you in a position to do more gifting?’” King said. “A lot of times we’re seeing clients put things in trust to go ahead and use some of their exemption now, even if the law doesn’t change. That’s a good example of being proactive.”

She said it’s also worth taking a look at a client’s capital gains budget—the amount of losses and gains they’ve already harvested throughout the year—to see if more of these can be used before 2021 is over. Clients might want to take more gains in 2021 before a potential jump in brackets or an increase in marginal rates.

Advisors and investors must also keep in mind potential changes to IRA rules, particularly Roth IRA conversions, King said. Not only has Congress considered rules to restrict and force drawdowns from so-called “mega-IRAs” (those with balances in the tens of millions of dollars), but it has also considered banning backdoor Roth IRA conversions for some or all investors.

“The general rule is that rates go up over time, so it’s a good idea to save in a Roth, but that’s not always the case,” King said. “A lot depends on the circumstances of their wealth and income picture. But depending on someone’s age, their ability to pay the taxes from non-IRA assets and considering the current income tax environment, there’s more reason to convert more assets to a Roth earlier.”

Given the changes to tax rules for inherited traditional IRAs—most beneficiaries now have to exhaust these accounts and pay income taxes on their balances within 10 years of the original owner’s death—those who expect to hold intergenerational wealth in their IRAs should also consider converting to a Roth account.

King recommended six tax-conscious planning moves for advisors to consider before year’s end.

Accelerate Income And Capital Gains For 2021
“We need to consider if pulling income into 2021 will help you avoid some of the negative consequences of having a high income level in 2022,” said King. “We know what the tax rate is now, and we know for someone retiring how their income might be changing.”

Defer Deductions And Delay Capital Losses To 2022
There are a lot of reasons to defer expenses to 2022, said King.

“If your adjusted gross income is higher next year so you end up losing a deduction, you need to take that into account,” she said. “Since the cap on the state and local tax deduction came in a year ago, we see more people itemizing. Watch out for the other tax brackets. If you have income that pushes you into the proposed 39.6% income tax bracket—and the capital gains tax is raised to 39.6% as well—that’s going to require a very different kind of planning than most advisors have had to conduct before.”

If capital gains tax rates increase, it’s worth either taking gains in 2021 or deferring losses to 2022.

Increase Charitable Giving In 2022
For clients interested in setting up several years of donations at one time, a donor-advised fund offers the opportunity to bunch these donations into a single tax year to allow clients to itemize their deductions.

But King also recommends advisors consider qualified charitable distributions (QCDs) from traditional IRAs to reduce a client’s future tax burden, and QCDs cannot be made to donor-advised funds.

“There are benefits to both,” she said. “We have to run the numbers for each client to see which is best.”

Convert To A Roth
“Like we’ve said, if you have more IRA assets than you will need to support your lifestyle, this is a good time to convert,” said King. “The traditional IRA is now the worst asset to inherit, while the Roth is the best. There just aren’t a lot of opportunities to change the worst-treated asset, tax wise, to the best.”

Create And Fund An Irrevocable Trust With Tax Exemptions
“I think this is a good use of the lifetime gift and estate tax exemption,” King said. “We’re working with a lot of people doing this actively, starting last year in anticipation of the 2020 election. It’s important to have the trust set up properly and to have the right fiduciary in place to act as trustee. Be thoughtful about the terms of the trust, because when you sign it, you might want to consider that you might not be able to change it.”

King discussed two types of trusts: a spousal lifetime access trust (SLAT), which provides income to a surviving spouse and a remainder benefit to heirs, usually children, and an irrevocable life insurance trust, which purchases a life insurance policy to create its income and remainder benefits.

Get More Life Insurance Coverage To Cover Estate Tax Increases
A change to the rules on the step-up in cost basis for inherited assets would have a ripple effect for all income levels, said King. While such a change has not been included in recent versions of congressional spending and tax plans, life insurance is a reliable method for passing assets tax-free to beneficiaries and funding a household’s expenses after the death of one or more of its members.

“For those who didn’t buy insurance in the past 10 years, they need to be thinking about the loss of the gift and estate tax exemption,” King said. “They want to think about if they want to fund a trust with that exemption and have that trust buy life insurance. Mixed-use trusts are more attractive; as the exemption goes down, they have more impact on taxes.”