Even though the economy is going through a tumultous period, advisors can take advantage of opportunities with their clients when it comes to estate planning, according to three Bank of America wealth managers.
The heads of wealth strategies, trust, estate planning, and taxes from Bank of America’s Private Bank hosted a webinar last week entitled “Tune Out the Noise: Wealth Planning for the Year Ahead,” during which they discussed estate planning during a time of economic uncertainty.
Rising interest rates, higher inflation, and volatility are the main issues on the minds of most investors, the managers explained. While they can make for a troubled economy, investors should not shy away from the markets, said Mitch Drossman, head of National Wealth Strategies at the Chief Investment Office of Merrill and Bank of America Private Bank.
“These are the major things that are running through the economy that will also likely dictate where you find opportunities for tax planning and decision making,” he said.
Rising interest rates, Katie Carlson, head of wealth strategy at Bank of America Private Bank, said, have had minimal impact on the so-called 7520 rate, which quantifies the value of a gift when implementing certain estate planning strategies. Last year, that rate was almost 2% and now it is about 4%. Despite that significant increase, the rate is still well below average, she said.
“Most of the estate planning strategies we’ve been recommending over the last decade can still make a lot of sense,” she said. “We don’t need to change course.”
There are two specific strategies that are normally not that favorable to implement, but due to rising interest rates make more sense now, Carlson said. The first is gifting a house to a trust. When rates are high, the value of the gift declines. That means a person can give more and it will cost less out of the gift tax exemption. This is a strategy many will use with a second home or vacation home to keep it in the family, Carlson said.
The second strategy is for those who are more charitable and want to establish a charitable remainder trust. It makes more sense with high interest rates because, for the strategies to be effective, a person needs to have a high enough remainder of interest going to the charity.
The grantor receives an income tax deduction, which is based on the amount that goes to charity. The IRS imposes a minimum threshold the charity receives to validate the income tax deduction. That rate is currently 10% of the initial fair market value of the amount transferred to the trust. High interest rates mean a higher 7520 rate, which makes it easier to hit that IRS minimum threshold, according to Carlson.
There are also ways to take advantage of the current inflation and tax code when providing gifts to others, Carlson said. Currently an individual can give up to $17,000 to another individual annually and a couple can give $34,000 without incurring estate taxes, she said.
There is also a lifetime exemption which is the amount a person can give away during their lifetime over and above the annual exemption. Due to inflation that amount is $13 million for an individual and $26 million for a couple, according to Carlson.
Many of the provisions implemented as part of the Tax Cuts and Jobs Act of 2017 are set to expire in 2025 unless Congress votes to extend them. If they expire, the lifetime exemption will drop to $7 million for individuals and $14 million for couples.
“If you can afford to gift today, start gifting these assets today so you don’t lose the benefit of the exemption,” Carlson said.
As for volatility, Drossman said there are ways to take advantage of that as well. If there is a drawdown in the market, there is an opportunity to harvest tax losses. If a person has an asset that goes down and has a trust, it opens the opportunity to swap that asset into a trust. Also, if an investor faces a declining IRA, they can move their assets into a Roth IRA that has less value and therefore lower taxes. They could also use it to fund another trust, Drossman said.
While there might be opportunities in the current economy, there will be clients who wish not to make any major changes to their estate plan. Instead, they may look for ways to optimize their current plan.
Advisors can still work with their clients to ensure that the plan makes sense and all their documentation is in order, the wealth managers explained. They can go over their ancillary documents such as the power of attorney, living wills, and healthcare proxy, Carlson said. If those documents are more than 10 years old, they should be updated.
That is also true for the beneficiaries in a trust. Clients should verify that those listed as beneficiaries are still the people they want in those roles. These routine evaluations ensure that the plan still meets the needs and goals of the client, said Jennifer Galvagna, head of trust, estate and tax solutions at Bank of America Private Bank, who hosted the event.
“The regular review of an estate plan can be critical,” she said. “I think we have some clients who have gone too many years without taking a look at what they’ve done [and] at that point you don’t even remember what you’ve done.”
Carlson agreed, saying that the estate plan must evolve and change as the person who designed it does.
“Drafting your estate plan is not a one and done thing,” she said. “An estate plan is something you need to continue to visit and re-visit not just when there’s potential tax changes, because there could be other changes in your life.”