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Top 3 Reasons to Meet with Clients NOW

We are over halfway through 2018 and financial advisors are well advised to start scheduling appointments post-haste with their upper net worth and higher income clients to discuss year-end planning affected by the 2017 Tax Act rules.

Here are the Top 3 Reasons to schedule client meetings right now:

1. SALT Deduction Limits.

Tax filers are no longer allowed to deduct the state and local taxes they pay in excess of a total of $10,000 on their federal tax returns. With the standard deduction for married couples at $24,000, it won’t make sense for most taxpayers to itemize. This means that if deductible items, like charitable contributions, are not in an amount above $24,000, their below-the-line deductible expenses are capped at the standard deduction.

There’s a solution. Higher income families who already make annual charitable contributions to their favorite causes may be able to “bunch-up” charitable gifts into one year so that they can itemize and increase their deductible expenses above the $24,000 standard deduction in certain tax years.

Please see Highland Capital Brokerage’s blog article, The Skinny of SALT Under Tax Reform, July 24, 2018.

2. Charitable Gifting Strategy. 

Charitably-inclined clients who have high incomes ($200k+) and who give annually to a favorite charity have a few options to consider when it comes to assessing the value of the gift and the tax deduction:

  • “Bunching” Gifts to a DAF. A Donor-Advised Fund (DAF) is a charitable giving vehicle administered by a public charity created to manage charitable donations on behalf of organizations, families, or individuals. To participate in a DAF, a donating individual or organization opens an account in the fund and deposits cash, securities, or other financial instruments. Clients may want to consider “bunching-up” charitable gifts, as mentioned above, and also consider making a donation directly to a DAF. This way, the client can maximize the deduction (so it is above the standard deduction and can be itemized), while also continuing his charitable giving plan. By giving the “bunched” gifts to a DAF, the gift does not go to the charity(ies) all at once. Instead, the gifts can be made annually from the DAF to align with how the client made those gifts in the past.
  • Charitable Lead Trust. Charitable trusts are often used by wealthier and higher-income clients to make charitable gifts while also providing an inheritance for the family. This is referred to as a split-interest trust. In the current low interest rate environment, a Charitable Lead Trust (CLT), structured as a grantor trust, can be effective in transferring an income stream to charity for a term of years, for which the donor receives a charitable income tax deduction (based on the present value of the income stream going to charity) in the year the gift is made. Although the taxes on the income generated by the trust must be paid by the client, it may be possible in some circumstances to minimize or eliminate taxation to the grantor by managing the types of assets in which the CLT invests. The CLT remainder typically transfers directly to children, or a trust on their behalf, at the end of the trust term. Sometimes, a CLT can pour into an insurance trust to repay loan principal on an intra-family or third party premium financing arrangement.
  • Charitable Gift Through an LLC. A client can make contributions to a Limited Liability Company (LLC) that houses a business or is being used to manage a portfolio of assets or property. At some point later, the LLC can make a donation to a charity the client supports. In this way, the LLC serves as a conduit for making the charitable gifts. When the client is ready to make the gift and can use the income tax deduction, the LLC makes the donation and passes through the deduction. The client retains control over the LLC assets and avoids the investment restrictions associated with charitable trusts. Note that the charitable income tax deduction can only be taken when the LLC actually makes the gift to charity, not when the contributions to the LLC are made by the client.
  • Charitable Gifts of Partnership Interests. Wealthy clients can make charitable gifts of Family Limited Partnership (FLP) or LLC interests to a Charitable Lead Trust (CLT). In so doing, the client continues to control the assets of the FLP/LLC while getting a charitable income tax deduction. At the same time, the client is pooling and thus diversifying the assets in the CLT to make it more tax efficient when making the income payments to charity. By diversifying the CLT assets in this way, the trustee of the CLT can minimize liquidating assets and incurring income taxes in the process of creating income for the charity. Since the CLT remainder benefits non-charitable beneficiaries, typically the children of the donor, it benefits the donor to pool assets and preserve the principal value of the FLP and CLT assets.

3. Temporary Estate Tax Exemption.

Under the new tax act, the estate and gift tax exemption amounts shelter wealthy people from incurring gift or estate taxes—but only temporarily. That is, $11.18M ($22.3M per couple) of assets can be sheltered from estate taxes at death, or from gift taxes if the gifts are given away during lifetime. However, in 2026 this exemption amount falls back to approximately $5.6M per individual ($11.2M per married couple), annually indexed for inflation.

In 2026 more clients will be subject to estate and gift tax. This means there is an opportunity to use the increase in the exemption now –-approximately $5.6M per individual and $11.2M per couple more– before it goes away. In other words, use it or lose it.

Your clients who already have financing arrangements to fund their life insurance premiums, for example, may want to consider, where appropriate, exiting the arrangements by forgiving the loans. The forgiveness of a loan is a gift, and therefore, the lifetime gift tax exemption can shelter an additional $5.6M ($11.2M per couple) from gift tax before it expires in 2026.

For ultra-high net worth clients (net worths of $50M+) who need planning and who are not ready to give away assets because of the uncertainty with tax law, entering into a financing arrangement now to fund a liquidity need with life insurance will give them flexibility to get the planning done without giving away the asset. As 2026 approaches, or other legislation is passed, a decision can be made on whether or not to forgive the note, have the note repaid, or refinance the note. In this way, the clients can maximize the use of the temporary exemption amount.

For clients (net worth $25M+) who have additional liquidity needs, now is the time to consider using the additional exemption amount to fund premiums on a life insurance policy that can be converted from term insurance to permanent, or for purchasing the additional coverage that they may require.


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Lina Storm, CLU®, ChFC®, MBA

Lina Storm, CLU®, ChFC®, MBA

Vice President, Field Marketing at Highland Capital Brokerage
Lina Storm serves as Vice President, Field Marketing for Highland Capital Brokerage. She has an extensive background in marketing insurance and advanced planning strategies having spent most of her career leading the marketing for John Hancock’s notable Advanced Markets Group. She has been an industry thought leader, industry columnist, advisor’s coach, trainer, speaker, and brand strategist—helping advisors position their expertise, add value, and drive sales. Lina is a CLU®, ChFC® and received her B.A. from Trinity College in CT and an M.B.A. from Rensselaer Polytechnic Institute in New York.
Lina Storm, CLU®, ChFC®, MBA

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