YEAR-END FINANCIAL PLANNING IN AN UNCERTAIN CONTEXT

1. What are some year-end tax and estate planning options that should be considered for individuals? And how can philanthropy be an option?

Year-end estate planning is a very heated topic, primarily because of possible tax law changes that could be introduced in 2021 or in the next few years. Currently, many incentives exist for individuals. With the prospect of potential changes, we advise them to consider their personal situation, the planning already done, and explore immediate planning strategies they could implement under the current law.

Many individuals are considering whether and how they want to use their estate exemption before the end of the year. For people with taxable estates, we are in the best economic environment for estate tax reduction strategies, mainly because of historically high estate exemption of $11,580,000 per person, low interest rates and the use of valuation discounts.

In addition, the silver lining of a very challenging economy like the one we are experiencing is that many people have assets depressed in value. For purposes of estate tax reduction strategies, all these variables create a perfect environment. As far as charitable giving is concerned, it is important to point out that any sum of money given to a qualified 501(c)(3), like The Miami Foundation, is not subject to estate tax; there is a dollar-for-dollar deduction off the taxable estate. Moreover, the passage of the SECURE Act in December 2019 changed the rules for distributing assets from an inherited IRA. The new law requires non-spousal beneficiaries to withdraw all assets from an inherited IRA or 401(k) plan within 10 years (instead of over the course of their lifetime as it was previously). For those individuals that have taxable estates and large IRAs or qualified plans the combination of estate tax and income tax results in a very large portion of the assets lost to tax and very little left for the family. Consequently, those assets are ideal assets to leave to charitable giving.

Other charitable planning strategies that are very popular in this environment are Charitable Lead Trusts. For people who consistently make charitable contributions every year, this is an effective way to support charities but also a very good income tax reduction and estate planning instrument. Charitable remainder trusts are very similar and equally effective in the current environment. Both trusts work regardless of whether the asset value is reduced or appreciated. In some instances, it works best if the assets are highly appreciated since one can contribute the appreciated stock into the trust and is able to sell the stock without triggering tax.

 

2/ How have the markets been affected by COVID-19 and what effects have you observed for charitable giving?

Up until March 2020, when COVID-19 became global, we were probably on our longest “bull market”. At that point, the US and global markets all declined significantly because of the uncertainty and the unknown. However, one interesting element became visible, which was not new: the technology revolution. This revolution was accelerated by the pandemic in fields like video-conferencing and online buying. Moving into the future, technology growth will continue, and with vaccine becoming available, some of the value-oriented companies, financial, insurance companies are also starting to recover. In spite of the recovery seen globally, it has been a roller-coaster year for a lot of investors.

To encourage more charitable giving in 2020 and to help nonprofits recover from the pandemic, the CARES Act* introduced a $300 above the line deduction for qualified charitable contributions. This deduction is currently only available for 2020 contributions and could be changed by future legislation. This is definitely something people should be considering this year for charitable purposes.

Another area of tax law that might change are existing itemized deduction, including the maximum amount of charitable deductions one may take. They are currently at 28%, but if that changes in 2021, charitable deductions could be limited. I have seen clients throughout years frustrated by limits on amounts they could contribute to charity, so the more flexible it becomes, the easier it is for people to make contributions to charity. Consequently, to maximize charitable deductions, I would advise that people – especially individuals concerned about possible tax law changes – speak with their tax professionals to consider the benefits of making charitable contributions in 2020.

 

3/ Moving forward, how would you advise your clients to consider proper planning during these uncertain times?

There are always uncertain times. And when times seem certain, the uncertainty is just around the corner. Nobody could have predicted a pandemic like COVID-19. But similarly, from an investor’s perspective, nobody could have predicted the exact timing and the scale of the financial crisis of 2008 or the tech bubble of the 1990s. This is why appropriate planning is designed to contemplate the uncertainties and why people need to diversify, have investments strategies suitable to their risk profile, time horizon, needs, ages and circumstances. This applies to how they invest, spend, how they grow and manage their business. It is crucial to have a deliberate, well-thought-out plan that is made to anticipate the next time we will face these kinds of uncertain circumstances.

While I used these past examples as a reference to volatile markets and a difficult economy, nothing in my lifetime has compared to COVID-19 and 2020. Not only from an investor’s standpoint but for client’s anxiety levels, impact to small businesses and of course the well being of our clients. There are always going to be uncertain times or an event that triggers areas of the market or the market overall to drop. Prudent investors are always prepared for that as part of a proper plan.

I am passionate and care deeply about a number of charitable organizations. It has been a very difficult year for charities, and I am observing how nonprofits are being forced to innovate, which is all part of the technology revolution I mentioned. Give Miami Day in this regard was outstanding. I feel The Miami Foundation is trying to embrace the world we’re living in and to help nonprofits adapt as well. It is probably the most difficult time in modern history, and people need help. My hope is that the giving public feels compelled and understands that charities need support now more than ever.

 

Eric Zeitlin is co-founder and CEO of Provenance Wealth Advisors (PWA). He is also a Board Member of several charities he is passionate about.

 

*For more details on the CARES Act and our year-end deadlines, please click here.

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