5 Financial Planning Strategies for Year End 2020

By Mark Clure, CFP®

Periods of crises often return our focus to what truly matters: The well-being of family members and the emotional health of the family unit. There may never be a better time to reinforce family values while re-evaluating goals and planning strategies.

Consider the following 5 tactics that could help shape the future for your family:

1. Consider a family wealth planning meeting.

A BNY Mellon study found that more than half of all wealth transfers fail due to poor preparation and family issues of trust and communication. Whether meeting in-person or virtually, allow family members to feel included in the goals and plans for how the transfer will be managed. Consider developing guidelines and guardrails for decision making. Clarify roles and be a resource. Let your family know that you are available to discuss investment ideas.

2. High net worth families should contemplate making lifetime gifts now to take advantage of the increased exemption amounts before they potentially expire or are repealed.

The IRS has stated that if estate and gift tax exemption amounts are reduced, any gifts made prior to that reduction will be protected from estate and gift tax obligations. Take the opportunity to discuss this strategy with financial, tax and legal advisors.

2020 also offers a unique opportunity to make large charitable contributions which are typically limited by a percentage of adjusted gross income. Donations made this year to qualified charitable organizations are completely deductible. You win by reducing your taxable income for the year, while also helping those in need.

3. For business owners impacted by the pandemic and in need of a liquidity buffer, remember that December 31, 2020 marks the end of the opportunity to borrow up to $100,000 tax-free, penalty-free and interest-free from your IRA or 401(k), if you pay it back over three years. Use caution with this strategy and weigh the impact on your retirement savings.

4. For those with an impending sale of an appreciated property or business, evaluate the potential benefits of a Deferred Sale Trust (DST).

A fundamental element of the DST is the use of an installment sale design to defer and control the capital gain tax obligations that accompany the sale of an appreciated asset. Here’s a handy graphic that shows that can help you visualize if a DST might work for you.

As an example, I recently spoke to an individual who shared ownership of a San Francisco apartment building with two siblings. All had tired of the demands of tenant issues, repairs and maintenance. The building’s $2.4 million valuation and $300,000 basis had greatly hindered sales discussions until the discovery of the DST. Now, the sibling set is seeing eye-to-eye. The DST was the answer for them.

5. Don’t forget the backdoor Roth. Roth IRA account would seem to be out of bounds for higher-income earners due to the strict income caps on contributions. But, by taking the backdoor route, savvy investors can put themselves back on the Roth playing field.

With this strategy, you open a traditional IRA and make an after-tax contribution (up to $6,000 or $7,000 age 50 and over), and then convert the funds to a Roth IRA. Could a tax loophole really be that easy? No, it is as complicated as explaining delayed gratification to a five-year-old in a toy store – particularly if you have an existing IRA account. Do not attempt this without the blessing of a tax or financial professional.

The appeal? No tax on principal or earnings when withdrawn (if over 59 ½ and held five or more years). And, for those wanting to leave money to their heirs, no mandatory withdrawal in the heir’s lifetime. Having both traditional and Roth accounts will help with tax diversification in retirement.

This “tale of two investors” illustrates how this could potentially cut your tax bill in the future:

Clark has done an extraordinary job at saving in retirement in a traditional IRA, as has Lois. But Lois has also carefully executed backdoor Roth strategy. Both had the same income and received the same Social Security benefit of $45,000 per year in retirement. Clark supplements his Social Security income with distributions of $40,000 from his IRA. Lois pulls the same amount from her Roth. To Clark’s surprise, the $40,000 taxable distributions cause 85% of his Social Security to be taxable. By using the non-taxable Roth distributions, Lois not only saves on income tax, but saves over $6,000 per year in taxes by using her Roth for income. This strategy is Social Security tax kryptonite! If this strategy seems to make sense, talk to your advisor now. This opening may be closed in the future.

By Mark Clure, CFP®

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