October 28, 2020

Tax Strategies to Embrace, or Avoid, Before the November Election

In life, having an acceptable hedge is always a bonus.

Roth I.R.A. conversions can fit in here. A good hedge would be to convert some portion now and more after the election. Another strategy would be to see how the public markets respond to the election. If stocks go down, complete the Roth conversion then; the lower market value will translate into a smaller tax bill.

There are risks. Income tax rates could actually fall, and “you could end up paying a lot of taxes you don’t need to pay,” said Kim Bourne, chief executive of Playfair Planning Services.

People looking to transfer money to heirs can make a loan to a trust now and then, depending on how the election goes, keep the loan in place or forgive it. If the loan is forgiven, that amount will count toward their gift exemption, said Alison Hutchinson, managing director at Brown Brothers Harriman.

One of her clients lent money to a trust she created for her children and grandchildren this month. The trust has to pay her a small amount of interest on the loan, but if it looks like the exemption levels for gifts are going down, her client will forgive the loan. Ms. Hutchinson said that process would be as simple as writing a letter to say she forgave it.

“We’re focused on flexible and resilient structures that can withstand different outcomes,” Ms. Hutchinson said.

The ultimate flexibility for couples is to create trusts that move the money out of one spouse’s estate but maintain the other spouse’s access to it. Called spousal lifetime access trusts, they can act as a safeguard against changes to a tax strategy that could backfire.

“You’ve completed and made a full transfer into the trust,” Ms. Hovanessian said. “You have cut off personal rights, but you can have your spouse as a beneficiary. It’s your backdoor strategy to have access to the funds.”

Article source: https://www.nytimes.com/2020/09/18/your-money/election-tax-strategies.html

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