Key Conversations
Top 10 Wealth Planning Ideas
for Year-end 2015
Tax policy and the need for comprehensive tax reform is shaping up to be one of the major issues of the 2016
presidential campaign. At the same time, a number of tax relief provisions for individuals and business owners
expired at the end of 2014 and may not be available this year unless Congress acts to extend these provisions or
makes them permanent as part of tax reform legislation. Affluent Americans face an uncertain and challenging tax
environment this year, and should remain flexible so as things change, revisions can be made to their tax plan.
The top marginal federal tax rate on ordinary income is now
about 44.6% when you add a 3.8% Medicare surtax on net
investment income and a phase out on itemized deductions
to the highest rate of 39.6%. For qualified dividends and longterm capital gains, the top rate is about 25% with the 3.8%
surtax and phase out of itemized deductions added to the
top rate of 20%. In addition, state income taxes can add up to
13.3% to either of those numbers, depending on the state.
The reach of the federal estate tax has been cut back
considerably. The estate tax now applies to estates greater
than $5.43 million (which is now “permanent” and adjusts
annually for inflation), and the tax rate has decreased from
55% to 40%.
Early tax planning is critical to ensure you can take advantage
of all available opportunities to reduce your tax bill. Here are
ten wealth planning ideas to consider this year based on
current legislation:
1. Navigate income, capital gains,
and Medicare surtax tax brackets
Some taxpayers may be in a position where deferring
compensation or capital gains may help keep them from
jumping into a higher tax bracket. For instance, a taxpayer
making $400,000 in taxable income who plans to sell an
asset for a $300,000 gain would see most of the gain taxed
at 23.8%. Selling the property on an installment sale or
using a charitable remainder trust to spread out the income
over several years may keep that gain taxed at only 18.8%—
nearly $15,000 of potential tax savings due to the rate alone,
not to mention the value of the tax deferral.
2. Review investment portfolio
An investment portfolio should not only be diversified to
reduce risk, but also to be tax efficient. Investors on the cusp
of higher tax brackets may want to consider rebalancing
and reallocating the investments in their portfolio to avoid
higher tax rates. This may include investing more in taxexempt bonds or growth stocks that pay fewer dividends.
Key Takeaways
The tax burden for affluent Americans
has increased significantly since the
American Taxpayer Relief Act of 2012
went into effect nearly three years ago.
Several wealth planning strategies
are available to help investors minimize
taxes and retain more of their wealth.
Early planning ensures investors
can take advantage of all
opportunities available that might
benefit their situation.
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Placing more assets in tax-deferred accounts may also
be considered. Coordinating taxable and tax-deferred
investments can also lead to better tax efficiency.
3. Take advantage of interest expense
With combined federal and state tax rates on interest and
non-qualifying dividend income exceeding 50% in many
states, it is important to structure debt in as tax-efficient
a manner as possible. Most of us know that mortgage
interest expense is deductible, but fewer people know that
interest expense on debt that is used to acquire “taxable
investments” is also deductible. Since investment interest
expense can also be deducted against the Medicare surtax,
it may be even more valuable. Also, cash accounts—interestbearing or not—can constitute a taxable investment for
purposes of these deductions.
4. IRA contributions and Roth conversions
Self-employed taxpayers may wish to consider establishing
SEP-IRA or other retirement plans, even for a side business.
All taxpayers, regardless of income, have the option of
converting their traditional IRA to a Roth IRA. Roth IRAs
do not require minimum distributions during the owner’s
lifetime and allow for tax-free income during retirement and
for beneficiaries. Unique among tax planning techniques,
Roth IRAs have an “undo” button—a 2015 conversion can
be reversed until as late as October 15, 2016 (if a return or
extension is filed on time).
5. Use appreciated securities for year-end
charitable gifting
While it has always been smart planning to use appreciated
long-term securities for charitable giving, higher tax rates
make this especially compelling. The after-tax cost of a
cash gift of $10,000 from an individual in the top bracket
is $6,040 ($10,000 less the $3,960 value of the deduction).
The after-tax cost of a gift of $10,000 worth of zero-basis
stock, on the other hand, is just $3,540. (In addition to the
value of the deduction, the donor avoids $2,500 in capital
gains tax—or more in some states.) Cash on hand can be
used to replace the gifted stock, effectively resetting the
cost basis of the position at the current fair market value.
6. Take advantage of low interest rates
While interest rates continue to inch up, they are still
extremely low. Take advantage of these favorable rates
by leveraging low cost borrowing. This is a great time to
refinance higher-rate or adjustable-rate loans and lock in
a lower rate. You can take advantage of low interest rates
with intra-family loans and installment sales to trusts. The
minimum rate for such loans varies monthly, but for most
of 2015 it has been less than one-half of 1% for short-term
loans, and has stayed between 1.46% – 1.82% for 3-9
year loans. Families of wealth can use these rates to transfer
considerable wealth free from gift, estate, and generationskipping transfer (GST) tax. Low interest rates also create
the opportunity to shift significant wealth by using estate
planning techniques, such as Grantor Retained Annuity
Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs)
that perform best in low-interest-rate environments.
7. Consider the annual exclusion, increased
lifetime gift tax exclusion, and 529 plans
The annual gift tax exclusion for non-charitable gifts is
indexed for inflation and is now $14,000 per donor per
donee in 2015. If the intended donee is a potential future
college student, consider gifting to a 529 plan, which can
offer income tax deferral, asset protection, the ability to
change beneficiaries, and the ability to “front load” five years
of annual exclusion gifts. Certain irrevocable trusts can also
better exploit large gifts. A couple with four children and 11
grandchildren might contribute $420,000 gift tax-free to a
properly structured trust. Also, taxpayers that used up their
full unified credit amount in 2012 should remember that,
due to inflation adjustments, they received an additional
$130,000 of applicable exclusion amount in 2013, $90,000
in 2014 and $90,000 in 2015. A married couple that used
up their credit in 2012 can make additional gifts of $620,000
this year along with their annual exclusion gifting!
8. Review estate plans
Now that the estate tax exclusion is “permanent,” taxpayers
should re-evaluate any tax-motivated clauses or bequests in
their will or trust. Portability may seem simpler to implement
than a traditional A/B estate plan for married couples.
However, keep in mind that the deceased spousal unused
exclusion (DSUE) amount is not indexed for inflation. It can
be lost or reduced, does not apply to generation skipping
transfer tax, and most states with a separate estate tax have
not adopted a parallel state estate tax rule. Consider adding
flexibility through clauses such as powers of appointment or
trust protector provisions to allow adaptations to future tax
changes. With interest rates still near all-time lows, consider
refinancing existing intra-family promissory notes.
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9. Benefit from basis and income tax
planning loopholes in bypass and other
irrevocable trusts
With fewer estates being subject to an estate tax, and
capital gains tax rates increasing, taxpayers should review
their trusts for ways to adapt them to optimize the step up
in basis for the next generation (sometimes referred to as
an Optimal Basis Increase Trust).
Trusts may be taxed at the 39.6%/23.8% rates for taxable
income in excess of $12,300, in addition to the 3.8% Medicare
surtax on net investment income, even when beneficiaries are
in lower tax brackets. Proper planning may be able to reduce
this tax burden. Trusts should be reviewed and trustees
should consider various strategies to avoid this issue, such
as adding provisions to enable capital gains to be taxed to
beneficiaries and allowing distributions to beneficiaries who
may be in lower tax brackets than the trust.
Depending on the state of the settlor and beneficiaries’
residence and other factors, state income tax may be
avoided for such trusts with effective planning. When
beneficiaries are in the highest bracket as well, trustees
should consider various tax-favored investing vehicles, such
as municipal bonds or life insurance.
10. Capitalize on estate planning loopholes
before future “revenue raisers” are passed
Many successful estate tax planning techniques could
be adversely affected by changes Congress and the
Obama administration are considering, such as: 1) valuation
discounts for family LLCs or partnerships; 2) Grantor Retained
Annuity Trusts (GRATs); 3) dynasty trusts; 4) “Crummey”
provisions that enable better exploitation of the annual
exclusion; and 5) irrevocable grantor trusts. The first of these,
valuation discounts, is expected to be changed by Treasury
Department regulation in the last quarter of 2015. To restrict
the remaining techniques, the Administration would likely
have to pass new legislation. Taxpayers with estates in excess
of $5.43 million ($10.86 million for a married couple) should
consider these techniques. Taxpayers living in states with
much lower thresholds for state estate taxes should consider
trust techniques to exploit state loopholes for lifetime gifting
trusts and use planning techniques that do not rely on
portability for tax savings, since the majority of states do not
yet have portability of state estate tax exemption.
Contact your Key Private Bank
Relationship Manager to discuss how
these wealth planning ideas might benefit
your particular financial situation.
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or other qualified tax advisor as to the specific legal and tax consequences of all planning concepts as they apply to the facts of your particular situation.
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