By: Emily Nolan | August 17, 2021

With all the uncertainty surrounding Biden’s tax policies, we want to be proactive on what could be, yet another, big year for taxes. We know you are hearing the news regarding Biden’s tax proposals and, for some of you, the changes could be significant. We want to assure you that TLG is monitoring all developments and will inform you as needed. Recently, we had the honor of talking with a tax policy lobbyist who is very active on The Hill. He believes that changes will not be as significant as proposed. Infrastructure is the main focus of Congress, and this will, most likely, mean increased tax rates. However, some of the more extreme items that are not instant revenue generators and could result in a loss of votes for moderates – elimination of step-up in basis, significantly decreased estate exemption, elimination of 1031 exchanges, etc. – may not make it further than the idea stage. He does not expect retroactive tax changes to occur, and most of the bills will not be finalized until the Fall meaning even more proposals could drop off. The longer the passage of these bills takes, the fewer things will stick.
This conversation eased a lot of our concerns; however, it is always advisable to plan and ensure your income and estate affairs are in order. Below are some strategies for you to consider.
Life Insurance – Not a Four-Letter Word

It might be time to shift your perspective on life insurance policies. While they have been seen as expensive products that are often sold unnecessarily, when used correctly, they can be a powerful income and estate tax tool. Depending on your age, wealth, and goals, some products to consider are private placement life insurance, premium financing, life insurance as a Roth alternative, and good old universal life. Some benefits include the ability to:

– Invest your policy in alternative investments to strengthen returns

– Withdraw your premiums first so that they come out as a tax-free return of basis (FIFO)

– Borrow from the policy and then repay the loan with your death benefit

– Tax-free growth

– Estate tax-free if set up appropriately

– Benefit from a rate arbitrage by borrowing at a lower rate to pay premiums

With potential tax rate increases and possible estate exemption decreases, life insurance is a product that should be considered. While we know the basics of these policies, we can recommend advisors who specialize in tailoring life insurance products to fit your needs.

Many of you have already set up trusts, but there are some trusts that you may want to consider adding to your estate plan. If you currently have a term life insurance policy, it may be worth putting the policy into an Irrevocable Life Insurance Trust (ILIT) and using your estate exemption while it is still high ($11.7M for 2021 per taxpayer). It also keeps the term policy out of your estate when payable. Crummey Trusts are also an inexpensive strategy to chip away at your annual gift exemption for beneficiaries by utilizing the annual gift exclusion ($15K per taxpayer in 2021). Many married clients have established Spousal Lifetime Access Trusts (SLAT).  SLATs are a way to utilize the higher estate exemption by gifting to your spouse. Not only will the spouse have lifetime access to the assets, but post-gift appreciation will be excluded from the estate of both spouses. There are several other trust structures that are more aggressive for both exemption and/or income tax planning. We recommend that you discuss these strategies, and your overall estate plan, with your attorney.
Charitable Giving

Appreciated Assets: If you are sitting on appreciated securities, there are a couple of options that could save you tax dollars. First, you could donate the appreciated stock to charity. You can donate to an organization directly or into a donor advised fund for distribution to a charity at a later date. Donating long-term stock to charity gives you a deduction at the fair market value without recognizing the capital gain. Another option is to pay your SC taxes by contributing stock to the SC Exceptional Needs Program. The law recently changed to allow an offset of 75% of your tax liability a five-year carry forward of any unused credit. So far, only $750k of $11.25M has been funded, and there are 2,000 students relying on the scholarships.

Conservation Easements: If you own land or historic structures that you would like to conserve, now may be a great time to consider a conservation easement as real estate values are at an all-time high. Conservation easements restrict the use of the land/structure, but in exchange you receive a Federal deduction up to the fair market value of the easement and a potential SC tax credit. You will need to work with a land trust or government agency as well as obtain an appraisal of the property.

Donor Advised Funds or Family Foundations: As mentioned above, donor advised funds (DAFs) are great vehicles to contribute cash or stock for an immediate charitable contribution deduction, but the funds can be disbursed to charitable organizations at a later date. They are easy to set up and do not require any additional filings. Family foundations are another option for charitable giving, but they do require more recordkeeping and an additional tax filing. If you have significant amounts of appreciated stock or are unsure of which charities to make contributions, these options are worth considering. If you do consider these options, keep a watch on The Accelerating Charitable Efforts Act which was recently introduced to Congress.  This Act could more heavily regulate DAFs and private foundations. This bill calls for faster disbursements of funds from DAFs and proposed changes to the minimum payout requirements.
Miscellaneous Ideas

There is a possibility that capital tax rates will increase in 2022 (currently suggested for those with taxable income over $1M), so 2021 may be the year to recognize income and pay tax. If you do have appreciated stock or concentrated positions, you and your advisor may consider selling, recognizing gains at low rates, and either diversifying your portfolio or re-purchasing the stock to achieve a step-up in basis in the event those provisions change.

Another income recognition event to consider is converting a portion, or all, of your traditional IRA to a Roth. The amount converted will be taxed at ordinary rates, but any future distributions from the Roth would be tax free in potentially higher tax rate years.

If you have already experienced a capital gain event and are within the 180-day window, you can defer your gain using an opportunity zone. 2021 is the last year where you can remove 10% of the gain, and any remaining gain will be taxed in 2026 at the rates applicable in that year. If the opportunity zone investment is held for 10 years, any appreciation will be tax-free.

If you are selling rental or investment real estate with significant capital gains and are interested in acquiring other real estate, consider a 1031 exchange to defer the capital gains.

Consider SC tax credits. Contributions to the SCRA Industry Fund provide a 100% credit against SC taxes up to $250k. This credit is applied after all other credits and can be carried forward for 10 years. As mentioned above, contributions to the SC Exceptional Needs program are a way to pay your taxes while helping children in this state receive the education they need for success.  Other state credits include Angel Investor Credit for investing in SC start-up companies, Solar Energy Credit for the installation of solar panels and other alternative energy property (set to expire 1.1.22), and the Retrofit Credit for retrofitting your legal residence to make it more resistant to storm damage. You can also purchase SC credits at a discount from a broker with whom we can make an introduction.

If your business is a Partnership or S-Corp in South Carolina, consider paying state taxes at the entity level. We don’t foresee the $10K SALT cap being repealed anytime soon, so this workaround allows the entity to subject itself to tax and deduct it fully on the entity return. This election gives shareholders the benefit of the tax deduction and excludes the income from taxation at the individual level. For more information, please refer to the blast we sent out on June 4, 2021.
The year is flying by and there is not a lot of time to implement these strategies. We recommend consulting with your advisors as soon as possible as we are anticipating a very busy year-end. Most attorneys have an internal cut-off of October 31 to ensure all plans can be executed by year end. Following suit, we are also implementing a cut-off of October 31 for tax planning. If you will need year-end planning assistance, please email, and we will add you to our year-end planning list. Due to extremely high volume, we cannot take on any additional planning if we do not hear back from you by our deadline.

Stay tuned for our year-end update, and as tax reform unfolds, we will keep you posted.
Enjoy these last few weeks of summer!
Your TLG Team