This is adapted from an article originally written by Lyle Benson for the CCH Estate Planning Review: The Journal (Vol. 49, No. 1, March 2023).
The beginning of a new year is always a great opportunity to step back and think more broadly about the planning issues you should be considering right now. Coming off a challenging year like 2022, with investment losses in almost all asset classes, inflation at record levels, a war in Ukraine, a new retirement tax law, and the upcoming sunset of tax changes just three years away, there is much to discuss.
This article evolved from a recent webinar I developed and moderated with three thought leaders from the CPA Financial Planning profession for the AICPA. I want to thank Sue Stevens, Scott Sprinkle, and Michael Goodman, the panelists, for sharing their best planning ideas on the panel and with the audience. In this article, we will look at some current strategies in income tax, estate planning, retirement planning, and investment areas.
Income Tax Planning
Planning in this area has become a multi-year process. It is critical to think about income and deductions over multiple years. Being strategic when you do tax loss harvesting (or possibly tax gain harvesting to reduce concentrated positions), Roth IRA conversions, significant charitable contributions (often using donor-advised funds), etc., is important to manage your tax brackets over time. The possibility that income tax rates will increase in the future when the current rates sunset means it might make sense to recognize income now rather than in the future when rates may be higher.
This kind of planning becomes especially important for those approaching retirement. If required minimum distributions (RMDs) are not starting for a few years after retirement, and there is a drop in income, there may be opportunities to do Roth conversions to take advantage of lower-tax rate years. In retirement, it is important to make sure you are looking at all aspects of your tax rates, including whether the Medicare surtax will come into play, possible IRMAA (Income Related Monthly Adjusted Amount) impact on Medicare premiums, etc. Unfortunately, there is no “cookie cutter” planning — every situation is different.
Don’t forget to also look at trust distribution planning since the trust tax rates are so compressed. Remember that distributions to beneficiaries must be made within the first 65 days of the year if you want to push income (or capital gains) out. Whether capital gains can be “distributed” will depend on local trust law, language in the trust, and historical patterns.
After a year like 2022 for the investment markets, it is important not to react in an unhealthy way to what is essentially a normal result of an economic cycle. Nobody knows what the short-term future looks like — whether we will enter a recession, what will happen with inflation, how the Federal Reserve will manage interest rates, etc. Most portfolios are likely still above the levels they were at the height of the pandemic in 2020, but the allocation has surely shifted over that time. This is a great time to review your asset allocation and make sure it is still aligned with your targets.
Some commentators have said that the traditional 60/40 (stock/bond) portfolio is dead, and it seemed like a diversified portfolio did not work in 2022. But now is probably a good time to have a diversified portfolio going forward. As a result of the losses in 2022, stocks are now valued more fairly, and bonds have likely already taken the hit from rising rates. The fact that you can now get real income from bonds with higher yields is an important aspect going forward.
You may question why you have international stock exposure as that asset class has underperformed U.S. markets for a decade, but the lower valuations may be a good reason to keep or even increase exposure in this area. It is important to understand what you are investing in when discussing international investments, as this asset class can be very broad.
Volatility in the investment markets and the inflation/interest rate picture has had a major impact on retirement planning. Reviewing return assumptions when performing an asset sufficiency analysis is important now as is the impact of inflation on your living expenses. Keep in mind that when we guide clients in the retirement planning area, we provide an overall sense of direction, not a detailed map that you can follow for the rest of your life.
As we work with clients, they are often surprised when they take a closer look at the details of their expenses. This is often a painful, but important process to go through. It was easy for clients to fall into certain patterns during the pandemic and we find that many people have seen value in reassessing their expense picture. Also, keep in mind that many people are “redefining” retirement as they age, so it is important to understand what your goals really are and build the planning around such goals.
The long-awaited SECURE Act 2.0 brought some changes to the retirement planning landscape. One of the most important changes included gradually extending the date for starting RMDs from age 72 to 73, beginning in 2022 and then eventually to age 75 in 2032. This could give you a longer period to take advantage of lower-income years if you don’t need distributions for cash flow. The ability to convert an unused balance in a 529 plan to a Roth IRA could also create some planning opportunities, although more details on these provisions are needed.
Another area that is often overlooked are Health Savings Accounts (HSA). These can be used to accumulate funding for current or future health care costs that are often a major concern for those who are retiring. Keep in mind there are options where you can have a broad range of investment options for an HSA.
With a federal estate tax exemption that has risen to $12,920,000 in 2023, a married couple does not incur Federal estate tax until their assets exceed twice that amount. Of course, state estate taxes could be an issue since many state exemptions are much lower. If you are over the combined exemption and can afford to move assets out of your estate without risking your own lifestyle, identifying the most appropriate assets to gift and the best techniques to use are key.
If you have $10-25 million of assets, the planning can be more difficult. While you are not subject to Federal estate tax under the current exemptions, when these sunset in 2026, the exemption will likely drop to closer to $7 million. But you also may not be able to be able to give up that much of your asset base without impacting your own financial situation. This is where strategies, such as Spousal Limited Access Trusts and intra-family loans, can make sense. Rising interest rates can also make planning more challenging and some strategies like grantor retained trusts (GRATs) no longer make sense, but others like qualified personal residence trusts (QPRTs) can make more sense.
If your estate is under the potential reduced exemption amounts, since there is likely no Federal estate tax at play, the focus shifts to making sure your estate planning matches your desire for how assets should be distributed at your death. Of course, everyone should also be making sure that the individuals named in the various roles in their planning still make sense, that all documents are current,you’re your beneficiary designations align with your planning.
It is often very helpful to create an estate planning flowchart that shows not only the legal structure of the plan, but also how the assets would flow upon your death. Often, with outdated estate planning documents, changes in values of assets, or changes in family structures, the plan may no longer accomplish your goals.
Deepening Client Relationships and Elevating Their Experience
While these aspects of our work with clients are often called “soft topics,” there is nothing soft about them! A critical element of good client relationships is our ability to connect with you around your “why” about money, and good listening skills are so critical here. We want to have transformational conversations, not transactional ones. Every client’s situation is different and unique. We need to be there to think through the tough decisions that you need to make. While our CPA background enables us to focus on “problem solving,” we strive to be more “human” and to serve as a coach for you on financial matters. Asking great questions and then “double clicking” to dig deeper where needed helps us really understand where you are in your lives.
- Lyle K Benson Jr., CPA, PFS, CFP
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.