Tax Law Update and Year-End Tax Planning 2021 for Business Owners

hi thank you for joining us today um we wanted to take a minute and put together an update and a end of year tax considerations for our business owning clients now this is uh as you are probably aware a really unique year for this kind of planning typically year-end tax advice is not all that difficult to give you're relying on some of the things that are standard in any given year and we will certainly talk about some of that stuff but it's a unique year and that there have been there has been so much turmoil politically about what the next tax year is going to look like so we're going to talk a little bit about that things are changing all the time they changed today they will change tomorrow but i think uh despite the fact that i have made this claim in the past i think now we have some clarity about what the direction of uh 2022 what we expect those tax laws to look like and surprisingly they're probably going to be relatively similar to this year so we'll talk a little bit about that we'll talk about what we thought was going to happen we'll talk about what we see now and then we'll get into the issues that again our business owning clients should be thinking about it here at so let's get started for the update um i'm going to go over a couple of things first again some of the proposed changes that we thought were coming for a very long time once democrats were in control of congress in the white house we thought they'd be able to pass their agenda essentially but there has been some dramatic evolution in the way that party has tried to put some of these things in place and so we end up with some changes that we really uh changes that we didn't expect and then a few things that we didn't really see coming so what we thought we were going to get and if you've seen anything i've put out in the past i certainly thought we were going to get a higher income tax rate i thought we were going back to the obama era administration i thought we would see an increased capital gains rate um one of the things you probably know is that the biden administration had created this full frontal assault on capital gains rates saying it was a tax uh tax rate for the rich um so we expect there were a number of proposals to increase that capital gains rate those are gone uh we expected that those very very high state tax exemptions that we have now again almost 12 million dollars per person we thought those were coming down to about six they're already scheduled to come down in 2026 so we thought we were going to lose them next year other things we were concerned about thought we might lose light kind exchanges thought we might lose 1031 exchanges that's the idea for our commercial real estate investors that if you sell a piece of commercial real estate as long as you reinvest those proceeds in another piece of real estate then you don't pay any capital gains we thought that a lot of the um a lot of the wealth planning techniques that we have in place that help those who uh those clients of ours who own closely held but valuable businesses real estate investments trying to ensure that while the value of those continues to grow their estate tax liability does not continue to go up or right with those values thought we were going to lose a lot of those strategies and then ultimately we thought we would lose a basis step up that occurs at death the biden administration very clearly positioned that as the biggest loophole in the entire tax code that's the concept that if um if our client inherits a 10 million dollar piece of property if she inherited it from her mother who only paid a million dollars well our client's basis in that real estate is 10 million dollars it's the value of the real estate at the time of her mother's death and that means that that nine million dollars of capital gains does not get uh there's no capital gains tax on that so that is positioned by the body administration as a loophole certainly it is it's tremendous tax savings for a lot of families now as i always say as an aside if you paid an estate tax to get that base to step up that seems more fair but right now there's such a dramatic diversion between basis step up considerations in the estate tax that that the two really don't um meet any longer so what what ended up happening is we got none of that so let me talk a little bit at least in what we've seen out of the house and what we expect to see from the senate and we when we believe we've gotten buy-in from the white house on this none of those changes that we were almost certain would be they were there here's what we have from an individual level first um the only increase in taxes that hits sort of the that hits an individual is a three percent surtax on income above 10 million dollars and an 8 surtax on income above 25 million now that is positioned of course as a as an additional tax on those who make more than 10 million dollars more than 25 million dollars a year and that's certainly true um but we all recognize that to make more than 10 million dollars a year on a regular basis that's pretty rarefied air not many americans are in that category but there are a lot of americans who will have a capital gain event that may be in excess of 10 million we have lots of clients who might choose to sell that closely held business that they work so hard to build might choose to liquidate some of the real estate investments that they've got they could absolutely see income that's in excess of 10 million dollars and for those this surtax is essentially just an increase in the capital gains rate it's not positioned that way by any of the people by the proponents of this bill it's positioned again as as though it only hits those who have this gigantic income level regularly but to be clear it affects anyone who has that amount of income in any given year which as i said means that to the extent it has real impact on most americans it will be because not most americans but the vast majority of the impact will be on taxpayers who have one liquidation event that gets them into that level of surtax and then again as i said essentially increases their capital gains rate another change that is actually attacks decrease and there is there's a lot of sort of consternation around this because the democratic proposal that concept was we are not going to increase taxes on anyone who makes more than four hundred thousand dollars anyone makes less than four hundred thousand dollars you know the wealthy need to pay their share well they've actually proposed an increase in that salt deduction we all probably know that we're capped now at ten thousand dollars of state and local tax deduction that would be increased all the way up to eighty thousand dollars now that's not the unlimited salt deduction that we had in the past but it's a pretty big increase and it will probably catch the vast majority of the people who are taking advantage of salt deductions in the first place so this is really going to hit those high income tax owners you're going to provide a savings there i want i won't get into how the way that they're pushing out the impact of this bill so that it's revenue neutral but essentially it is a tax cut and there's going to be a little bit of flack around that but we we think we're actually going to see that salt deduction uh maintained at least at some level there is some pushback from certain senators uh probably more to come on that the interesting thing is that the only consistency that we have seen and we have seen a number of proposals we've seen legislative language on a number of occasions the only consistency that we have seen is surprise is the uh that the revelatory way that we see these new proposals and recognize that it's nothing like what we had anticipated okay for business owners there are a couple of changes that could actually have some impact and it may be on a number of our clients who are in certain situations so uh the first is this 3.8 net investment income tax change for our clients who own s corporations this is a little bit unique but there are a couple of different kinds of taxes that that you all know and become very confusing and hit our clients at different levels and one of those is a medicare tax there is a 3.8 medicare tax after a certain amount of earned income after that you continue to pay that 3.8 medicare tax on all of your

income that's true for a pass-through entity like an llc all of the income that comes through will pay that 3.8 income tax as part of the uh during the obama era when we were when we creating the you know obama attacks the ach i'm sorry the obamacare process the ach there was an addition of another 3.8 on net investment income so those who earned income were already paying the 3.8 percent and now those who have investment income also are blessed by paying that 3.8 tax s corporations fell into a little bit of a crevice there because an s corporation is a pass-through so you can imagine that i own an s corporation maybe it makes a million dollars a year well if that million dollars inside of the s corporation is there i can choose to take that out in a couple of ways one i can pay myself a salary and two i can make a distribution to myself i can make a tax i make a dividend out to myself as the owner so if there's a million dollars in there maybe i choose to pay myself a salary of a hundred thousand dollars and then i make a distribution of nine hundred thousand dollars well the salary i paid myself the 100 000 that's subject to all other employment taxes including the medicare tax the distribution however is not just investment income it's not just capital gains or dividends from some passive investment that i'm not part of i'm actively involved in this s corporation so that nine hundred thousand dollars is not subject to the net investment income tax currently and it's also not subject to that medicare tax so there is this this crevice in tax law that allows those exclusively with s corporations it doesn't work for partnerships and llcs and of course it doesn't work for earned income that we could avoid that uh level of tax and so within s corporation planning there has been a lot of work around taking a small salary large distributions because of all the employment tax planning that can be done well it appears that as it's definitely proposed and it looks likely to pass that they are going to essentially pave over that crevice close that you know what they perceive as a loophole and put s-corporation owners in that same position as other partners partners or llc owners uh it's more conversation later about whether or not that's going to impact the way we think about business structures but but that could happen uh another major change that could impact some of our clients who own businesses is the qualified small business stock exemption i know what the biden administration proposes as you know the biggest loopholes in the code i would tell you that this to my knowledge is the largest exemption in the code i mean you wouldn't call it a loophole it's right there it's written in the code but it is the greater of 10 million or 10 times your basis in a company i won't go through and you have to be a founder of the company i won't go through all of the requirements to qualify for qsbs the 1202 stock but i will say that right now that 10 million dollars that you might be able to receive upon the sale of that stock if you qualify that 10 million is entirely tax free there is a change in the new law that would bring that down from 100 exemption to a 50 exemption still a tremendous savings and by the way back to where it was when the concept was initially added to the code the ratcheting up from 50 to 75 to 100 exemptions that happened in years past so now we're looking to bring that back down the other thing that they're looking to do as part of that change is some some individuals who have that company and qualified for small business stock want to take their own 10 million dollar exemption and they might transfer some of those shares into trusts for family members or others and those trusts each get their own 10 million dollar exemption if done appropriately that there is an an effort in this law to eliminate that qsbs exemption as well and the ability to multiply these trusts same um same rules that we are now sort of used to regarding active pass-through losses you know there were times when we could take active nl's back that's no longer the case uh we can use them of course in the year and then to the extent we can't we move them forward and we can use them uh up to 80 of next year's income assuming we don't have any other deductions at the same time so that looks like it's going to continue to be in place and the only other thing i would want to point out and it's not in this federal build but it is an important piece and is this ab150 within california california has joined you know uh i think by i think now there are 15 or more states who have essentially enacted a law that allows pass-through entities to deduct their state and local taxes remember when we're stuck at 10 000 of deduction for state and local taxes we really uh some of our business owning clients really got impacted by that so this the ftb enacted a law or the legislature enacted a law that allows for essentially the pass-through entity to take advantage of the deduction by by reducing the amount of taxable income that gets k1 down we have a whole video on that on the website so i won't get into any more detail something interesting though is that this ab-150 from california has a self-destruct mechanism in it it says hey if the if that ten thousand dollar cap is eliminated then this law goes away because there's no need for it anymore if we're able to take the federal deduction individually we don't need this sort of gainsmanship around the pass-through institute well that poison pill that that self-destruct mechanism doesn't say anything about what happens if that cap goes from ten thousand dollars all the way up to eighty thousand dollars that's an interesting circumstance we could get a large exemption for individuals plus this ab-150 that allows us to an unlimited salt deduction inside of pass-through entities so a lot to be looking at there and those are some of the things we're going to need to be thinking about going forward the good news about any of this is doesn't impact what you need to be doing right now at year end for the most part uh but it but those are changes that we should just be aware of okay so let's get into the changes or the things that we should be thinking about towards your end again none of this is magic a lot of it is the same kind of stuff we see but it can be it but it is important this year just as it is in other years even though there is this lack of clarity around what next year's laws may look like okay first and foremost i'll get to the uh contributions in a second first for business owners if you're in a cash method accounting if you can defer invoices if you can defer income right it's not taxable and this year it can be taxable in the next year now i recognize as uh so many of our business owners will say look if i can get the revenue i need to get it if i can if i can get a client to pay i need to invoice and get them to pay especially with the amount of time that many of our clients take between the invoice and actual payment so i understand that but to the extent it's reliable and you can push those invoices out or at least the recipient the receipt of those payments out then we can push that tax into a different year i should come back to a point uh that i forgot to make initially which is because we don't see the income taxes going up necessarily assuming we're not in a 10 million dollar range then we are kind of looking at well we we're back to our our sort of standard tax totem which is defer gains and accelerate deductions that is just sort of general rule now we thought there might be an exception that because if the income tax rates are going to increase next year then maybe we want to incur these taxes this year it doesn't look like that so we're kind of back to our standard push income out accelerate deductions they said you can my caveat is i didn't think we'd be here i was entirely surprised by what i saw earlier in the year which means i could be entirely shocked by what comes in december though i've been wrong on this on on multiple occasions i would find it very difficult to imagine they would increase tax rates just watching the political machinations that got us to where we are today that got us to the build better build better back act which if that is a mouthful that we have today um the way that that has been pared down it's really hard for me to imagine in this political environment they're going to re-expand that when they're just trying to get essentially at this point senators to sign off senators who are objecting to larger tax increases but it's always possible so take what i say uh with that grain of salt same thing as far as reducing income or or deferring income if you have capital gains assets with gain that you're going to sell maybe we wait don't sell them in december sell them in january so we get that extra year again deferring gains in the same when we're going to be at the same rate is always advantageous just from a time value of money perspective so as long as we don't think those rates are going up that's the advantage let's push out those gains the other thing of course you can do to reduce the tax burden is accelerate deductions as i said so if we have less taxable income we have less tax and maximizing contributions to qualified plans is one way to do that we're going to talk about that in a in a slide coming up but of course the concept is you get a deduction for any contributions you make to those qualified plans so make those contributions let the let the plans grow uh tax free and again we'll get into that in just a little bit if you have investments that have that have uh come down in value that are less than the basis that you paid for them and you want to sell them anyway tax lost harvesting think about selling those we'll talk a little bit about that in a minute as well take advantage of the extent possible that we can use some capital gains against ordinary income um incur deductible business expenses if you've got things if you've got expenses you know are going to hit in january february if you take those in december great if you can put equipment into service now get the 179 deduction at 100 deduction in the year and you have the income to use it then think about that as well and then finally get deductions get those charitable deductions if this is a big income tax year let's create uh some some strategies that will allow us to set money aside for charities but do it in this year and get the deduction this year even though we don't have to give that money away uh until the future and that's those are donor advice funds we'll talk more about that in a minute as well things that are specific what we've been talking about so far is in many ways apply to a lot of income taxpayers but specific to businesses remember those nols remember the limitations we have on them they have to carry forward so do the math work with your tax advisor that should go uh that should be sort of an unsaid statement throughout this presentation work with your tax advisor to understand the implications of this obviously but do the math run the equations so that you can see when is the best time to have these to the extent you can time some of those expenses maximize 199 a deductions there's a lot of complications to this it's a qualified business income deduction for small businesses there are phase-outs but if you have the right kind of business if you employ a lot of people depending on the way that you operate you may be able to take some advantage of this and make sure that you're doing that and then finally at the end of the year as you're thinking through all these issues let's look at the overall business structure so i mentioned this before think about those changes that are coming perhaps to s corporations well there are not a whole lot of advantages to s-corporations in comparison with maybe an llc that's taxed as a partnership or as a straight pass-through if you're a 100 owner there are some but there are not a whole lot of advantages in fact there are some pretty significant disadvantages in the way that you can move assets in and out of a corporate structure like an s corporation so if we had that s corporation in place for a long time it was probably because we were playing the compensation game we were using those advantages those small narrow lanes that we talked about well if those lanes are gone if that advantage is gone we may want to consider recapitalizing that entirely uh the other thing that should go us just should be throughout this entire presentation is to the extent you have questions about this please give us a call we're happy to talk through uh your individual situation all right the other thing to look at it may be hard to pull this off at your end but it should be something we should be thinking about throughout the year is pay attention to those tax elimination strategies so one of those is a qualified opportunity zone with those those got a lot of fanfare initially when they came out and you don't hear as much about them now and of course many of our clients respond even those clients who are in real estate development or real estate investors when we've talked in the past about qualified opportunity zones they'll say that i get it but that's not my business model i i don't want to be investing in urban blight uh areas that need gentrification and and i appreciate that it's nice what they're trying to do that's not what i do i would tell you that you should not think about qualified opportunity zones that way there are huge huge broad swaths of land that are are qualified opportunity zones where there is no pun intended some great opportunity for those of us in san diego a good example is if you think about petco park all the area to the east and to the south is a qualified opportunity zone and if you think about what's happened to downtown the way that continues to evolve there could be some really good opportunities that happen to sit there and in those circumstances we can take capital gains and defer paying the taxes like a 1031 or a lifetime exchange except these capital gains can be from anywhere they could be from the sale of stock or anything else they don't have to be real estate and you don't have to invest all of it in the qualified opportunity zone you only have to invest the gain you can have your basis back that can go into your checking account so it's a really impactful uh plan you get to defer those capital gains and in many ways you get to eliminate those over time some of them anyway um also i talked about this before 1202 stock to the extent you have a business it looks like we're going to keep that going for a while and ultimately you'd like to sell it down the road think about whether or not you can convert yourself into a structure that would qualify for 1202 for qualified small business stock now there are some complexities to that it's beyond the scope of this webinar but you should be thinking about it you should uh definitely have a conversation especially if those kind of corporate structures that you have to put in place don't cause uh any issue for the kind of work that you're doing we're working with clients right now who have their own llc they're starting a business they're doing great things they're starting to have success and we're talking to them about the fact that if they'd make some conversions here their life will be very similar to what it is today but we position them to qualify for millions and millions of tax free dollars down the road again you have questions about your specific situation please give us a call okay um all right we talked about this a little bit tax loss harvesting so this is a pretty common concept at the end of the year if you have those investments and those investments have come down from their purchase price you can sell them and take the loss to offset some gain that you have somewhere else now keep in mind the big thing you have to keep in mind about about stock sales is the wash sale rule if it's a security which all stocks are essentially the way that you think about them if you sell it you cannot buy it back for the next 30 days so that stops people from essentially just selling and buying and then just capturing the loss wherever they can i mentioned that unless it's bitcoin the irs has not been entirely clear about this but it looks like you because because bitcoin is not a security the wash sale rules as interpreted now don't apply to bitcoin that would also uh perhaps be changed with this new law but it's not true yet and what that means is as bitcoin though it seems like cryptocurrency does nothing but go up if you watch there are times when you will see those vacillations and if you catch it if you bought it at the wrong time you see a 20 dip before it goes back up you can flip that uh investment perhaps and take advantage of the loss without really being out of the market for any amount of time the other thing about stocks in general are the wash sale rules is it's a great idea if you can sell out of certain technology stocks and then buy back into others or you have certain etfs you can replace with something that's similar but not exactly the same those are great ways to take advantage of your loss now without worrying too much about it if you don't have the sort of uh if you don't have the assiduous personality to pay attention to when did i sell when can i buy back it may not be for you what you do not want to do is let the tax tail wag the investment dog you don't want to accidentally end up out of the market at a time when you should have been in and that uh will that could be far more impactful than the tax savings that we're trying to uh to create here and then of course for business owners are there capital assets that you can tell are there things you're looking to get rid of anyway you may want to sell them as soon as possible to take that capital loss now to offset uh other gains okay mention this before qualified plans right so these are the typical plans you think of are like 401ks iras the idea is you take your ordinary income and you take some of it a limited amount unfortunately you take some of it and you contribute it to this plan and you get a deduction for that contribution meaning you are not paying tax on that today it goes into the qualified plan it can be invested and that growth occurs tax free or at least tax deferred right it continues to appreciate over time hopefully if we make good investment decisions and then on the distribution out that distribution is taxable to you well what where's the advantage if i get a deduction now but it has to be taxed later well the advantage is you're probably in a higher income tax rate than you will be when you are taking these out maybe much later in life and we got that deferred gain and that growth on on pre-tax funds for all of that time so if you look at that you just run the numbers on and it's really really impactful to be able to stock away pre-tax funds uh and let them grow pre-tax before you have to take those out you recognize of course the distributions back out our ordinary income tax so what do our business owner clients do sometimes we're familiar with how employees can deal with this or and create iras and 401ks business owner clients can create solo 401ks or sep iras it's the same thing the limitations work in similar ways and you know it's not unlimited but you can set money aside deductible funds that will then grow tax-free there is another advantage for those who have relatively high income from business and that's relatively stable if we can project if we can press edge that we believe we're going to have that kind of income for years to come a defined benefit pension plan can really uh be impactful because the deduction limits are much larger now what you're actually putting in place is a defined benefit plan a pension plan and as you can imagine true pension plans have a lot more administrative costs there's there's the administration of setting it up itself you got actuarial analysis you have to do but again it doesn't work great if we think that that income is going to vacillate wildly over time if that's the case that's typically not a great structure for a defined benefit plan in fact it can even sort of blow up on you which is unfortunate but if you have uh if you have good significant ordinary income going forward and it's reliable going forward then a defined benefit plan is absolutely worth considering also sometimes discussed as cash balance plans okay um another couple things to point out about qualified plans are are some some features that are available one is a roth conversion now this may not be a surprise to many of you this may be something you've heard of before um but uh the key is you could take some of those uh some of those pre-tax retirement accounts a roth ira excuse me an ira maybe you had a 401k converted into an ira we can take that and we can convert it into a roth ira what's the advantage of a roth ira well a roth is post tax money going in grows tax-free and then is entirely tax-free on the distribution to the owner so what's the what's the cash well the catch is as i said it's post-tax money and this ira we have is pre-tax so the conversion is a taxable event you will create if you're converting a million dollars if you're converting a million dollar ira to a million dollar roth ira you're going to have an extra million dollars of ordinary income that sounds bad and it is and you're gonna owe taxes on it but if we have those assets of special qualified tax deferred tax uh benefited funds then what that essentially allows is when you think about a raw you have a milk that million dollars in in the i'm sorry the million dollars i had in the ira it's not really a million dollars when i get that out i'm going to pay ordinary income tax on all that so the value the after tax value that's actually in there it's more like 500 600 000 to me to actual spendable money if on the other hand i take that million dollars and convert it now i did have a million dollars of ordinary income and i have to pay the tax on that but if i can pay the tax from other non-qualified assets if i have the cash the liquidity around to pay the tax on that now that million dollars is really worth a million dollars in a qualified account and now that can grow entirely tax free and it will be tax free when i receive it and by the way if i don't think i'm going to need that and ultimately want to get it to my children or family this will not create this will be available to them entirely tax free we talked about that basis step up earlier one asset that does not get a basis step up is those qualified accounts if you have a big 401k a big ira whoever the beneficiary is upon someone's passing they still have to take the ordinary income tax that is due on those funds when they withdraw that's not true for a wrong so there are big advantages to making that conversion the other thing that can happen the other thing you can use qualified accounts for are charitable distributions now this is uh not available for all of us by any means uh for the most first and foremost you have to be 70 and a half when when you make that contribution but if you're if you are there and you need you know otherwise you have to take out your required minimum distributions on an annual basis and you have to pay income tax on those rmds when they come out one solution is to say if i don't need it i don't want the extraordinary income tax let me instead make a contribution to charity out of this qualified account we help clients do that all the time and what's the advantage there do you get a deduction you don't there's no charitable deduction for that distribution but it does qualify as your uh required minimum distribution and you get an effective 100 deduction because if i had had to take my rmd was a hundred thousand dollars i had to take it out and then i just want to cut a check to the to the old globe for a hundred thousand dollars well i have to take the ordinary income in then i have to figure out what my deduction is we have to go through the agi issues do i itemize or not that has a significant impact on the amount of charitable deduction i could take if instead i send it directly from the qualified account to a charity none of that has any impact i get an effective 100 percent deduction for those funds uh and that can be really really impactful for those people who don't need their rmds and we're going to get to charity anymore okay uh some additional charitable giving issues because of course one of the uh best ways to reduce income taxes to the extent you have fill and profit goals is to make contributions to charities so a couple things you should know number one special law this year that up to a hundred percent of your agi can be deducted for cash gifts to charity this is essentially an effort in the recovery postcode to get people giving again now i don't know how many people are giving cash that were going past their 50 agi already there may be some that this inspires to give more also think about in-kind giving of stock if i have a million dollars of stock and i have no basis if i sell it in order to get the cash i want to give to maybe the old globe well i have to sell it and pay my capital gain well i have to sell it and get a million dollars then i then i make my contribution well on my income tax return though i had a million dollars of capital gain and just like i talked about before now i've got to figure out how much of my how much my agi i'm allowed to use if i itemize or not if instead i just make an in-kind contribution i get that i never have to take the income on the sale of the stock and i get a full deduction for the value of the stock that i contributed so i get a million dollar deduction and i didn't take on that million dollars of income which means i have a million dollar deduction i can use somewhere else so it is far more effective than selling the stock and giving it away i mentioned this earlier as well if we have a big income tax year and this happens a lot sold a business had a had a big year uh anything that where this is an unusually outsized income year maybe we want to in this year when we're flush take a lot of those funds and set them aside for charity so that we can get the deduction this year we take that huge tax bill and knock it down a little bit well but if someone said i sold the business for 10 million dollars i'd like to set aside two million dollars for charity but i'm not ready to give away two million dollars that's okay we put it inside of a donor advice fund by irrevocably setting it aside we can choose to invest it however we want but by irrevocably setting it aside we get the deduction today and we get to give that money away in whatever amount we want over the rest of our lives there are no minimum distribution requirements etc that may change in the future by the way there's some pretty significant criticism of the fact that there's all of this charitable money awash in these uh in these accounts but it is true you can't have it back so i'm not sure what what the real concern is um but ultimately you'd like to be able to get that out to charity so take that um you can do that over time and the other thing you can do of course is before you sell something take some portion of it and get it inside the donor advice fund before the sale occurs it's just like that stock issue i talked about now whatever percentage is inside the donor advice fund you do not pay capital gains at all because that the donor advice fund itself is tax-exempt it sells the asset now you've got those proceeds in there and you get the full deduction for the contribution depending on on the structure but you can take essentially a double deduction in that in that scenario again if you have questions about that please give us a call and then a charitable remainder trust is another similar idea around that and should be talked about far more often when our clients have philanthropic goals again none of this is in an effort to get necessarily more money into your pocket it's really about reducing tax bills and advantaging charity instead of maybe the irs so if you were going to sell a business for instance or a large piece of real estate let's say you're selling a 10 million piece of real state and you have no basis so that's 10 million dollars again well we can sell that we can pay the capital gains we can pay california taxes and maybe walk away call it five million dollars all after tax instead we set up a charitable remainder trust we take the 10 million dollars of real estate we put it in that charitable remainder trust the charitable remainder trust sells the asset because the charitable remainder trust is a charitable entity it does not pay capital gains taxes so now that 10 million dollars of liquidity that can be invested in any way that we choose and over time that charitable remainder trust pays an annuity back to our client that can be an annuity over a term certain or it can be for the rest of that client's life now the payment back is taxable and it's taxable in the same way that the sale would have been taxable plus any earnings that might occur there's some there's some ways that that's handled but what that means is you get to defer a vast majority of those taxes until the payments are made which means you get to continue to reinvest those funds rather than having five million dollars to invest you have 10 that you can continue to invest and then pay your annuity over time and and hopefully we've made some good investment decisions and the remaining funds after the course of our client's life or after the course of that term the remaining funds go to charity that's why it's a charitable remainder trust and so that can um essentially put clients in a very similar situation except they cut the irs they haven't cut them out but they've significantly reduced ultimately what the irs will get out of this instead shifted that to charity which very frequently more aligns with our clients goals um the only thing to keep in mind about that is the well my point uh that i made earlier the value of what you receive is probably not greater than what you would have gotten that is to say you sell the 10 million dollars you walk away with five okay or i sell it inside of a charitable remainder trust and i walk away with the right to this annuity that the present value of that annuity is probably right around five million dollars so there is some advantage you'll get more than five million dollars over time but it's not in your checking account right now uh so the present value is about the same again clients in a very similar situation than they would have been but we got to cut the i the irs significantly out and instead benefit charities so a couple of other things that we've got to remember towards year end is the giving structures and you may have you may be using this a lot you may have talked about this and thought through it a lot but it's one of those uh tax advantages that expires at the end of the year and if we don't use it it's simply gone so you may know that every taxpayer can give up to 15 000 to as many individuals as they want without paying any gift taxes and without using that lifetime exemption that they have which we'll talk about which means a married couple can give up to thirty thousand dollars to as many of their family members as they choose and again we don't lose we don't use up any lifetime exemption and if we don't do it it's gone this annual gift exemption can be used to create some significant wealth and a couple of different ways that's done very frequently you can make these outright or you can make them into a trust for the benefit of family members now there's a little administrative complexity that occurs when we put them in a trust but but it's not a big deal and it's something that happens very very commonly but then it doesn't mean that our our families have money in their hands it means that it's in a trust for their benefits set aside for them we can use those funds to invest in life insurance so that there's a significant amount of income tax-free state tax-free liquidity at the time of the senior generation's passing which can be really impactful in an estate tax and estate planning strategies or we can simply set that aside and invest we can even buy into the same kind of investments that we might be participating in ourselves but now it's outside of the taxable estate and growing and you can imagine you take a married couple thirty thousand dollars per family member all of whom are beneficiaries of this trust that can be a relatively large amount of money you can set aside over time the other thing to think about um are i should i should mention too to the extent we want to set that money aside for family members very frequently those same that same senior generation would like to set money aside for education health issues things like that first and foremost you can always probably heard this before but just keep in mind you can always pay for health and education expenses it has no impact on your lifetime exemption or on your annual exclusion you can spend as much as you want without any gift tax implications at all the only caveat is you have to spend it you have to actually be paying the invoice to the institution so you can't cut a check to granddaughter for tuition you have to cut a check to the university for her tuition the other thing that a lot of people think through is well my i've got grandchildren they're in grade school they're not going to school yet but their parents are worried about the expense of education in the future so that's why we have those 529 plans those are special qualified plans you put money into that account so you can use your annual exclusion to put money into that account in fact you can use up to five times your annual exclusion in one year in case we wanna recall super fund that account so we can really get it started you put that into a 529 plan those assets then are invested just like any other asset and they grow and they grow tax-free within the account and then if they are spent ultimately on um education expenses qualified educational expenses you never pay tax on that growth so not a whole lot of opportunities within the tax code to see growth occur and never pay taxes on it so those are some of the things that a lot of our clients think about and the other thing is to the extent you're going to be making gifts anyway maybe you were gonna be selling some stock and then ultimately want to want to make gifts of that cash keep in mind we can make gifts of the stock itself into our family's hands if we are going to put it in if we are going direct to kids let's say well maybe uh so long as they're not subject to a kidney tax we're talking about adult children who have their own income but maybe they don't have as much income as we do and therefore they're in perhaps a different capital gain bracket maybe they're still within the zero capital gain bracket or a lesser for the 15 bracket if that's the case maybe we give them some stock we would have had to sell anyway and let them sell it take the after tax proceeds from a family perspective that might be a relatively large tax savings depending on uh your situation okay this is maybe one of the bigger changes that we got from not having change that is these very very very large state tax exemptions that we have so remember we have now estate tax exemptions that are 11.7 almost 12 million dollars per person which means a married couple has you know more than 23 million dollars of estate tax exemption that they can use they can give it away during life or they could pass away with that and pay zero in estate taxes now we thought we were going to lose those large exemptions we thought they would be cut in half as of january looks like that is not the case it looks like we have until at least the legislated date which is 2026 that means by the end of 2025 these are these are scheduled to be cut in half at that time this is tremendously important and valuable for our business owning clients and our clients who have a real estate investment certainly you know i mean no one wants to pay a state tax but if you have a hundred million dollars in marketable securities someone there's an untimely passing and we owe 40 million dollars to the government well that's unfortunate no one wants to pay that tax but we have the liquidity to do it we're not having to give up a family asset in order to pay those estate taxes on the other hand if we've sweat and we've been sweating and toiling to create this closely held but valuable business that we've been building and of someone's untimely passing this thing looks like it's worth 50 60 70 million dollars because of the appraisals that are happening right now it would be a real tragedy to see that the family can't even continue the business because they simply can't afford the estate tax obligation so those are the clients that we say while we've got these large exemptions let's start taking pieces of that business and get it out of your taxable estate i'm not asking you to give up control i'm not telling you that you can't continue along the path that you were that you were down before and i'm not telling you you have to give anything outright to the children you do not but we need to set those things aside so that as they continue to appreciate the irs does not continue to participate in its sort of right of survivorship i i describe that for clients commonly as the government has a 40 right of survivorship on the appreciation that you're seeing so let's get that tax monkey off the back so we can continue to have this growth and then if something happens if there is an untimely death then we can figure out a way to deal with the liquidity need for the estate tax but that that tax doesn't just continue to grow and become such a gigantic onerous uh issue for the family as a whole and i also mentioned this we thought we were going to lose some of the strategies that were the most effective for stopping the increase in estate taxes as business as business values continue to appreciate as those real estate investments continue to appreciate we it looks like we are going to continue to have those techniques that we're going to continue to be able to put those in place at least for the next few years and so we should be paying really close attention to where this is appropriate because as you can probably imagine these structures take time and they take some analysis and so it's not the kind of thing that as we figured out this year when we thought we're going to lose them at the end of the year it's not the kind of thing you can say well i got three months let's put it in place it's much more difficult than that at least it's much more difficult to do it right so we need to have our clients thinking about this many of our clients you're going to hear from me in the new year uh to talk through some of these issues so that we don't end up stuck up against it uh like we did this year okay finally uh i would tell you no one no one likes doing this but but you should do it as you're thinking through all these tax issues review your overall estate plan as well think about the people that you put in place think about some of those names that you put there uh as your personal representative or your executor think about the people who are beneficiaries on those qualified accounts did you set up uh transfer on death accounts to avoid probate let's look at that again and make sure that still in line with your goals if something were to happen to you that's an important piece of this so um there's a lot here i i apologize for having to race through it i've done this in the past and it goes on for an hour so sometimes i just want to go fast so that uh we just get through the information and then if you have questions if there's something we weren't clear about or you'd like more detail please let us know obviously i want to show you the disclaimer here but the really i have said this on multiple occasions but this is the most dynamic tax year of my entire career we have been planning in environments that entirely evaporated on us and then uh we're looking at totally new structures and it could happen again we might not yet know what the real impacts of 2022 are going to be yet as i said before because of the political issues that have occurred because of the machinations i suspect we do have some pretty good clarity spoiler alert i've said that before so uh don't take anything uh to heart yet but i do think we're ready to start doing some planning in any case a lot of these things make sense under any circumstance if you have questions please talk to your tax advisors and then give us a call and we'll be happy to walk you through anything thank you very much and we look forward to working with you

2021-11-28 15:01

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