Time for the (tax) talk

Time for the (tax) talk 

Four key topics you should discuss with your high-earning or high-net-worth clients — soon!

As we previewed last month, and analyzed previously, the proposal for the “American Families Plan” has finally come out of the Ways and Means Committee. Here’s how you can help your clients prepare for changes to come.

Individual Tax Rates

The proposal returns the top individual ordinary income tax rate to 39.6%, which has been the high-water mark since the 1980s, when rates were as high as 50–70%. More significantly, there will be more taxpayers swept into the highest bracket: it will impact single filers earning over $400,000 (currently $523,600) and married filing jointly earning over $450,000 (currently $628,300).

Start a conversation with clients facing new or increased taxes about tax control through tax deferral. Choosing when to trigger taxable events gives them command over how much tax to pay and when – and helps them feel greater control over their tax outcomes.

The good news: capital gains rates for top earners will go from 20% to 25% — a relief to investors compared to the expected increase to 39.6% to “level” with ordinary income rates. Also not included? The elimination of the stepped-up basis at death – a revenue measure that has long been discussed (and even passed into law once) but never implemented.

Changes to Roth IRAs

Roth IRAs may see some significant changes under this new legislation. Investors will need to say goodbye to the “backdoor” Roth conversions, where earners over the threshold would overfund a traditional IRA with after-tax dollars and convert it to a Roth IRA — basically funding a Roth through a loophole in the system.

Retirement investors will also see Roth conversions eliminated entirely for single filers earning over $400,000 and $450,000 for joint filers, phasing out over 10 years. Legislators are banking on top earners to spend the next decade paying taxes on their traditional IRAs to convert to Roth IRAs, creating an influx of revenue. Your high-earning clients can convert existing traditional IRAs to Roth accounts either all at once, or piece-by-piece, depending on their unique financial needs. 

The Estate Tax Exemption

In 2017, estates got a major boost to their exemption limits, which is currently $11.7 million per taxpayer ($23.4 million for married couples). The proposal would cut that by more than half to $5 million per taxpayer. This means that clients may only have until December 31, 2021, to take advantage of the current use-it-or-lose-it exemption limits. 

High-net-worth investors, and their financial and tax professionals and attorneys, need to have serious financial planning conversations over the next few months. Gifts to trusts and loved ones may play a major role as we close out 2021. Clients may find an opportunity to gift their existing nonqualified annuities to a loved one through a lifetime gift or multigenerational income strategy. 

Estate Planning with Trusts

Trust planning may take a hit if this bill passes. An important tool, the “Intentionally Defective Grantor Trust,” will be a thing of the past. Today, a client can create an irrevocable trust to remove the asset from their estate — while keeping the income tax responsibility. The assets are assessed against the estate tax exclusion at their current value, while continuing to grow in the trust for future inheritance. Meanwhile, the grantor can reduce their estate outside of the trust by paying the taxes. Under the new plan, the assets in such a trust may be included in the estate at death.

With so much uncertainty in trust planning, trustees can still prepare for the tax bill using cost-efficient tax deferral and tax-smart income options. Help your clients find dynamic trust solutions as they navigate these new limitations.

As you coordinate with your clients and centers of influence to prepare for this new environment, including Lincoln Financial in the conversation may help. Our tenured team of professionals can offer perspectives and strategies in the industry on:

  • Tax deferral and tax-efficient income
  • Roth conversions
  • Trust tax planning
  • Lifetime gift
  • Multigenerational legacies

Partner with us

To learn more about helping your clients plan for protected retirement income, contact your Lincoln representative today at 877-533-0265. And follow us on LinkedIn and Twitter for regular insights and tips on retirement income planning conversations..

About the author

Thea headshot

Thea Marasa-Scafidi, MFin, CFS®, CES™, joined Lincoln in 2013 and has been partnering with financial professionals and their clients to plan for retirement as part of our Advanced Sales team since 2016. Prior to Lincoln, Thea worked directly with clients in retail banking.

Thea strives to make complex planning opportunities more accessible through her knowledge of the annuity landscape and background in wholesaling and banking.

Thea holds a B.A. in economics from Rutgers University and a Master of Finance from Penn State University. She also holds FINRA registrations Series 6 and 63. Thea resides in Pennsylvania with her husband and three young children.