High-Net-Worth Tax Moves for Right Now

The current tax environment has put us into a fairly distinctive landscape: Following the Tax Cuts and Jobs Act of 2017, tax rates are at relatively low levels, and interest rates remain historically low. Meanwhile, the CARES Act, passed to address the concerns caused by the coronavirus pandemic, brought a number of changes to retirement and tax planning, especially for high-net-worth families.

So, what can you do to take advantage of this unique environment? If you’re in that high-net-worth category, here are some strategies to consider:

Roth IRA Conversions

If you have a traditional IRA, this may be an excellent time to convert it to a Roth IRA. The foremost consideration is whether your tax rate is lower now than you expect it to be in the future. Another factor is whether the market’s volatility this year has caused a drop in value of the assets in your IRA; if you move those assets to a Roth, that allows any future appreciation to grow tax-free in the account.

Loans and Debt

Given that we’re in a period with low borrowing costs, it’s worth seeing if you have assets that might benefit from refinancing, like a second home. The rule of thumb is, for a mortgage refinance to be beneficial, you will need to reduce your current interest rate by at least 1.00%. Remember that a mortgage refinance often involves costs such as an appraisal, closing costs and application fees, so you will want to balance the monthly savings against the upfront costs. If you plan to sell the home in the next few years, a refinance may not be worth it.

Another possibility to consider: Historically low interest rates provide a great opportunity to make loans within the family at rates less than what an individual would receive from a financial institution.

Trusts

Giving away assets that have lost value allows you to keep those assets’ future growth out of your taxable estate. For married couples, Spousal Lifetime Access Trusts (SLATs) allow spouses to provide sizable gifts to one another: Currently, an individual can transfer approximately $11.5 million ($23 million for married couples) before having to pay a gift or estate tax, but that number is expected to decrease to about $6 million per individual as of January 1, 2026. Gifts should not be made hastily as both use and control of the assets are lost, but there is plenty of time to discuss this strategy with your Baird Financial Advisor.

Lower valuation of assets and historically low interest rates also provide an opportunity to transfer wealth without One possibility: A grantor retained annuity trust (GRAT) is an irrevocable trust that pays you or your estate a fixed annuity for a term of years. This technique benefits from historically low interest rates that the government uses in determining the value of gifts of partial interests in property. Any appreciation in excess of that low rate can pass to your beneficiaries free of gift tax. Again, it’s a complex situation, so discuss with your Baird Advisor whether this technique is right for you.

Tax-Loss Harvesting

It may be possible to harvest some equity losses from this year to offset your capital gains through tax loss harvesting: Selling securities at a loss to offset current or future capital gains. A capital loss in excess of the current year’s capital gains can offset up to $3,000 of ordinary income in the current year. Any unused capital losses can be carried forward to use in future years. Remember, though, that if you buy any security, or any substantially identical security, 30 days prior to or 30 days after the date you sell it, the loss is disallowed for tax purposes under the wash sale rules. This BairdWealth article explains wash sales in more detail.

Charitable Giving

The CARES Act has provided additional incentives to increase giving in 2020, including a new above-the-line deduction for those who do not itemize. Additionally, individuals may take a charitable deduction for cash contributions made directly to public charities equal to 100% of the taxpayer’s 2020 adjusted gross income. In a normal year, this AGI threshold limitation for cash donations is just 60% for individuals. For more on how you can take advantage of the CARES Act, see this guide to its benefits.

The current unique landscape has made planning more complex for everyone but especially for high-net-worth families. To make sure you’re doing everything you can to protect your assets, contact your Baird Financial Advisor who can work with you and your outside advisors.