8 top tax and estate-planning tips

These underutilized strategies give financial advisers the edge with clients

Oct 28, 2017 @ 6:00 am

By Greg Iacurci

Let's face it, tax and estate planning can be complicated. The good news is, it doesn't always have to be.

We talked to experts to get the lowdown on their top techniques for tax and estate planning. In other words, what underutilized yet relatively simple strategies can advisers use to improve financial outcomes for clients? Here are eight ideas.

Upstream planning


Reduce capital gains tax by gifting low-basis assets to an elderly family member.


Let's say George bought stock at $20 per share, and its value has swelled over the years to $150 per share. George wants to sell the stock, but also wants to avoid substantial taxes on its $130 gain.

He can gift the stock to an older family member (his mother, for example) and would inherit the asset upon her death with a step-up in basis (meaning, at fair market value of $150 per share). George can subsequently sell the asset with no capital gains tax, which can be upward of 30%, depending on an individual's annual income and state of residence.

(More: Trump, House tax chief send mixed signals on 401(k) tax break)

Steven Siegel, president of The Siegel Group, calls this "upstream planning."

"The beauty of this is it can be used by everybody," Mr. Siegel said. "You don't have to be rich to do this. You can be someone who doesn't want to pay a lot of income tax."


• George's mother must hold the stock for at least one year.

• She would have to ensure in estate-planning documents that George is the stock's inheritor. Or, instead of naming George, she could name George's daughter as the beneficiary; the granddaughter would get a step-up in basis even if George's mother dies before she has held the asset for a full year.

• The estate may owe taxes upon the mother's death if it exceeds state and/or federal tax thresholds.

life insurance for spouseS WITH NO INCOME


Close an estate's insurance gap by covering the value of a nonworking spouse.


Families often buy life insurance to insulate themselves from the negative financial impact of losing a working spouse's income in the event of his or her death. However, insuring against the loss of life for the nonworking spouse is an important estate-planning tactic, too, said Jamie Hopkins, associate professor of taxation at The American College of Financial Services.

"There's usually some type of income loss, or possibly increased responsibilities for the surviving spouse, so insurance on that spouse would be prudent to consider," Mr. Hopkins said.

Surviving spouses will often see their costs increase because of a need to hire an individual to take over some of those now unaccounted-for responsibilities.

The surviving spouse in a retiree couple would, at a minimum, lose the spousal retirement benefit provided by Social Security, he said.

extra 401(k) money in a Roth account on the cheap


Do a Roth conversion of after-tax contributions in a 401(k) plan for tax-free investment earnings.


Clients who want to stash away more than the annual $18,000 tax-advantaged 401(k) deferral limit may opt to make a non-deductible contribution to the retirement plan. The contributions are made with money on which a saver has already paid tax (similar to a Roth contribution).

Not all 401(k) plans allow savers to make nondeductible contributions. If they're allowed, and if the plan offers designated Roth accounts, it's likely the plan also permits the saver to convert those savings to a Roth account inside the plan, said Natalie Choate, an attorney at Nutter McClennen & Fish.

"Tax-free is much better than tax- deferred."
Natalie Choate
Attorney, Nutter McClennen & Fish

Investment earnings in the Roth account would be tax-free, resulting in the entire distribution being tax-free in retirement.

"Tax-free is much better than tax-deferred," Ms. Choate said.

The goal would be to do the conversion as soon as possible after making the nondeductible contribution, before any earnings start to accrue on that contribution, Ms. Choate said. That way, the saver wouldn't pay any tax on the conversion.


Because the money would be in a Roth account, it may be less accessible due to tax penalties for early withdrawal.

'free' step-up in basis when selling appreciated assets


Pay a 0% capital gains tax rate by controlling how appreciated assets are sold.


0%Capital gains on controlled asset sales

Clients falling in the 10% and 15% income-tax brackets don't pay tax on long-term capital gains. (The ceiling for the 15% rate is $75,900 for married couples in 2017.)

Financial advisers with clients who fall far enough below this income-tax threshold, after tax deductions, should consider taking advantage of the 0% capital gains rate, said Jeffrey Levine, CEO and director of financial planning at BluePrint Wealth Alliance.


Let's say a couple has taxable income of $50,000. They also have an investment that makes $25,000 per year over a period of 10 years. If the couple waits 10 years to sell the investment, they'll pay substantial tax on the $250,000 of appreciation. But if the couple sells $25,000 of gain every year, they'll pay 0% in tax on the entire gain, because their taxable income will be $75,000 annually, which is below the $75,900 threshold.

This is what Mr. Levine calls a "free step-up in basis."

"Anyone in that 15% ordinary income tax bracket should be looking to take advantage of that," he said.


• The strategy may not be useful if the couple plans to hold the asset until death, because the estate would get a step-up in basis at death anyway.

• Increasing adjusted gross income in this manner every year could increase other taxes tied to AGI, such as those on Social Security benefits. It also may inhibit other strategies, such as doing Roth conversions in a low tax bracket.

Digital asset planning


Protect a client's estate from financial loss and postmortem identity theft by providing for fiduciary control of digital assets, such as credit card accounts and social media pages.


State contract law and the terms of service agreements dictate that digital accounts are, in most situations, nontransferable upon death. However, many states have passed laws in recent years allowing individuals to name a fiduciary who can access and manage these accounts when they die, said Jamie Hopkins, associate professor of taxation at The American College of Financial Services.

Digital assets include things such as email, Facebook accounts and bitcoin, and can have tremendous financial and sentimental value. Such assets should be identified and addressed in any estate plan.

(More: Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry)

"Today, I think this is the single most overlooked estate planning topic," Mr. Hopkins said.

Without specific provisions in estate-planning documents, a family member who has the relevant account login information likely wouldn't have legal recourse to take action in the decedent's accounts, such as memorializing social media pages.

And not having the ability to delete accounts with credit-card information leaves them susceptible to hackers, who can steal a decedent's information to make fraudulent purchases and leave an estate on the hook for the debt, for example.

"Not listing fiduciary access to these assets in the will, trust or power of attorney could cause serious issues for the heirs and even result in a malpractice suit against the advisers, as the law in many states requires these clauses to stand alone in the documents and specifically discuss digital assets," Mr. Hopkins added.

Cash balance planS for older business owners


Wealthy clients who find themselves behind on retirement savings after divorce or another life-altering event can save much more through a cash balance plan than other vehicles like 401(k)s.


Paul Auslander, director of financial planning at ProVise Management Group, has several wealthy business-owner clients (doctors, lawyers) in their mid-50s who've lost half their assets during divorce, severely crimping their retirement savings.

One quick, tax-advantaged way to save and catch up: cash balance plans, a type of employer-sponsored defined benefit plan.

Benefit calculations for these plans allow clients with a short time frame to retirement to save much more than the overall contribution limit for a 401(k), which includes employee and employer contributions, Mr. Auslander said. That limit is $54,000 in 2017, or $60,000 for those 50 and older.

"You can put away double, sometimes 2½ times what you can put away in a 401(k) or profit-sharing plan," he said. "It allows them to re-fund their retirement plan and also gives them a really healthy tax deduction."


• The plans make most sense for solo practitioners or those with part-time employees. Because the plan is a type of DB plan, business owners would have to make contributions for all qualifying employees.

• A client must follow through on the commitment to contribute to the plan every year, according to the plan's formula, regardless of company performance.

• Cash balance plans must be opened by Dec. 31 in the year a client wishes to take the deduction. Then the client has until his or her actual tax filing to make the contribution.



Surviving spouses with a sizable estate can effectively double their estate-tax exemption by filing an often-neglected tax form shortly after the spouse's death.


The federal estate and gift tax exemption in 2017 is $5.49 million for individuals. The law allows for portability, so a surviving spouse can apply a deceased spouse's exemption to their own, for a maximum $10.98 million that can be exempt from federal tax.

However, the exemption doesn't automatically transfer to the survivor — an estate tax form (Form 706) must be filed for the decedent, by the estate's executor, to the Internal Revenue Service, within nine months of death.

Many people don't file the return, though, said Jeffrey Levine, CEO and director of financial planning at BluePrint Wealth Alliance.

But it could come in handy. As an example, let's say the combined estate of Fred and Diana, a married couple, is worth $4 million upon Fred's death. Diana doesn't file for portability. Then an unforeseen event, such as a stock going gangbusters, causes the estate's value to balloon past $5.49 million. The additional exemption could have helped avoid tax.

"Every married person should file a [form] 706 when their spouse passes away."
Jeffrey Levine
CEO and director of financial planning, BluePrint Wealth Alliance

"My advice to all advisers, including financial advisers, tax advisers and estate-planning attorneys, is every married person should file a 706 when their spouse passes away so they can transfer that exemption," Mr. Levine said.

If they don't, advisers should have a note on record from the surviving spouse to document why he or she didn't want to file the return, he added.

credit shelter trusts WITH 'SPRAY POWER'


A spray power provides trusts with tax flexibility by allowing the trustee to distribute net income to multiple beneficiaries.


Credit shelter trusts, also known as bypass trusts, are useful to wealthy married couples. They provide a surviving spouse with access to the net income of the trust and principal as needed without adding to the surviving spouse's taxable estate.

43.4%Tax rate on some trusts' net income

These trusts often provide that the net income be mandatorily payable to the surviving spouse or have the income build up in the trust at the trustee's discretion —but that could create a tough tax situation, said Charlie Douglas, director of wealth planning at Cedar Rowe Partners.

That's because of the tax rate on trusts' net income — they pay the highest tax rate on net investment income — 39.6% plus the 3.8% surcharge tax — once annual income hits $12,500, a relatively low bar.

If the spouse doesn't need the income from the trust and a trustee wants to avoid the top tax rate from income buildup, a spray power would allow the trustee to distribute income to additional beneficiaries, such as children, who are in a lower tax bracket, Mr. Douglas said. So the trustee has flexibility to make a more tax-efficient distribution.


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