Year-End Planning Roundtable: What to Expect and How to Prepare

First Republic Private Wealth Management
October 21, 2021

In this collaborative discussion our panel of senior First Republic Private Wealth Management leaders discuss year-end planning in a tax-changing environment and what to review before year-end, including: 

  • Retirement savings
  • Income taxes and capital gains
  • Top items to review annually 

Read below for a full transcript of the conversation. 

Rich Scarpelli - Good afternoon, everyone. We're glad you can join us today for a year end planning roundtable. Very, very exciting times we live in. But before we get started, we do have a few housekeeping items. We're going to be taking questions, we ask that you submit your questions through the Q&A function at the bottom of your screen. And we're definitely going to save some time at the end to answer as many questions as we can. Hopefully, we can get through them all. We're also going to cover a number of different topics throughout our discussion today, we're going to have some key takeaways at the very end. Additionally, we're going to provide a link to some materials. So you don't have to worry about scrambling around trying to take notes. But feel free to take notes if you wish to, I don't want to discourage that at all. So with that, I'd like to introduce myself and our guests of course. I'm Rich Scarpelli, head of financial planning at First Republic. I'm joined by Miranda Holmes, senior managing director and regional leader for advanced planning. Also with us and first time guest, is Justin Makso, senior vice president and advanced planner in our Boston region. Justin, we're definitely going to reserve the tougher questions for you at the end, since you're a first time guest. So okay, but with that, what are we going to cover? Three main goals or three main topics that we'd like to cover. We want to cover retirement planning, and things you can do before year end, as well as into next. Second, we'd like to discuss several items to keep in mind and review on an annual basis or regular basis, or preferences at least annually. And then third, we're going to be talking about some income tax planning strategies to consider before year end, and perhaps even into next.

Miranda Holmes - Rich, since we'll be talking about income tax planning, why don't you start by giving us your perspective on the new recent tax proposals out of Congress?

Rich - Interesting, excellent idea. Why don't we start there, For those that don't know, the House Ways and Means Committee released their proposal on September 13th. And I can't believe it's already been a month. Time flies really quickly. But this proposal really created a tremendous amount of uncertainty among a number of our clients. And the three of us realized that right away, but it also created concern for wealth tax legal advisors around the country. I cannot stress enough and most of you know this, that this is just a proposal. And items will more than likely change. And we see it in the newspaper already. Some items may be completely stricken from the proposal and some other items may in fact be added that weren't in the original proposal. So for example, we know there has been a big push in Congress to bring back, I'm sorry, bring back the full or greater part of the state and local itemized tax deduction, especially important or meaningful for those clients that live in and residents that live in California, New York, New Jersey. So we don't know exactly when something is going to pass. We do anticipate sometime this year, probably a watered down version of it. But it's really important to know what the changes are and how to plan now before year end, or before date of enactment and on a go forward basis in 2021, and in 2022, 2023 and in going forward. So since these changes are evolving, we want to touch upon the major headline grabbing proposals out there. So I'm going to bring up a slide. Let me just share my screen. Bring up the slide. Justin, why don't why don't you kick us off with the first couple.

Justin Makso - Yeah, absolutely. Thank you, Rich and Miranda for inviting me here today. Good afternoon, everybody. It's a pleasure to be speaking to you. As Rich mentioned, there are a few big changes that have captured a lot of attention and headlines recently, maybe a few is an understatement. I'll mention a couple here. First, the increase to the top capital gains tax rate going from 20% up to 25%. And that would be effective as of the date of the introduction with this bill, which was September 13th, 2021, already passed us. Any gains realized after this past September 13th and before year end may already be subject to the higher 25% capital gains tax rate if your AGI or your adjusted gross income is over $400,000. That's number one. Number two, effective January 1st, 2022. So this upcoming January, the top marginal income tax rate may be increased from 37% where it stands today, to 39.6%. And that's Part two A to this piece. Part two B also reduces the AGI or the adjusted gross income amounts that this highest rate applies to. So for example, if you are married filing jointly, the highest rate of 37% currently applies to income over $628,000 if you're married filing jointly, that number is going to be reduced to $450,000. So a decrease in the income and an increase in the tax rate. If you are a single filer, the new highest marginal rate, that is currently 37% will be 39 potentially 0.6% applies to income over $400,000. Right now that set at $523,000. And the lower rate. That's number two. Third, there are some meaningful changes to trust planning, specifically what we refer to as grantor trusts which Miranda i think is going to speak to in a few minutes.

Rich - Justin, why don't I jump in here, let me cover the next couple. I want to mention the 3% surcharge tax for those making over $5 million, or having income greater than $5 million. Because this is personally something I didn't expect in the proposal. And I just want to reiterate that it's the amount in excess of 5 million, so the 3% surcharge tax wouldn't apply to the 5 million, just the amount above it. I also want to mention that the proposal expands to 3.8% net investment income tax to cover more types of income. So folks may have heard that the capital gains, top capital gains rate is 20%. It's typically quoted at 23.8 because of that additional 3.8%, where long term capital gains, interest, income et cetera, fall under that. However, in the proposal, they're going to expand it to business income over $400,000, as the audience can see from the screen.

Miranda - Rich another proposed change we're talking to a lot of clients about right now is the possible reduction of the gift and estate tax exemption. So currently, each individual has the ability to pass up to $11.7 million to their heirs or to trust outside of their estates free of gift and estate tax. However, the current proposal in Congress would reduce that exemption as of this upcoming January 1st to $5 million per person adjusted for inflation. And we anticipate that that would be about $6.02 million per person next year. So this reduction would also apply to multi generational trusts, requiring generation skipping transfer tax or GST tax exemption.

Rich - Miranda, thanks, there are going to be a lot of potential changes, or there are a lot of potential changes in the proposal with regards to wealth transfer, that will impact many wealth transfer strategies. And I know we're going to be touching upon life insurance and some other things later on. So maybe we can expand, that's an area that we can expand on. It's really a very interesting area. So those are some of the main changes, what you see on your screen. There are a lot more, we'll bring them up as we go along. We'll sprinkle them in there, here and there. But why don't we get to our agenda, a lot of important things to talk about. Let's pick up the retirement topic. Justin, I'm going to turn it back to you to start to cover retirement.

Justin - Yes, thanks, Rich. So as you can see on the slide with so much uncertainty, we'll talk about retirement planning, but we always recommend focusing on the things that you have some or total control over. Things such as how much you save, how much you spend your asset allocation. So that's your mix of stocks and bonds and real estate, the types of assets that you own and your asset location. So where are your dollars? Are they in checking accounts, retirement accounts, brokerage accounts, et cetera? Those are things that you usually have a lot of control over. And even when there aren't any large and pending legislative changes, like we're seeing right now, year end tax planning should be done every single year. Let's specifically look at retirement savings, which is what we have pulled up on the screen in front of you. So hopefully by now, you have already fully funded your 401k plan through salary deferrals. If you haven't, you should check make sure that you do that. For 2021, the salary deferral limit is $19,500 if you are under the age of 50. If you are 50 or older, there is a catch up provision of $7,000 in addition to the 19,500, so a total age 50 plus deferral would be 26,500. And remember that any 401k contributions have to be done before year ends. You need to do it in this calendar year if you're going to maximize your 401k.

Miranda - And some qualified plans allow for additional contributions above and beyond your pre or possibly post tax salary deferrals. So notice the four circles on the right side of the slide here. This particular employees setting aside 19500 in salary deferral, they're getting $9,000 in employer matching contributions from the employer. And they're contributing an additional 29,500 in after tax contributions into the 401k for a total of $58,000 per year. So under current law, as long as your qualified plan allows it, you can actually make these after tax contributions which can grow tax deferred, and even better, you can then convert those after tax dollars inside the qualified plan if it has this feature, to a Roth 401k balance to grow tax free. And some people refer to the ability to make additional after tax contributions to a qualified plan and convert them to Roth assets as a mega Roth strategy.

Justin - Miranda, that's a really important point. So help me understand this. Let's say that I'm over 50. To keep it simple, my employer does not give me a matching contribution. I contribute my maximum salary deferral of 26,500, that's made up of the 19,500 deferral that I'm allowed plus the $7,000 catch up, because I'm over 50. So does that mean that I can contribute up to an additional $38,000 as an after tax 401k contribution, and then convert that $38,000 to Roth in my 401k?

Miranda - That's right, Justin. So this can be a tremendously powerful benefit to set aside significant assets for long term tax deferral and ultimately tax free withdrawal in the future. But be aware that the ability to make those after tax contributions to qualified plans might be going away as part of the proposed legislation at the end of this year. And the ability to convert the after tax contributions to Roth 401k assets is also proposed to go away as of January 1st. So if you have the ability, make your after tax contributions before year end, and convert those after tax qualified plan assets to Roth assets if you can. You can check with your plan administrator to see what your plan allows. And Justin, what about IRA contributions and Roth IRA conversions?

Justin  - Good question. So the legislation does seek to eliminate the backdoor Roth contribution, but not until 2032. It's a little over 10 years out, and only for folks that have income more than $400,000 if you're individual or $450,000, if you're married filing jointly, so that's a little bit off in the horizon. The backdoor Roth contribution as we know it, just the way that it works, it involves making an after tax IRA contribution up to the limits which this year are 6000 if you're under 57,000, if you're over 50. And note that there is no income limit on making a non deductible IRA contribution right now. And then you convert that contribution, that non deductible IRA contribution to a Roth IRA, that's kind of the backdoor Roth as we know it. Now, the timing delay to 2032 may seem a little bit odd. But it makes sense from a tax raising perspective because Roth conversions generate tax revenue right now, if you're going to do a conversion, you're going to likely pay tax on it and the administration is looking for tax dollars. So it makes sense to try to close this loophole down the road to try to capture as much income tax as they can in the next decade.

Rich - Thanks, Justin. Thanks, Miranda. Really, some very important retirement planning points that folks should go into year end and like I sprinkled in little tidbits about the tax proposal as well. So let's move on to some year end planning items to review on a regular basis. What do we have up first? Budgeting. Saving, spending and budgeting. Budgeting maybe seems easy to do. But it definitely could come really quite complex. And we asked folks, a lot of our clients to review their savings and spending for the past year and on a regular basis, and where they think they're going to be in the upcoming year as well. Also, we stress to develop a complete picture of all the assets you own because this sometimes is the gasoline that makes the engine run. It'll be the resources you need to meet expenditures beyond what your income can meet. We also ask clients to write it down, put it on paper, put it into context. Now with respect to budgeting, there is a helpful guide out there. It's a 50-30-20 rule. Let me spend a little time. What is this rule? Let me spend a little time on this rule. It's general guidance on how to allocate your after tax income, where 50% of your after tax income should be allocated towards needs, the mortgage, the rent, utilities, groceries, et cetera. It's items that you really can't do without. 30% of your after tax income should be spent on more discretionary items, a cup of coffee in the morning at Dunkin' Donuts or Starbucks. Although that might be a bad example, I would definitely put that as a need. But Netflix subscription entertainment, going out to dinner, these are items that you may be able to do without, not classified as needs. And the last bucket, the 20%, really should be allocated towards longer term goals such as retirement, which we were just discussing, or saving for future college education costs. So this is just a guideline, it's going to help you get started, your allocation may very well be different. For example, it could be 40-40-20, or something even different than that. There are going to be a few factors that dictate what that allocation looks like, where you live is going to be one of them. The cost of living and the standard of living in certain areas is different than others. Number two, your goals. What are your goals? That's going to impact what your allocation looks like. And thirdly, what is most important and meaningful to you? Is that cup of coffee a need versus a discretionary item? Bottom line is, the school it's a general rule. It's a good starting point. It gives you a framework really to see if you're way off track if you're making some big major errors, and it gives you the ability to adjust. Miranda, anything to add on the topic.

Miranda - Yeah, Rich, it can also be beneficial to use a tool like Mint or Excel or Quicken to set up and track your budget and your expenses. I have found working with clients that these programs can be very enlightening to help you determine how much you're really spending each year. So Justin, what else is on our annual checklist?

Justin - Everyone's favorite topic insurance. I have a terrible analogy for insurance, but I think of insurance like vehicles. So when I was a younger single guy, I had a motorcycle, loved it, got married, had to give up the motorcycle, went to a sedan. Kids started to come into the picture, gave up the sedan, got an SUV. Different seasons of life require different types of life insurance and different ownership structures. And there are a lot of types of insurance, ownership and beneficiary designations also matter. So think about just over the past year or years if you haven't thought about it, it's been a long time. Did the makeup of your family change at all this year? Did your balance sheet change? These are all very good reasons to reconsider and re-evaluate what you have for insurance. How you own life insurance I mentioned matters a lot, meaning do you own the life insurance in your own name? Is it in your spouse's name? Is it in a life insurance trust? Miranda actually mentioned at the beginning of our conversation that one of the significant changes in this proposed legislation targets something called grantor trusts. And life insurance trusts also known as ILIT. So the acronym ILIT, Irrevocable Life Insurance Trust, ILIT, are usually grantor type trust. Maybe you want to speak to the implications there since we're talking about insurance.

Miranda - Yes, so one of the new tax proposals would drastically change the treatment of new grantor trusts. And as you mentioned, a lot of people on life insurance in irrevocable trusts in order to keep the death benefit of the insurance outside their estate, and free from estate taxes. It's also really common for people to make annual exclusion gifts each year of up to $15,000 per beneficiary per donor to these irrevocable trusts, the ILITs, in order to pay the annual insurance premiums. However, if the ILIT is a grantor trust, meaning that the grantor is also the income tax owner of the trust even though the trust is outside the estate of the grantor, future gifts to the ILIT may be subject to estate taxation under the new rules. So if you have a grantor ILIT to which you are currently making annual gifts and expect to continue to make annual gifts going forward, it's a good idea to work with your estate attorney and your insurance advisor to determine whether you need to take action such as making a larger gift to the ILIT before the proposed grantor trust rules take effect. An amount that can be used to cover all the future insurance premiums or perhaps turning off the grantor trust status for the ILIT going forward.

Justin - Miranda, maybe we can pivot a little bit better go back to some of the year end things and that would be deduction. So don't forget about the concept of bunching deductions. Bunching deductions means that you take certain expenses that may be paid in the following calendar year, I think, 2022, but you pay them this year, instead of waiting until the next calendar year since you're going to pay them anyway. Now recall the standard deduction which everyone gets is $12,400 for someone filing single. It's $24,800, if you file married joint. Every time you file your taxes, you are deducting from your taxable income, the higher of either the standard deduction or the sum of your itemized deductions. Now, things that are in the itemized deduction category include things like charitable contributions, mortgage interest, and I'll put property taxes and estate income taxes together. Because between those two, there's currently a $10,000 cap, combination cap, also known as SALT, S-A-L-T. but also adding further to the deductions category, is margin interest and any business expenditures. So if you own a business, and you have expenses to make at the end of the year, purchase equipment, et cetera, those things get added to your itemized deduction. So let's just say kind of making an example here. Let's say that you're married filing joint, and generally your itemized deductions add up to $15,000 a year. So you typically take the standard deduction because it's higher, 24,800. But you're thinking about making charitable gifts of your budget is $10,000 a year for the next five years, over five years, you're going to give 50 grand to charity. Well, if you can afford to accelerate and make the entire charitable gift of $50,000 now, then, your itemized deduction for the year, this year would be $65,000. Take your typical 15,000 itemized deductions, add the $50,000 to it, and you've got a $65,000 deduction that is much higher than your standard deduction, therefore giving you a much higher tax benefit. Whereas if you had spread the gift out over five years, you'd still be right at the standard deduction amount, and you wouldn't really be maximizing your deductions.

Rich - So Justin, let me jump in here. Bunching and deductions is very important. But I want to talk about charity in particular, because you also got to be careful when you bunch the charitable deductions. I also want to touch upon charity, because there are actually a couple of unique opportunities this year. But let's just talk about the deduction in general. So the deduction that folks receive may be limited for the year. And any contribution not used because it was limited may be carried forward for up to five years. But if you don't use it within that five year period, the deduction is lost. So I'm sure you're all asking, how's the deduction limited? It's going to be limited and capped based upon a percentage of your adjusted gross income, or what we refer to as AGI. You may be subject to a limit of 20% of your adjusted gross income, 30%, 50%, 60% of adjusted gross income, or even 100% of your adjusted gross income. So what dictates which limitation applies? It's really going to depend on a couple of things. Number one is going to depend on what you donate, cash versus securities. And then number two, who you make the donation to. Public charities such as the United Way, a donor advised fund or a private foundation, a variety of these limits may apply. So for example, if I give cash to a private foundation, it's going to be subject to a 30% AGI limitation. If I give stock to the United Way, something that has a long term capital gain, it's going to be subject to a 20% limit. And some of the limits that I just went through, they have to be all cash in order for them to apply. So it can be really difficult to keep track of all these limits. Sometimes it's even difficult for us, but we advise folks to speak with their tax advisor as to which limitation would be applicable, and what would be best to contribute, cash versus stock or even a combination. So to start, let me go back to the opportunity. So I just got carried away on the limitation side. So let's run through the two opportunities. Opportunity number one, the 100% AGI limitation that I just spoke about, it's only available for this year. It will not be available for next year. It's got to be all cash. Opportunity number two, there is a $300 adjustment that everybody is going to be entitled whether you itemize or you don't itemize. So even if you're not able to itemize deductions and take advantage of your charitable donations for the year, you'll still be entitled to a $300 deduction before your standard deduction is applied to your income. So those are a couple of things I wanted to mention on charity. I don't think I'm missing anything, Miranda.

Miranda - Rich, let's also talk about qualified charitable distributions or QCDs. So if you're over age 70 and a half, you can transfer up to $100,000 directly from your IRAs to a qualified charity instead of taking those distributions as required minimum distributions or RMDs. So there are three things to keep in mind. Number one, it will count toward your required minimum distributions. The second thing is you will not be able to take a deduction for the amount that you transfer directly to charity from your IRA. However, number three, it will also not be included as part of your income, so you don't include it in your income. That means your AGI, or modified AGI might be lowered could be beneficial for some other tax reasons.

Justin - Let me jump in here. So another thing to keep in mind in the year end or what makes the year end a good time to evaluate this are offsetting investment gains with losses and the reason being is we're far enough into the calendar year where you probably have a fairly good sense of what your tax situation is going to be for the year. Now, when you offset investment gains with investment losses, we call this tax loss harvesting, which is again good for the end of the year to evaluate. For example, there is some probability that you have both winners and some losers in your stock portfolio. Well, you may want to sell some of the winners and take the profits, but you don't want to pay the capital gains tax. You can realize a similar dollar amount of losses by selling the losers and offset what would otherwise be a taxable gain by selling some of the winners. This lets you reduce the overall capital gains tax and gives you the opportunity to rebalance your portfolio simultaneously if you don't need to take the money out.

Miranda - And Justin, for investors who have more losses than they do gains, they can actually deduct up to $3,000 of those losses against their regular income. So it doesn't have to be dollar for dollar gain loss offset in order to be tax beneficial.

Rich - Miranda, let me jump in here because I think folks should be very careful when taking losses and utilizing losses. Because in fact, some losses could be disallowed if one purchases a similar security close to when they sold a security at a loss. So very important to be careful of that. So let me just run through a quick example. If I had IBM and there was a capital gain or capital loss embedded in it, and I sold IBM today, say at a $2,000 loss, and then tomorrow, I repurchased it, I would not be allowed to take that loss, that $2,000 loss to offset any gains that Justin was talking about or utilize it to offset $3,000 worth of regular income that you just mentioned. So folks need to be careful when they purchase substantially identical securities 30 days before or after the sale that generated a loss. I'm also going to throw in another little tidbit on the tax proposal. So under the tax proposal, and this was a little bit of a surprise to me, cryptocurrency transactions will also be subject to this rule if the proposal goes through as is. And this rule is known as the Wash-Sale Rule, many may already know about it. Really important for folks to work with their wealth managers, their investment advisors on making sure that they don't run afoul of these rules. So well, we talked a lot about income taxes, I love income taxes. I'm a tax guy. Let's switch some gears. Let's talk about wealth transfer a little bit. Anything for us to review there, Miranda.

Miranda - Yeah, as I mentioned earlier, each person is able to gift up to $15,000 per beneficiary each year with no gift tax consequences. And that's in addition to paying tuition costs directly to educational institutions, and paying medical expenses and health insurance costs directly to the provider. But remember that if you don't take advantage of the annual exclusion gifts before the end of the year, you do lose the opportunity to use the $15,000 annual exclusion for a particular calendar year. So make sure to use these gifts if that's your intent.

Rich - Well, we covered a lot. We are at the bottom of the hour. Why don't we sum up some key points and then we'll start to dive into some questions. That sounds like a plan, right? All right. Some key takeaways. Miranda, you want to go first?

Miranda - Yeah. So first key takeaway is if you're considering making a lifetime gift that exceeds the proposed reduced amount of $6.02 million next year, don't wait until the end of the year to make the gift, do the appropriate planning now. A lot of estate attorneys are really busy. And it's a great idea to get it done as soon as possible in order to get that gift completed this year. And if you're considering making a gift for sale of assets to a grantor trust, consider completing those transactions as soon as possible because these new proposed grantor trust rules, if they do get enacted, might prevent those transfers from being effective for gift and estate tax purposes,

Justin - Rich, maybe I'll take number three here. Don't forget to make after tax contributions to qualified plans, like your 401k, do it before year end. And don't forget to convert those after tax contributions right away because this ability to do so may no longer be allowed for anyone regardless of income level come the end of the year. That's number three. Number four, is another takeaway, is look ahead at your anticipated 2022 expenses. And if there are any of them that you can accelerate into 2021 in order to bunch your deductions and put yourself in a better tax situation, try to figure that out before year end.

Rich - Yeah, and finally, we ask everybody to review annual items, or review certain items annually, at least annually, such as life insurance, beneficiary designations, we didn't mention that earlier. That's really important, your annual gifting, and then the budgeting and saving, really, really important to review these items on a regular basis. So as we wrap up, I just want to let everybody know that we did move quickly, if you were taking notes, hopefully you got some things now, but not to worry, we do have resources available. We have a 2021 year end planning considerations guide that has some important items that you can address before year end and perhaps even into next. We also have a piece that highlights the tax deadlines and dates, filing dates, it's a good reminder. And stick those dates on your calendar. And then we have a year end checklist that you can go through, that covered a lot of the items that we went through. So you should see a link in the Chat function on your screen. And that link will take you to our year end planning webpage where you can look through some of these materials. So let me take down the slides. And let's go through some questions. I see we have a number of questions. All right, so let's take the first question. What surprised you the most about the tax proposal? Miranda, you go first. I'll go last. Miranda, you go first. Justin, then may come second.

Miranda - Sure, Rich. What surprised me the most I think the grantor trust rules. I was definitely not expecting to have drastic changes made to the grantor trusts, particular for new trust that would be created and trust that would be funded after the date of enactment that would cause estate inclusion and also some transfers between the grantor and grantor trust in the future, potentially causing gain recognition events so that was out of left field for me. Also, the QSBS exemption or qualified small business stock exemption, is proposed to be reduced to a 50% exclusion for those taxpayers making over $400,000. And that is not something that I was anticipating.

Justin - I'll jump in. So I think for me, the biggest surprise was not so much even the increase to capital gains tax rate, which is going from 20% to 25%, if you're in the top tax bracket, but the effective date, which is already past us. So basically the day they rolled out this proposed legislation, they said if this thing passes as is or at least this piece of it, any capital gains realized from September, this past September 13th, going forward is going to be subject to this higher 25% capital gains tax rate. That's a pretty big pill to swallow. If you have a lot of capital gains, you're subject to the higher rate. Or even think about if you were planning on selling your business and you had a deal lined up and a closed date after September 13, now you don't really know, you're going to be paying more tax or not. Hopefully that's one of the things that changes but as the proposal is currently written, it's backdated basically to September 13th. Rich, what about you?

Rich - Yeah, so I mentioned before, I was surprised about the surcharge tax at 3%. But aside from that, I would have to say it would be some of the restrictions on IRAs specifically around what types of investments they can hold. So many folks on the call may have alternative investments in their IRAs, under the proposal, that's going to be a no-no, you're not going to be able to invest in alternative investments. So that was a little bit of a surprise to me. Well, here's an interesting question. And Miranda, you were talking, do any of the tax changes affect grantor trusts already in place? Miranda, do you want to touch upon that? I'm more than happy to do so.

Miranda - Yeah. Yeah, I can. There's a mixed answer here, which is that any grantor trusts that are currently established and funded before date of enactment are grandfathered and now there are some rumblings that that legislation may actually take effect as a date of introduction. So the date of introduction being essentially September 13th, as opposed to date of enactment. There's some questions about when that might actually happen. But there's a separate piece that it's important to watch out for, and that is for trusts like GRATs, grantor retained annuity trusts, that have already been set up, they are grantor trusts, but you might have set them up a year, two years ago, if there are annuity payments in the future after the enactment of the law, assuming these provisions are enacted. If those annuity payments are paid back to the grantor in kind, meaning using stock or other appreciated assets, as opposed to cash, those could potentially be a gain recognition event for the grantor, which is not something that exists under current law. So even though you may have set up grantor trust already and funded them already, there are still some to watch out for.

Rich - Thanks, Miranda. I'm going through some questions, trying to group them as well. Here's one, Justin, you talked about life insurance. By the way, I love your motorcycle analogy, I'm definitely going to use it. When should I consider starting to think about purchasing life insurance? Why don't you take that one?

Justin - That's a good question. I think I go back to the seasons of life really should drive how you think about life insurance, what you have, but I'll read into the question a little bit and is presumably as someone that's just for the first time starting to think about it. So I would first ask yourself, what kind of liabilities or responsibilities do you have right now? Do you have any student loan debt or credit card debt? Do you own a mortgage, and you're the sort of primary payer of that mortgage? Who would be responsible for your financial situation, whether good or bad should something happen to you? And then you should appropriately speak to an insurance advisor to help you with this, but then appropriately align the right type of insurance product, right type of death benefit amount, and then of course, figure out how that should be owned and structured. But I would first just start looking at what would you want, or need at least accomplished, if something were to happen to you? That's really the starting point, and then reevaluate that as your seasons of life change. And if you get a motorcycle, you need more life insurance, most likely and disability insurance.

Rich - My wife won't like me riding a motorcycle, I'll say that much. We have a bunch of questions around IRAs and retirement plans. We talked about conversion. Here's one, I'll take this one, when should I consider converting an IRA to a Roth IRA? It's a good question. There's one size does not fit all. Primarily going to depend on what tax bracket you're in. What tax bracket are you in today? And what tax bracket do you think you're going to be in in the future? So you have to have a little bit of a crystal ball? Because if I'm in a low tax bracket today, versus a much higher tax bracket when I'm going to take out distributions, then yeah, it makes sense to convert. Pay the low tax now on conversion, and avoid that higher tax when distributions come out. If it's the flip, then it's just the opposite answer. I will say the timing of the distribution is also a factor. Because you need time for the assets to grow. If you pay the tax upfront. I'm a tax person, I never like to prepay the government on anything, but there are certain situations where it does make sense. So if you don't foresee meeting distributions in the near future, and you have the ability to let the conversion grow on a tax free basis, then yes, convert. Miranda, I know you've looked at this topic, anything to add there? I keep on going back to you, do you have anything to add there?

Miranda - So actually, you mentioned the timing of the distributions. And I've done a bunch of analyses for various folks. And what I found is there tends to be a breakeven point, let's say about 20 to 25 years down the road. And if you're likely to need distributions before that 20 year period, so maybe in the next five, 10, 15 years, generally, a Roth conversion doesn't make as much sense because you don't have the amount of time for those assets to grow in the Roth. But if you're planning on keeping the money in the IRA, per se, more than 20 to 25 years, or you're thinking that it would be a great asset to leave to the next generation kids or maybe grandkids, then it's often a good idea to convert to a Roth and allow that to grow tax free in the Roth if you're not going to make any distributions in the near term.

Justin - There's a couple questions about the after tax 401k contribution that maybe I can answer.

Rich - Sure, go ahead.

Justin - From a few different folks, I'm seeing them. So one is, just generally asked me to talk about that a little bit more, why is it a priority to do it before the end of the year, and then just some sort of general elaboration on it. So there's two real reasons to do it before the end of the year. One, regardless of pending legislation is a 401k contribution is a calendar year by calendar year limit. So if you don't maximize your 401k contributions in the calendar year, you can't go back and redo it. So you need to do it before year end. Second reason that this year is a little bit unique is part of the proposal is to no longer allow the after tax 401k contribution strategy that we talked about going into 2022. So this potentially could be the last year and take advantage of what's really a mega, we call it, sort of informally a mega backdoor Roth IRA account. And just to reiterate briefly how that works is, when you make a salary deferral contribution to your 401k, you're limited to 19,500 plus a catch up if you're over 50. And that deferral has to be in the form of either a pre-tax or directly a Roth 401k. It's not addition to, its 19,500. However, you want to give it up between all pre-tax, all Roth or a combination of the two. So those are two buckets, think of it like in your 401k plan. Imagine a third bucket which is called the after tax bucket. And that's a bucket that you can salary defer. Again, has to be done through salary deferrals before year end, that you can defer as an after tax contribution. So presumably, you've already done your 19,500 plus catch up if applicable. Now you're trying to fill the rest of the bucket, which is an after tax bucket. Once you put your after tax dollars in that after tax bucket, you ideally immediately if your plan vendor, or your 401k platform allows you to do it, you immediately convert that to your Roth bucket. So you're not directly putting money in the Roth, in this scenario, you're making it into the after tax tax bucket and then converting it thereafter. Hopefully that clarifies.

Rich - Thanks, Justin. Now we have a lot of questions coming in. Let me take take this one. Can you explain paying life insurance premium from the annual exclusion gifts? I'll try to be brief. When folks set up life insurance, there are many times they want to make sure that it's removed from their estate for estate tax purposes. So they'll set up a trust, typically a grantor trust, and it's otherwise known as an irrevocable life insurance trust. Now that trust now owns the policy, and that policy has to be paid for. How's a trust going to pay for it? It doesn't when it's established and may not have any capital, it doesn't have any capital. So how it's paid for is the person who set up the trust typically will gift assets to the trust, they'll use the $15,000 annual exclusion or other gifting capacity that they may have, their lifetime estate and gift tax exemption, for example, which is currently 11.7. But many times, they'll use the $15,000 annual exclusion and gift it into the trust. And now the trust has the $15,000, they'll turn around, and they'll pay the insurance company. So that's typically how that works. Hopefully that answers the questions well. Miranda I pick on you now. What do you think about 529 plans?

Miranda - Yeah, I think they're actually a great use of the $15,000 annual exclusion. They grow tax deferred. If you take distributions for qualified education expenses, that money comes out tax free. You can use the distributions for college expenses, graduate school expenses, private school tuition, typically it's qualified education expenses include tuition, room board books. You can use the private school tuition limits are 10,000 per year, I believe. And you have the ability to front load a 529 plan with up to five years of contributions right at the very beginning. So $15,000 times five is $75,000 that you could put into a 529 plan for a beneficiary this year, and then you would take the gift tax implications over a five year period. So you can actually start growing those assets right away on a tax deferred tax free basis. And then some states like New York actually provide a state tax deduction, which can be very beneficial in addition. I would say for the average American family who anticipates having significant amounts of education expenses, 529 plans can be a really great way to go. 529 plan assets are also held outside the estate of the donor, so they won't be included in your estate for estate tax purposes. When we work with clients who have very large estates, who may be focused more on wealth transfer, there are other strategies such as making the $15,000 annual exclusion gifts to irrevocable trusts, and paying the tuition cost directly to the educational institutions out of pocket, which can be more effective overall from the estate tax standpoint. But 529 plans are great, and I definitely recommend them.

Rich - Okay, thanks. I'm going through a lot of these questions here. So many great ones. What about life insurance? For some reason, hot topics, life insurance on a number of these in a row. What about life insurance through your company, as opposed to done directly? When should you look at that? So, definitely look at that. If you in particular could be attractive, if you have health issues or health problems, usually, there's no medical that you have to do for life insurance brought through some benefit through the company, that's important. A couple things to note, though, depending on what age bracket you're in, or you go through, you could see it increases, some of it could be significant. Secondarily, I also talked about many folks hold life insurance in an irrevocable life insurance trust. So depending on your company, many companies potentially allow you to hold it in an irrevocable life insurance trust to ensure it's outside of your estate. But through the company benefit, it also forces you to look at it every year, what your needs are, but it's typically term coverage, and term might not be the solution. And let me take a step back, what is term? Term is renewed every year, based upon the premium you pay, it's generally the most inexpensive form of life insurance, but it may not be right for you based upon your goals, your objectives and what you want to accomplish. It's good for certain situations, but permanent may be a better option. And it's definitely important to speak with the appropriate professional, which we have here about what sort of product would be or solution or type of insurance policy will be right for you. Let's see. Justin--

Miranda - Rich, there were a couple of questions about the SALT deduction, the state and local tax deduction. And at this point, the repeal of the SALT deduction limit, which is, as Justin was mentioning earlier, is currently capped at $10,000. It is not included in the existing proposal from the House Ways and Means Committee from September 13th. But we know that it's on the minds of a lot of folks in Congress. It's been discussed, removing the cap on that SALt deduction. However, it is not in any of the current proposals, and we don't have any idea whether it will be added or not. We're going to continue to watch and wait and see.

Justin - One of the question was on minimum distributions for IRAs for somebody that is taking an MRD, they're over 70 and a half, or they were already taking an IRA presumably a minimum required distribution. The question was, if that distribution goes to charity, is it included in tax? I'm presuming it means is it included in their income tax? The answer is no, up to $100,000. So if your MRD, minimum required distribution is $30,000, and you want to give that to charity, instead of taking the receipt of it yourself and paying the income tax, you don't get a $30,000 tax deduction. You just don't owe the tax on the 30,000. But you also don't get the 30,000 pre-tax.

Rich - Thanks, Justin. So why don't we wrap it up here. We talked about a lot, definitely a lot to digest. We talked about potential legislative changes. We talked about retirement. We talked about some important income tax planning strategies that folks can do going into year end. Insurance we definitely talked about it, that seemed like it was a hot topic today and a few other items, we definitely covered a lot. My final key takeaway or takeaways for everybody is just try to keep them forum, try to keep up with things. Talk to your advisor often. Never, ever, be afraid to ask questions. Okay with that, I want everybody to enjoy the rest of the week. And it should definitely be a very exciting fall for all of us. Take care.

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