Wealth planning for the year ahead

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Tune out the noise: Wealth planning for the year ahead

Please see important information at the end of this program. Recorded on 2/27/2023.

JEN GALVAGNA: Welcome and thank you for joining our conversation about Wealth and Legacy Planning. I'm Jen Galvagna, head of Trust, Estate and Tax Solutions at Bank of America. Today, we'll explore the legislative and tax landscape, potential opportunities for investors and strategies that can positively impact your short and long-term financial goals. We'll also touch on family dynamics and the role they play in is estate planning. I'm joined today by two of my Bank of America colleagues.

First, let me introduce Katie Carlson, head of Wealth Strategy for Bank of America. Katie leads a team of wealth strategists that provide customized wealth and legacy planning strategies for our clients and their families. Welcome, Katie. Thanks for being with us. We also have Mitch Drossman. Mitch is head of the National Wealth Strategies team, and part of our Chief Investment Office for Merrill and Bank of America Private Bank. He provides objective insights, thought leadership, and education to help clients pursue their wealth and estate planning goals. Welcome, Mitch. Thanks for being here.

So, let's jump right in. And Mitch, I'd like to ask you a question first. And for this question, I would like to look back before we look forward. So, here's the question. I find it interesting that in the past six years, we have seen more tax law changes than we've seen in the prior 30. It's just mind-blowing. And even last year, although we only saw a few changes, there was a lot of legislation out there on the sidelines. So, I'm curious what's driving this and what do you make of all of it?

MITCH DROSSMAN: Thanks, Jen. Thanks for the kind introduction. I do think it's helpful to look back before we look forward. Last year was a year of near misses, close calls, start, stops, ups and downs. And if we look back, let's start beginning of last year. It was we saw "Build Back Better." That was the President Biden's human infrastructure proposal, and there were a lot of tax provisions in there. Particularly, on the estate and gift tax side, there were some really controversial provisions that would have turned the not only the estate planning community upside down, but I'd say inside out.

That "Build Back Better" kind of slowly went away. And then, there was kind of a skinny version of it. And ultimately, it turned into the "Inflation Reduction Act." And there were a couple of tax crumbs that were kind of picked up in that bill. Most of the tax provisions really were targeted at corporate America, there was some additional funding, a significant additional funding, for the IRS that could adversely affect higher income taxpayers. But of course, if you're straight and narrow, nothing to worry about there. And so, that was really, but we got a chance to see how difficult it was to pass tax legislation even in a unified government. And then, we concluded the year with what retirement legislation, what we call this "Secure Act." And that was really within the last week of the year. Again, that did not have major tax changes for upper-income taxpayers. It made it easier to access retirement plans and easier to fund retirement plans. But generally, it was a year that started out pretty scary, and it ended up pretty good for taxpayers.

JEN GALVAGNA: It's nice to end on a high note for a change, right?

MITCH DROSSMAN:  Yes.

JEN GALVAGNA: So, let me ask you, what does the rest of 2023 have in store for us?

MITCH DROSSMAN:  Well, I got to go back and I got to say is we saw it last year was unified government. We saw how difficult it was to pass tax legislation. We now currently have divided government, and it is even more difficult. But that doesn't mean we're not going to hear a lot of noise. There's going to be a lot of noise. I kind of consider it background noise, white noise. We're going to hear, and we've already actually started, with the President in the State of the Union Address, is we're going to hear more tax proposals. We're going to hear those tax proposals. They're going to be targeted at upper-income taxpayers. They're going to start with the, -- you know, the budget. We're going to hear more details on that.

What's going to happen is we'll hear that and the house is going to ignore the President. And the house is going to have their own ideas about taxes. Particularly, about extending some tax legislation. And then, the Senate will ignore the House. And then, the Senate, although we might see some stuff out of the Senate, the Senate has a difficult time, pursuant to our Constitution, the Senate cannot originate revenue bills. That has to be done in the House of Representatives.

But you'll see the cycle of the White House proposes something, the House ignores them; the House proposes something, the Senate ignores them. And we go round and round. And that's the noise. And I kind of look at this, this is a flywheel of inactivity, and there's some good news there. The good news is that if we don't see anything adverse in terms of tax changes, that will probably continue not only through this year, but we'll probably get into next year or maybe even after that. So, I look out as far as I can see, which is probably only about two years out, I think it is a relatively benign landscape for in terms of adverse tax changes.

JEN GALVAGNA: So, that is definitely good news and good news to our clients. So, let's dig a little deeper on that. What do you see being proposed and debated in the months ahead?

MITCH DROSSMAN:  Okay. So, I think it's the President will kind of go back to the same menu that he created a year or so ago. Of all the tax changes, all of them were targeted at upper income taxpayers. They started out with increasing the marginal tax rate, bringing down the threshold at which that increase would take effect, changes for capital gains and dividends; that if you earn greater than $1,000,000 that there would no longer be a preferential rate on those capital gains and dividends would just be ordinary income tax rate. We heard in the State of the Union Address to bring back something that's called the "Billionaires' Tax." We know that does not apply to wealth of greater than a billion, applies a lot lower than that, but it's essentially a minimum tax of 20%. That's kind of a cornerstone of the income tax side. We'll probably see proposals on the estate tax side, the limitation on the duration of trusts, maybe no step-up in basis. Maybe even goes back to some of the proposals that were in there for trust that were really quite alarming.

But you know what? Just keep in mind is none of this stuff passed in a unified government. It'd be a lot more difficult to do it now. In terms of the House, I think what we'll see and we actually have seen about 75 House Republicans propose a continuation of the 2017 Tax Act. That's the act most of those provisions expire at the end of 2025. So, in 2026, the laws are quite different. There are proposals right now to extend that. There's a proposal out of the Senate in terms of the buyback tax. So, we're going to see a number of proposals. It's just that I think our clients need to focus on what is noise and what actually can get done, and very little it's going to be able to get done.

JEN GALVAGNA: Well, you just shared a lot. So, if all of that is noise as you say, what should investors be thinking about when setting up their estate plan? Where should they focus?

MITCH DROSSMAN:  Yeah. So, I think you come back to all of the things that investors, taxpayers are seeing and feeling every day. When they go to the store, when they go out to dinner, when they make a big purchase. And that is rising interest rates, higher inflation, and volatility. It is those major themes that are running through the economy that also will likely dictate where you will find opportunities for tax planning and for decision making.

JEN GALVAGNA: Right. All great points. So, Katie, I'm going to turn to you. So, interest rates, inflation, and volatility. These are three large umbrella themes. And so, I want to ask you, when you're talking with clients, where do you focus with all of this in the backdrop? And how do you help clients cut through all of this information? Why don't we start with rising interest rates?

KATIE CARLSON: Excellent. Well, first, thank you for having me here today. And yes, look at rising interest rates. We're hearing about it all over the place. It's impacting everything from borrowing, credit cards, auto loans, mortgages. It also quite frankly, impacts how we value gifts. In the estate planning world, we call that the 75/20 rate. That's a rate that's used to help us determine the value of a gift when using or employing certain estate planning strategies.

To give you some context around that rate, last year at this time, that rate was roughly 2%. Today, we're around 4.5%. So, what does that mean for clients, and how do we try and help them remove that noise? The first thing I want to remind everyone is, yes, we're talking a lot about rates. Rates have increased pretty significantly. But when we look at that 75/20 rate over the historical landscape, it's still at or below average. What that means is, most of the estate planning strategies that we've been recommending over the last decade, can still make a lot of sense. We don't need to change our course.

What has happened though, a favorable turn of events with the rising interest rates is two strategies that haven't been as favorable over the last decade, are now starting to get their turn. The first is the concept of gifting a house into a trust. When rates are high or as rates are rising, the value of that gift becomes lower. And so, what that means is you're allowed to give more and it costs less of your gift tax exemption. We typically see that strategy most commonly used with vacation homes, a house that families want to keep in the family for multiple generations. So, that's a good strategy. And then, for our clients that are charitably inclined, contemplating charitable trust right now is also favorable in a rising tax rate, or a rising interest rate environment. Mostly because in order for those strategies to be effective, you need to have a high enough remainder interest going to the charity. The higher that 75/20 rate is, the easier it is to hit that rate.

JEN GALVAGNA: That's great, Katie. And those are planning strategies we haven't seen in the last number of years to do rates being much lower. So, there's a lot of opportunity. Let me ask you next about inflation. Based on our data from our 2022 Bank of America study on wealthy Americans, about half of investors with at least $3 million in investable assets, haven't done any advanced planning beyond a will, which is interesting, and it means there's a lot of opportunity out there. So, the question for you is, how is inflation making now an even better time to put in a estate plan in place and do some more advanced planning?

KATIE CARLSON: So, let me hit inflation. But before I do that, let's really talk about why do we put in a estate plan in place? And for me, there's really two buckets. That first bucket is control and protection. The second bucket is tax planning or tax minimization. So, for most individuals, it's really about the control and the planning. Who's going to serve as guardian of your children? Where will your assets pass, to whom? And how will those assets pass? That's really important. Those are really important decisions.

For individuals that are fortunate enough to have an estate tax problem, all of the things in bucket one are important, plus tax minimization or planning strategies that sit in bucket number two. That's where maybe, dare I say, inflation has been our friend. Under the current tax code, there's two different ways that we can make gifts free of estate taxes. The first is the annual exclusion gift. It allows each individual to give $17,000 away to another individual, free of gift taxes. For married couples, that's $34,000 per individual that you can give away. Similarly, there's the lifetime exemption. That is the amount that you can give away during your life, over and above those annual exclusion gifts.

And today, because of inflation, that amount is currently just shy of $13 million per person, or $26 million for married couples. When you think about that number, $26 million for married couples, there's lots of individuals that today don't have a tax problem. What we have to remember is that if nothing's done to extend those tax cuts that were put in place in 2017, those exemption amounts will reduce. Essentially, in half. So, we'll go from roughly 13 million per person to 7, that's because there's still a little bit of inflation there, right? So, that's where inflation can be your friend. Or $14 million for married couples.

It's really important to think about those strategies now. If you can afford to gift today, start thinking about gifting those assets today so you don't lose the benefit of that exemption. And if you're not sure if you can gift, it's a perfect opportunity to reach out to your team at Bank of America and really run the numbers to understand how much you can afford to gift this year.

JEN GALVAGNA: And it sounds like we may have an extension of the time horizon where clients may be able to make more aggressive gifts. You know, based on Mitch pointing out that we're unlikely to see any tax legislation, you know, maybe over the next several years or possibly.

And so, let me turn back to you, Mitch, with the volatility issue. So, you touched on it in an earlier conversation. And I think we all know and we sit down with clients all the time, investors can be nervous to make decisions around their estate plan when we're in the midst of a downturn, understandably. Sometimes though, there is a silver lining to that. So, do you agree with that, Mitch?

MITCH DROSSMAN:  Yeah. Well, I'll start out and saying is investors and taxpayers are not looking for volatility. But if you look at volatility from the right angle, I think you'll find opportunities. And so, some of those opportunities could be if the, you know, if there's a drawdown in the market is there may be an opportunity to harvest tax losses. Take those losses, offset those against capital gains, or use them for a following year. There may be an opportunity if you have an asset that has gone down in value. And let's say you have an existing trust. You may have an opportunity to swap an asset in the trust. Maybe pull back some cash and give an asset that is lower in value into the trust, and hope for further appreciation, and let that occur in the trust. If you have, let's say, an IRA that has gone down in value, it might be an opportunity to convert that to a Roth IRA at a lower value, which might mean lower taxes. Maybe it's an opportunity to fund a new trust. So, there's a lot of opportunities out there to take advantage of if there is volatility.

JEN GALVAGNA: And it may seem counterintuitive, but funding a trust when asset values are lower, can often bring opportunity.

MITCH DROSSMAN:  Yeah. So, let me there's two points that I want to make about that because I think that that's great. Is it the right entry point? Just like, you know, a long-term investor may want to get in at the right time when asset values, or lower. If they have a long enough time horizon is it might be the right time to fund a trust. If you're going to fund it with assets, let's say, in kind, not in cash. As something that has gone down in value, now might be the right time.

Or you could look at it from another perspective. Let's just say somebody wanted to make a gift of $100,000. I'll use that as an example. That was their -- call that their "gift-giving basket." Now, if they used -- if they made a gift in kind, let's say they used securities. And the securities, the stock was $100 a share. They'd be able to put 1,000 shares into that gift basket. But if the stock declined in value, let's say to $80 a share. Well, now you can stuff that gift basket. It's the same size, 100,000. But you can now put in 1,250 shares into that basket. And that's where volatility -- that's where you can take advantage of volatility. Is give a greater number of something in there, in the hopes that, you know, all that appreciation will occur in the trust and off your balance sheet. So, that's how you take advantage of volatility in this environment.

JEN GALVAGNA: It's great examples. Both of you have given a lot of great examples on different strategies that the clients can be thinking about today. And one of the things that I talk with my team about all the time is that we need to meet clients where they are. And clients are in all different places. So, Katie, I want to turn to you. What about clients who aren't ready to make any new changes to their estate plan right now? They're not looking to set up anything new, but they would like to consider optimizing the current plan that they have in place.

KATIE CARLSON: Absolutely. Look, there's always a ton to do and to talk about relative to estate planning. Doesn't always need to be a new plan, a new entity, or a new trust. Three things that really every client can think about right now. First, I start with what we call "ancillary estate planning documents." Think of those powers of attorney, living wills, health care proxies. Look at them. How old are they? If they're over 10 years old, maybe even a little bit less, I would really recommend revising them. Look at who you've named. Is that still the person that you want to be the power holder?

The second thing is many individuals have already funded trusts. You need to continue to review those trusts. Do the provisions make sense? Does the asset allocation make sense? Are you serving as trustee and are you comfortable with that responsibility? If not, that could be a time to partner with a corporate trustee to help you around trust administration.

And then, the third thing that I like to focus on are beneficiary designations and asset titling. Mitch, I'm sure you've seen this too. I can't tell you how many times clients have come to us with a beautifully well-written estate plan, but the asset titling has not been changed to coordinate with that plan. And therefore, all of that planning just really won't work. So, looking at your documents, and then understanding, are your assets titled appropriately or beneficiary designations updated. Three things that everyone can and should do right now.

JEN GALVAGNA: I think that is invaluable to point out that the regular review of an estate plan can be critical. And I think that we have seen many clients who have gone too many years without taking a look at what they've done. And at that point, you don't even remember what you've done anymore. So, it's such an important piece of advice, and I appreciate that. And if that's not enough motivation for you to review your estate plan, there's family dynamics that factor into this as well. So, a client's family, as we know evolves over time and there can often be complicated situations that take place over the years. So, we have blended families, second marriages, kids with differing needs, multigenerational beneficiaries. And so, I'm curious, how do you broach those topics with clients?

KATIE CARLSON: Well, listen, family dynamics are present in everyone's life in every estate plan. They impact not only how we choose to give or pass or transfer wealth, they impact how we choose to talk about wealth, how we choose to educate the next generation. For me, one of the things that I say to our clients is there's lots of things that are catalyst for you to think about your estate plan or to review it. Very simply, maybe it's the five Ds, right? These are things that happen all of the time, unfortunately. Death, divorce, disability, say diagnosis and unfortunate medical diagnosis, or domicile, a change in residency. Those are all reasons to look at your estate plan and reevaluate it. Does it make sense? Is it written to comply with law where you are today? If you unfortunately are divorced, did you remove your ex-spouse as a power holder or as a beneficiary, right? Always reasons to continue to look at and review your documents.

JEN GALVAGNA: It's a great advice. So, we have covered a lot of information today. Mitch talked with us about what's happening in the markets and government. And Katie's given us practical strategies to explore. And before we go, I would like our guests to be given a couple of actionable takeaways. So, I'm going to ask you each a question. What is the one thing we want our attendees to take away from this discussion? Mitch, I'm going to start with you.

MITCH DROSSMAN:  The one thing, I'm going to go back.

JEN GALVAGNA: There are so many things. But just one thing.

MITCH DROSSMAN:  I'm going to go back to the same things that I talked about earlier of what I, how I think the year is, or the year or two, is going to shape up. There's going to be noise is, but I think it's going to be awfully difficult for Congress to enact adverse tax changes. So, to me, if I'm quoted to draw on a golf analogy, I'm saying is, "Well, the hole might not be any closer. I think the fairway is just wider." I think it's wide open there. If you want to take advantage of it. But that doesn't mean that you just pull out any club from your bag. You pull out the right club. And what I mean by that is, the same themes that we talked about earlier, higher interest rates are rising, inflation, volatility. You put pull out, and you focus, and you look to get the right club to attack it, or the right tool. And I think there's a lot of opportunity for planning in the near term.

As Katie mentioned, in 2026, we see the kind of the revival of a whole set of older tax laws. Because in 2025 a number of provisions will sunset, and I think that that's the window of opportunity between here and now. But if there's volatility and markets have -- if an asset values have gone down, now may be the right time to take advantage of this. Whether it's funding new trust or taking care of old trust as well.

JEN GALVAGNA: Great. Thank you, Mitch. Katie, let me turn to you.

KATIE CARLSON: Yeah, thank you. Listen, I think one of the most important things is for everyone to realize drafting your estate plan is not a one-and-done thing. And an estate plan is something that you need to continue to visit and revisit. Not just when there's potential tax changes, right? We said there's likely not going to be anything this year, but there could be changes in your life. There's opportunities in the market. And so, I encourage each of you to kind of reach out to your team at Bank of America. Our job is to work with you, and your attorneys, to educate you around the strategies that may make the most sense, to help you reach your goals and objectives, and then help you to implement those strategies once they've been agreed upon.

JEN GALVAGNA: Thanks, Katie. And I'll answer my own question. And I'll say to our viewers, there's no one right answer. What I would say is you need to make the decision that feels right for you and for the people that you care about. And remember that the right decision today, may not be the right decision a year from now, 10 years from now. Things change, families change, financial situations change. And there's always an opportunity to update the plan.

So, thank you, Mitch. Thank you, Katie, for joining us today. And thank you for joining us. Whether you're new to estate planning or have an existing plan in place, I'd encourage you to consider some of the ideas we've explored today. Thank you.

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