Estate PlanningOur clients rely on us to inform and educate them about business and financial management issues. We value our role as trusted advisors, and we constantly educate ourselves about changes in tax law, financial reporting standards and good business practices so we know the advice we give our clients is the right guidance.

But we’ve noticed a change in recent years. Often, clients come to us already armed with information about new tax strategies or business management practices, and they want our perspective. Sometimes they’ll even question our conclusions.

Welcome to life in the Information Age.

With the massive volume of information at our fingertips today, it’s possible for people who use it wisely to make better, more informed decisions for their lives and their businesses.

But it also changes the nature of relationships, and that’s a good news/bad news story.

We like it when our clients become more educated and informed about taxes and financial management. It makes for livelier, more in-depth discussions when we meet with them, and it challenges us to be clearer and more concise when explaining our advice. Occasionally, it leads us to re-examine our conclusions and explore other options.

But sometimes the information they read is easy to misinterpret. If they’re not reaching out to us and they’re making decisions based on what they’ve read online, they may have only 25% of the information they need. Getting an education from the “University of Google” can lead to making important decisions based on incomplete information.

The Employee Retention Tax Credit (ERTC) is a good example. There is a lot of information on the internet about it, but it’s important to remember that one size does not fit all situations. Every business that utilizes the ERTC must go through a process to determine eligibility and use of the credit must be balanced against other incentives that may be more beneficial. We should be having conversations to ensure that each client is going down the right road.

There is also the 2,500-page tax bill put forth by President Biden. It is not yet law, but if it does become law by the end of this year, it contains a provision that would change tax rates on capital gains retroactive to September 2021. In other words, it’s already too late to make any changes in investments to avoid a higher capital gains tax rate. But there are strategies we can discuss with clients that they may not be aware of that could benefit them. No one should assume that what they have read online about this change gives them all the information they need to know.

Little-known Estate Planning Tool

With potential changes to the federal estate tax also on the horizon, we’re talking to more clients about Spousal Lifetime Access Trusts (SLATs), which are a little-known estate planning tool that can help high net worth couples transfer wealth while they are still living.

Even if you have other wealth transfer vehicles set up, a SLAT can help prepare for the inevitable reduction of the estate tax exemption. While it is up to $23.4 million for 2021, that exemption is scheduled to expire in 2026. President Biden has proposed reducing the exemption to roughly $5 million (before inflation adjustment) even sooner – in 2022 – so it is important to transfer as much wealth as possible now.

Under a SLAT, each spouse has his or her own trust, and the beneficiary of it while both spouses are still alive is the other spouse. The trusts are designated for specific purposes such as healthcare or living expenses. During their lifetime, the funds from each trust can be spent only by the owning spouse, even though funds may be expended on behalf of both. In other words, if a wife owns a trust designated for healthcare, she can use its funds to pay for her husband’s medical expenses. The two trusts can’t be identical – they must be different in the way monies are expended and they must be initially funded with different amounts. Ultimately, when one spouse dies his or her trust is transferred to the children.

SLATs are considered grantor trusts, and the Biden tax proposal would change the treatment of grantor trusts as of January 1, 2022. So, any taxpayers considering SLATs as a wealth transfer strategy should get them done by the end of this year.

SLATs are a good example of what can come out of direct conversations between clients and advisors. Even if they have read about the Biden tax legislation online, most of our clients haven’t heard of SLATs and they are grateful when we suggest them as a wealth transfer solution.

No matter what you read on the internet – and much of it is good information – it takes a conversation with your trusted advisors to flesh out how changes in tax laws will affect you because every situation is unique, every business is unique and every family is unique.

Keep reading and educating yourself. And give us a call. We always have time to help you interpret information and to recommend strategies and solutions that will help you reach your goals.

Brandon Miller, CPA, CGMA
CEO
brandon.miller@hwco.cpa