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A frequent topic of discussion these days is what investors should be doing before the end of the year. This article was written prior to the election, so the results are unknown. Regardless of the outcome, the $3 trillion debt related to coronavirus relief will need to be addressed at some point, and the current lower tax brackets are scheduled to increase when they sunset in 2026. With that in mind, there are several strategies investors may consider to better position themselves for the future.

Portfolio Strategies

With a goal of making portfolios more efficient, investors should consider the following:

  1. Dovetail investments with financial plans and rebalance portfolios back to established targets.
  2. Invest in more tax-efficient vehicles for the future, such as Exchange Traded Funds (ETF), which historically have minimal capital gains distributions.
  3. Reduce portfolio drag by selecting equivalent investment vehicles that have lower internal expenses.
  4. Redeploy realized gains into Qualified Opportunity Zone (QOZ) investments. QOZs provide much needed investment dollars to target areas, and the program provides several tax benefits for investors, providing certain criteria are met.

Planning Strategies

For tax optimization, consider these planning strategies prior to year-end:

  1. Review the ownership structure of assets and consider asset retitling using the transfer on death (TOD) designation. TOD designation allows beneficiaries to receive assets at the time of death without going through probate court. In addition, couples could put joint assets in individual names, utilizing the TOD designation, which would allow both spouses to take advantage of the step up in basis at death and possibly work around large unrealized portfolio gains.
  2. Another estate planning option gaining traction is the Spousal Lifetime Access Trust (SLAT), which is an irrevocable trust created by one spouse for the benefit of the other. Explained simply, a SLAT allows these assets to be excluded from estate tax consideration of the donor spouse while still allowing access by the receiving spouse.
  3. Revisit gifting strategies:
    • For those with a focus on charitable giving, consider making a sizeable contribution to a donor-advised fund. These donors receive an immediate tax deduction on the contribution and grant s can be issued in the future from the fund at the owner’s direction. Appreciated securities can be used to fund a donor-advised fund, and any asset s in the donor-advised fund at the time of the owner’s death are excluded from estate valuations.
    • Most 529 college savings accounts are not included in estate valuations. Investors should consider maximizing 529 gifting rules to possibly overfund a college savings account now to fulfill both current and future educational needs. If crafted and managed correctly, a 529 plan has the potential to extend beyond the original plan’s beneficiaries. In fact, the contributions can help cover education costs for many generations due, in part, to the fact that you can change the account owner and beneficiary multiple times, of ten penalty-free. The lifetime contribution limits are generous; there is no limit on growth, and individuals can own multiple 529 college savings accounts.
  1. Consider a Roth IRA conversion. A Roth conversion occurs when assets are moved from a traditional IRA to a Roth IRA. A Roth conversion provides many benefits, which are discussed in an in-depth article inside this newsletter.

While it is impossible to predict the future, now is certainly a time to think ahead. Consider what makes sense, start the discussions, and give us a call—we’re here to help.

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