7 Potluck Financial Planning Ideas

Taylor A. Whitt, CFP®
Associate Wealth Advisor

As we approach Thanksgiving and eagerly await the potluck to be shared amongst family and friends, the limited capacity of my ambitious stomach is soon to be confronted with some difficult decisions.

When looking at your wealth, and the ubiquity of in formation available to provide you with financial strategies, and investment insights, you might find yourself in a similar predicament. In the same way, as we look at our individual wealth and how to navigate through our greater financial world, it can be hard to discern what information out there is important, and in what order to proceed.

As my contribution to the potluck this season, I offer seven financial planning insights, which do not all nee d to be consumed in one sitting. I address various strategies to combat rising healthcare costs, shelter estate
taxes through various forms of gifting, and optimize your retirement income with tax-deferred strategies. Some may not be relevant to you right now, so save these insights and reference back to them as you would those inevitable Thanksgiving leftovers.

  1. Estate Tax Planning Window
    The 2017 Tax Cuts and Jobs Act (TCJA) significantly increased the lifetime estate tax exemption offering the opportunity for individuals to shield their assets from estate tax (currently 40%). In 2019, the lifetime estate tax exemption is $11.4 million per individual, up from $5.49 million in 2017. Under current law, the higher exemption will expire in 2025 at which time it will revert to $5 million indexed for inflation. Additionally, the current estate tax law will likely become a popular target of lawmakers in the current political environment.  Individuals who anticipate having large estates and those who have assets with significant appreciation potential should consider taking advantage of the current law and other advanced planning techniques while developing thoughtful long-term family goals. Beyond advanced estate tax planning, 529 plans, qualified direct tuition, medical payments, and a consistent program of annual gifting remain very effective tools to bring down the value of estates without using our individual lifetime tax exemption.

  2. Tennessee Community Property Trusts
    Some couples own valuable assets with a very low tax basis: a home, other real estate, a stock portfolio. The couple may be reluctant to sell an asset, especially in old age, desiring to avoid capital gains taxes. In certain instances, a Tennessee Community Property Trust (CPT), a Trust only available for married couples, may serve as an effective tool for managing unrealized capital gain tax exposure and achieving portfolio diversification. The utilization of a CPT allows for a 100% step up in basis on appreciated assets within the Trust (securities, real estate, etc.) rather than the 50% step up in basis that jointly held property would otherwise receive. The result is the elimination of all capital gains at the first spouse’s death which allows the surviving spouse to diversify Trust assets while avoiding capital gains tax. While there are important considerations to contemplate before creating a CPT, the potential benefits are worthy of exploring. Increasingly, CPT provisions are being incorporated into Revocable Living Trusts.

  3. Tax Loss Harvesting
    Losing investments are valuable - as long as you have some winners. Having capital gains tax liability indicates a successful investment outcome, but tax loss harvesting offsets realized gains with realized losses during the year. If realized capital losses are in excess of realized capital gains, we can offset some of our ordinary income, then realized capital gains. Any unused realized losses can be “carried forward” to offset realized capital gains into future years. While losses have been rare in recent years, part of the investment process at Truxton is to look for losses to offset against gains. Additionally, Truxton portfolios intentionally limit the utilization of pooled investment vehicles (like mutual funds and collective trusts) to further reduce undesirable capital gains distributions not related to our clients’ own investment activity. Following a decade long run in equity markets, many pooled investment vehicles currently have significant capital gain tax exposure.

  4. Refresher on “Bunching”
    The Tax Cuts and Jobs Act (TCJA) brought significant changes to individual and business taxes. One prominent change was the doubling of the standard deduction to $12,200 per individual and $24,400 per married couple. The increased standard deduction will likely result in fewer people electing to itemize deductions. Here is a quick refresher on standard versus itemized deductions. Every year taxpayers choose between the standard deduction or itemizing deductions on their federal income tax return, generally electing the option that reduces their overall tax liability. Common examples of itemized deductions include state and local taxes such as property taxes, mortgage interest, and charitable contributions. Because the standard deduction is significantly larger than years past, many taxpayers will find that their itemized deductions do not exceed the standard deduction. What does this have to do with charitable giving? You may want to consider “bunching” your charitable contributions. Bunching refers to the strategy where taxpayers “bunch” donations to charities in specific years, while limiting donations in other years. The strategy requires you to combine multiple years of annual charitable contributions into a single year to increase the likelihood of exceeding the standard deduction, thus producing additional tax savings by electing to itemize deductions.

  5. Health Savings Accounts
    There’s no better way to shelter a portion of your current income from taxes and to prepare for growing medical costs than by contributing to a Health Savings Account (HSA). If you are on a high deductible healthcare plan (HDHP), then you are eligible to participate in an HSA. 2019 contribution limits are $3,500 for individuals, or $7,000 for families. The contributions, earnings, and distributions are completely tax-free as long as they are used for qualified medical expenses. HSA funds can even be used toward Long Term Care insurance premiums. With early and consistent HSA contributions, appreciation in HSA balances and paying ongoing medical expenses out of pocket, HSA account balances can grow to sizeable amounts in an extremely attractive tax structure.

  6. Hybrid Long Term Care Insurance
    In 2016, the national average for Long Term Care (LTC) costs were $225 a day with an average nursing home stay of 272 days, costing a total of $61,200 (www.longtermcare.acl.gov). Today, relative to years past, LTC products combine various features offering more flexibility and customization to meet specific needs and circumstances. In many instances, we consider hybrid LTC products that combine the benefits of LTC with life insurance, or an annuity. This can provide some comfort knowing that if an LTC claim is never made, assets will come back to heirs as a guaranteed income tax free death benefit, or to you as guaranteed income for life, depending on the product. Cash values of existing life insurance and annuities can be exchanged without creating a taxable event to obtain benefits of LTC insurance.

  7. Life Insurance Death Benefit Subject to Estate Tax
    Even though the named beneficiary of a life insurance policy receives the policy’s death benefit income tax-free, the owner of the policy can still face a taxable estate situation. If the decedent is both the insured and owner, the proceeds are still included in the gross estate tax calculation. Some estate planning techniques involve transferring the ownership to someone other than the insured, or by titling the policy to an Irrevocable Life Insurance Trust (ILIT).