Tax planning moves to end the year right

Are clients seeking more from their money than just favorable returns? Are they eager to lock in tax-efficient financial decisions before year-end? The following are some planning strategies that may make sense.


Currently, each person has an estate and gift tax exemption of $11.58 million ($23.16 million for married couples). Any gift made over the annual limit discussed next decreases both the donor’s lifetime gift tax exemption and the federal estate tax exemption that the donor receives upon death.

Paying directly for someone’s tuition or medical expenses, or giving up to $15,000 to another person before the new year are gifting techniques that taxpayers are using to transfer assets tax efficiently. Neither the donor nor the recipient is taxed on these gifts. The gifts can be made to anyone, and there is no limit to the number of people to whom you can give these gifts. 

Under current law, the estate and gift tax exemption will be reduced by more than half, to $5 million ($10 million for married couples) in 2025. The IRS has said that gifts made up to the limit will not be taxed retroactively once the limit decreases. Some people who will be affected by the reduction and who believe they might be vulnerable to additional tax changes are making more gifts up to the limit sooner, rather than later.

[More: Gifting in uncertain markets]


Charitable remainder trusts and charitable gift annuities offer an immediate charitable deduction and income to the donor as well as benefits to the chosen charity.

CRTs are “split interest” irrevocable trusts that provide income to the donor or beneficiary for a time, with the remainder of the donated assets going to one or more designated charities after the time elapses.

Charitable gift annuities are also “split gift” irrevocable donations of assets to a qualified charity, with the charity assuming legal ownership of the gift for its purposes and to provide the donor and up to one additional beneficiary with income until death. Both strategies help avoid taxes on appreciated assets donated to the charity, achieve an immediate income tax deduction and help generate cash flow streams for the donor. The investment income from CRTs is exempt from tax.

If a donor doesn’t need cash back from the donation, donor-advised funds provide an immediate charitable deduction along with tremendous flexibility to direct future charitable gifts later.

Think of DAFs as investment accounts that exist to provide grants to IRS-qualified charities. Remaining aware of the standard income tax deduction, donors may aggregate several years of planned charitable giving into one gift to the DAF to maximize their tax deduction.

As with all charitable donations, appreciated assets make the best funding source as the donor avoids any tax on the appreciated assets. A highly appreciated concentrated stock position makes an ideal donation to the DAF. The concentrated stock is reinvested tax free into a growth portfolio for tax-free growth inside the DAF. The donor benefits immediately by taking a tax deduction for the entire value of their stock donation, avoiding paying capital gains on the contributed stock and reducing their concentrated stock risk.

Donors also enjoy the ability to request grants from the DAF to qualified charities when they wish. Large, sophisticated DAFs can accept more illiquid donations, such as a piece of real property or a limited interest in a private vehicle such as a hedge fund or private equity position as well.

Switching gears, while this year’s CARES Act waived required minimum distributions in 2020, some clients are still using their traditional IRAs to make charitable contributions via qualified charitable distributions. They are direct transfers of IRA funds to a qualifying charity.

IRA owners who are at least 70 ½ can make QCDs of up to $100,000 per year, regardless of whether they claim the standard deduction or itemize. This technique may be appealing if clients have few other deductions or are close to their charitable deduction limits and are seeking efficient ways to decrease IRA funds at zero tax cost.   

In addition to these strategies for taxpayers who itemize, the CARES Act made available to all taxpayers in 2020 a $300 deduction for charitable contributions. 

[More: Uncharitable giving]


While there is lots of speculation around how long the current, historically low tax rates will continue, there is no doubt that the IRS will claim its due on tax-deferred accounts like individual retirement accounts. People anticipating having a higher income tax bracket in the future are considering two strategies related to traditional IRAs before year-end.

First, a Roth conversion merits serious consideration. A Roth conversion is the taxable transfer of retirement funds from a traditional IRA to a Roth IRA. While the account owner pays income taxes on the amount withdrawn from the traditional IRA, the owner benefits in three ways through the Roth conversion. First, the funds in the conversion grow tax free. Second, there are no lifetime RMDs from a Roth. Third, there will be less money remaining in the traditional IRA that is subject to RMDs and taxes.  

Second, voluntary traditional IRA withdrawals may be relevant. Since the SECURE Act eliminated stretch IRAs for most non-spouse beneficiaries, some people are taking funds out of their IRAs after retirement but before RMDs begin at age 72 with the aim of avoiding spikes to higher income tax brackets once RMDs begin.

If the extra cash is not needed, people could leverage cash value life insurance as an alternative estate planning strategy. The life insurance cash value grows tax-free during the owner’s life; upon death, the policy’s proceeds are passed to the beneficiary tax-free.

[More: Ed Slott: Every adviser must master IRA withdrawal strategies]

Jeff Farrar is a co-founder of the independent RIA Procyon Partners. Caroline Wetzel is a private wealth advisor at Procyon.

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