Your year-end financial planning: 10 things to consider

As the year draws to a close, it’s again time to focus on year-end financial planning opportunities. In addition to the annual review of insurance policies, estate plans, and gifting strategies, 2021 brought us various new challenges: Proposed tax changes focused on higher marginal and capital gains taxes, reduced estate tax exemptions, and limits on popular retirement planning techniques. Here’s our “top 10” checklist for finding opportunities.

1. Monitor your portfolio positioning

As a strong year in the markets continues, interest rates and inflation expectations remain a focus of economists, the financial media, and investors. This uncertainty occurs within the context of ongoing pandemic concerns, supply chain disruptions, and labor constraints. Amid such unknowns, it’s important to work with your advisor to confirm your portfolio exposure and overall investment policy aligns with your long-term plan.

2. Incorporate possible tax scenarios in your planning

With details of the Build Back Better Act (BBBA) now on the table, it’s time to understand the potential tax implications and plan accordingly. Proposed changes include higher marginal and capital gains rates as well as limitations on popular IRA/retirement plan techniques and common estate planning strategies among others. 

While this proposal is far from final, proper planning requires time. Develop contingency plans now so you’re ready to take action prior to the effective dates of the legislation — some of which could come before year-end. Such plans will be unique to each taxpayer. We recommend such conversations entail your broader advisory team to account for your unique circumstances appropriately.

For investors triggering larger capital gains, opportunity zone funds (OZFs) remain a valid consideration in certain circumstances due to the potentially higher capital gains rates (per the current proposal) and time left to leverage potential OZF benefits fully.

3. Revisit your wealth transfer strategy

Families considering wealth transfer strategies should be actively developing and implementing their plan. The BBBA proposal may limit common vehicles used in family gifting, specifically the use of grantor trusts and transactions with those trusts. The BBBA also proposes an early reduction in the estate tax exemption amount from $11.7 million per person to approximately $6 million per person. As written, the proposed legislation may also limit the use of popular grantor-retained annuity trusts (GRATs). 

4. Practice sound personal cybersecurity habits

Well-publicized data breaches within companies and government entities have highlighted the increasing sophistication of hackers. But the threat extends well beyond these settings. Be vigilant as cyberthreats continue to evolve, and make it a priority to take extra steps to protect your personal information and financial security.

5. Consider RMD/QCD planning

Evaluate the role required minimum distributions (RMDs) will play in your cash flow and tax planning. If your RMD is in excess of required tax payments, consider the use of year-end RMD withholding as a replacement for quarterly estimates.

Remember that qualified charitable distributions (QCDs) remain a viable option for the charitably inclined to partially or fully offset RMDs. For those considering QCDs, it may still be wise to wait for clarity on tax policy and the resulting impact on itemized deductions.

6. Review insurance policies

With record-low yields, dividend crediting rates on whole life policies may be negatively impacted. Without proper management, this trend could place certain policies at risk of lapse. To ensure sufficient time to make appropriate changes, review your policies now and develop a plan to protect your coverage. The review should also assess whether the current structure remains appropriate for your situation.

7. Develop your family education plan

Now is a great time to refocus on your family’s financial future. Developing a proper plan to bring the next generations into the fold isn’t only a good complement to sound financial planning but critical to its execution. Developing the next generation to operate as sound stewards of your legacy is a high-impact activity that magnifies the benefits of prudent wealth planning.

8. Review your estate plan

In 2020, you learned to plan for the unexpected, and in 2021, the lessons extend to your estate plan. Review the key tenets of your plan and confirm that they still align with your wishes. This includes trustees, personal representatives, financial and healthcare powers of attorney, guardians, and distribution provisions.

9. Don’t forget the estate planning “freebies”

While this is certainly an important time to be considering larger taxable gifts, be sure to remember the simpler options as well:

• The annual exclusion gift limit remains at $15,000 per person.
• Medical expenses can be paid without limitation, as long as you pay the medical provider directly. 
• Education expenses can also be paid with no limit as long as you issue payment to the institution and not an individual.

10. Plan for philanthropic giving

Donor-advised funds and family foundation balances have swelled in recent years, due to both accelerated gifting for tax purposes and market performance. This is a great time to take a step back and develop or confirm your strategic plan for the funds available for grants moving forward.

Not sure where to start?

As with many financial topics, these planning concepts shouldn’t be viewed in a silo. Your advisory team can work with you to tie those pertinent to you into your broader plan. Feel free to contact your relationship manager to discuss further.