The approach of holiday season signals the end of the year – and the perfect time for ultra-high net worth families to evaluate their financial position and deploy relevant tax strategies. Thoughtful planning now can lead to significant benefits down the road. Here are key items to consider as we approach year-end.
1. Review Your Overall Tax Position
Understanding your tax liabilities is crucial – and although many taxpayers will wait until April to focus on taxes, the end of the tax year is a better time to review your situation. Schedule a meeting with your wealth planning or tax advisor to assess your current tax situation. Key considerations include:
- Income Projections: Analyze your income for the current year and project it for next year. Determine whether it makes sense to accelerate or defer income and expenses. Consider whether or not to harvest investment losses (but be mindful of the wash sale rules). Evaluate whether to adjust your withholding or estimated tax payments.
- Tax Bracket: Know where you stand in terms of tax brackets to determine if certain strategies (like Roth conversions or additional contributions to your retirement accounts) might make sense.
- Lower income tax bracket years: If you find yourself in a lower tax bracket than normal, consider taking advantage of strategies that help you make the most of lower tax rates for the current year. Doing a Roth conversion, taking a qualified distribution from your tax-deferred accounts (if you are over age 59 ½ and not subject to penalties) or harvesting investment gains at the lower tax bracket could all prove beneficial in future years.
- Higher income tax bracket years: In higher income years, it might make sense to defer as much income as possible, maximize contributions to retirement accounts, harvest capital losses or make significant contributions to charitable organizations.
2. Maximize Charitable Contributions
If philanthropy is part of your family values and overall financial strategy, consider making charitable contributions before the end of the year. Not only can this enhance your legacy, but it may also provide immediate tax benefits.
- Donor-Advised Funds (DAFs): Contributions to DAFs allow you to make a charitable contribution in the current year, receive an immediate tax deduction, and distribute funds to charities over a period of time.
- Appreciated Assets: Donating appreciated securities instead of cash to charity can help you avoid capital gains taxes while also maximizing your charitable impact.
- Qualified Charitable Distributions (QCDs): QCDs allow individuals who are already in Required Minimum Distribution (RMD) status to distribute up to $105,000 (indexed for inflation) directly from their IRA to a qualified charity and exclude that amount from their taxable income.
3. Harvest Tax Losses
Tax-loss harvesting can be a strategic move, particularly in volatile markets. Review your investment portfolio throughout the year to identify underperforming assets and generate tax losses that may:
- Offset Gains: Sell investments that have lost value to offset capital gains realized during the year.
- Carry Forward Losses: If your total capital losses exceed your gains, you can carry forward the excess to future tax years.
Be mindful of triggering the wash sale rules. The wash sale rules require you wait at least 30 days before or after your sale date to repurchase a substantially identical security or your losses may not be deductible.
4. Assess Your Estate Plan
The end of the year is an excellent time to review your estate plan. Changes in tax laws and your family circumstances may necessitate adjustments:
- Annual Gift Tax Exclusion: Utilize the annual gift tax exclusion to transfer wealth to heirs without incurring taxes. The current exclusion allows you to give up to $18,000 per recipient (as of 2024). In addition, paying educational or medical expenses on behalf of anyone directly to an institution is not treated as taxable gifts and unlimited.
- Check Beneficiary Designations: Certain assets like retirement accounts go to your heirs via beneficiary designations – the end of the year is a great time to review and make sure these are all up to date.
5. Plan for Required Minimum Distributions (RMDs)
If you’re over 72, remember that RMDs from retirement accounts are mandatory each year. Ensure you plan for these withdrawals to avoid penalties:
- Timing: You can take your RMD as late as December 31st, but planning earlier in the year can help with cash flow management.
- Charitable Distributions: Consider directing your RMD to a qualified charity (see discussion of QCDs above), which can satisfy the distribution requirement while providing potential tax benefits.
- Inherited IRAs: Final regulations related to RMDs from inherited IRAs and other qualified plans were issued by the IRS earlier this year – review the new rules and regulations before making decisions related to inherited IRAs.
6. Review Retirement Plans/Accounts and Contributions
Keep in mind that all contributions to a traditional or Roth IRA must be made by the due date for filing your tax returns (not including extensions). Conversely, the SECURE Act enables a business owner to set up and fund an employer- sponsored retirement plan to the employer’s tax filing deadline (including extensions). Review all your current year contributions and make plans for timely future contributions to maximize retirement savings benefits.
Conclusion
Year-end financial and tax planning is a vital exercise for ultra-high net worth families. By proactively addressing these considerations, you can optimize your financial strategy and position your family for success in the coming year. Coordinating with your wealth management team at Crewe Advisors can provide tailored insights to ensure you’re making the most of these opportunities.
