Op-ed: Here are 3 year-end strategies for high-net-worth families to consider

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This has been a year of opportunity for investors who took to heart the old Wall Street adage that “the time to buy is when there’s blood in the streets.”

Indeed, a market drop can prove to best the best time to take advantage of various financial planning opportunities. Some of the most popular strategies this year among investors attempting to make the most of a challenging environment have included tax-loss harvesting, Roth individual retirement account conversions and buying the dip as stocks continue to plunge.

For high-net-worth investors, there may be additional planning considerations that should not be overlooked. Here are three strategies to discuss with your trusted advisor before the year ends.

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1. Use a donor-advised fund to ‘bunch’ donations

A donor-advised fund is an investment account whose purpose is supporting charitable organizations. A donor is eligible for an immediate tax deduction when contributing cash, securities, or other assets to a DAF. Those funds can then be invested for tax-free growth until the donor decides to distribute them.

Grants can be made to any qualified public charity, right away or over time. A DAF is particularly useful when an investor owns a security with no cost basis, a highly appreciated stock or a long-time held concentrated position. In all these scenarios, a capital gains tax liability can be avoided by moving the position to a DAF.

A DAF is also valuable when “bunching” charitable contributions. In this approach, one would contribute several years’ worth of charitable contributions to their DAF all at once.

This strategy addresses the fact that charitable contributions are only tax-deductible for those who itemize their deductions. The standard deduction for 2022 is $12,950 for single filers and $25,900 for joint filers.

“Bunching” charitable contributions by utilizing a DAF allows a donor to exceed the standard deduction and take the itemized deduction this year, while offering the flexibility to still distribute the funds over the current and subsequent years.

2. ‘Freeze’ lower value of assets for gifting purposes

For ultra-high-net-worth families, making gifts today at the depressed market prices is an opportunity to more tax efficiently shift funds out of a family’s estate. Since the gifted assets are “frozen” at today’s lower values, they use up less of the federal lifetime gift tax exemption.

The exemption is $12.06 million per person for 2022, but is set to revert to $5.49 million after 2025. At current levels, a married couple with an estate above $24.12 million, or $10.98 million after 2025, may be hit with federal estate tax. Gifting funds to family members or into properly structured trusts may help minimize the tax someone’s estate will need to pay at their death.

3. ‘Superfund’ a 529 for estate, legacy planning goals

A 529 is a tax-advantaged college savings account that may provide immediate tax savings, tax-free growth and tax-free distributions if the funds are used for qualified educational expenses. Most states require you to invest in their in-state plan to receive the deduction for contributions. However, there are several states that are considered tax parity where you can use any state’s 529 plan to receive the deduction.

The annual gift exclusion in 2022 is $16,000. That means an investor can gift each person $16,000 this year gift tax-free. The annual gift exclusion recycles on Jan. 1, so if someone doesn’t use their 2022 gift allowance by Dec. 31, they lose it.

High-net-worth families that want to help fund a family member’s higher education should consider “superfunding” 529 accounts. In this approach, you can frontload five years’ worth of tax-free gifts into a 529 account. A married couple not making any other gifts to the beneficiary during the five-year period can contribute up to $160,000 to a 529 plan for each child and, with the proper election, not run into gift tax problems.

This is a smart way for someone to utilize tax efficiency to get money out of their estate while helping to fund a loved one’s higher education.

— Jonathan Shenkman, president of Shenkman Wealth Management

Sophie Tremblay

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