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Tax and wealth planning for your family and business

Welcome to the 2021 edition of PwC’s guide to tax and wealth planning

PwC’s Tax and Wealth Planning Guide is updated annually, and includes information on family and business taxes for 2020 as well as 2021. The guide covers issues related to investment and insurance planning, and options for giving to charity. A thorough discussion of choices and tax implications relating to estate and gift planning is also included, as well as insights on the myriad tax issues stemming from cross-border activities, including residency nuances. Lastly, the guide covers topics relating to setting up and maintaining a family office.

We're keeping a close eye on the Biden Administration’s tax policy proposals, as well as proposals put forth by key members of Congress. We plan to share updates on the rapidly changing legislative environment as they happen throughout the year.

Thank you for your interest in the guide.

Frank Graziano, US Personal Financial Services Leader

Pcs 2021 tax wealth guide

Key considerations this tax season

With the Biden Administration taking office in January 2021, several changes to tax law have been discussed. Tax legislation with significant provisions affecting high-income individuals could potentially be enacted by the end of 2021, but no formal proposals have been put forward yet. Taken together with the rapidly changing economy, the following highlights some actions individuals may want to consider in the current tax year:

Additional business related tax changes

In addition to the tax changes relating to individuals noted above, the CARES Act also included business related tax provisions. A few key changes include certain net operating loss deductions can now be carried back five years, the excess business loss limitation rules will not apply to any tax years beginning after December 31, 2017 and before January 1, 2021 as well as a change in Section 163(j) interest deduction limitations, among other changes.

Charitable lead trust (CLT)

A CLT can be leveraged as a vehicle to make annual transfers to a charity or multiple charities for a period of time, while leaving the remaining assets of the trust to future generations with minimal transfer tax implications. In essence, the future generations would receive the appreciation of the trust’s assets in excess of the hurdle rate, so the technique may be advantageous to consider given the possibility of depressed assets and the current low interest rate environment.

Converting a traditional IRA to a Roth IRA

When a traditional IRA is converted to a Roth IRA, income tax becomes immediately payable on the value of the converted assets to the extent that there is no tax basis in the assets. Given the market recovery over the past year, converting to a Roth IRA is now relatively less attractive than it would have been through much of 2020 because the taxes would be based on the current fair market value of the assets held in the IRA.

Deferring required minimum distributions (RMDs)

The CARES Act temporarily waived the RMD rules for certain defined contribution plans and IRAs for the 2020 calendar year. This waiver is no longer in force for 2020, so RMDs must be taken in 2021.

Grantor retained annuity trust (GRAT)

A GRAT generally is used as a vehicle to transfer the growth of assets in excess of the Section 7520 interest rate to the following generation. Due to the low interest rate environment, the March 2021 interest rate is at a historic low of 0.8%; therefore, the annuity stream would be lower than what would normally be expected. Essentially, this planning technique transfers the asset growth in excess of the Section 7520 rate to the beneficiaries free of transfer taxes, so it may be advantageous to consider it with interest rates being low and assets being depressed.

Intentionally defective grantor trust (IDGT)

An IDGT, also commonly referred to as an intentionally defective irrevocable trust (IDIT), is an irrevocable trust funded by the settlor that is structured as a grantor trust for federal income tax purposes. The grantor can make a gift to the trust, but in the current economic environment, it may make more sense for the grantor to sell property to the trust in return for an installment note bearing interest at the Applicable Federal Rate (note that the trust still may need at least a “seed” gift.). Or, if an IDGT is already established and provides for the power to substitute assets, a grantor may consider swapping the trust’s assets with any undervalued assets personally held.

Intra-family loans and mortgages

Loaning cash, as opposed to making an outright gift, can result in significant transfer tax savings. With the current low interest rate environment, the loan can be made for little cost.

Modification of limitations on charitable contribution deductions

Under the 2020 CARES Act, the modified gross income limitation on the itemized deduction for charitable contributions was increased from 60% to 100% for cash contributions made during calendar year 2020 and 2021 to churches, universities, hospitals or other public charities (see Section 170(b)(1)(A) for a list of qualifying organizations). Contributions to supporting organizations, private foundations and donor advised funds (DAFs) are specifically excluded.

Sale of a private annuity

A private annuity sale is a transfer of property in exchange for the unsecured promise to make periodic payments to the transferor for their lifetime. The annuity is computed based on the fair market value of the property conveyed, the transferor’s life expectancy and the applicable federal funds rate at the time of the sale. Given the current federal funds rate, the value of the annuity likely would be lower.

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Frank Graziano

Frank Graziano

Personal Financial Services Leader, PwC US

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