Tax and wealth management planning for your family and business

Welcome to the 2023 edition of PwC’s guide to tax and wealth planning

Effective tax planning can be challenging, especially in a complex tax environment. PwC’s guide to tax and wealth planning is updated annually to provide you with the latest tax planning information aimed at helping you make the right moves to plan for your family’s future and manage your wealth. In addition to insights on a myriad of tax issues and policies, our guide also covers topics related to setting up and maintaining a family office, as well as business continuity and succession planning for a family business.

We continue to keep a close eye on tax policy changes in Washington DC and will share updates as they happen. You can find our latest Insights on these matters here.

We would welcome the opportunity to discuss any of the content presented in the guide in greater detail.

Frank Graziano, US Personal Financial Services Leader

Key tax planning considerations for this tax season

We believe divided party control of the federal government will limit tax legislation through the end of President Biden’s term in 2024, with the next major tax changes occurring at the end of 2025, due to the sun-setting of individual tax provisions enacted as part of the 2017 Tax Cuts & Jobs Act (TCJA). In this environment, individuals may want to consider taking action on the following in the current tax year.

Intra-family loans and mortgages

Loaning cash, as opposed to making an outright gift, can result in significant transfer tax savings. While rates have risen in the last 12 months, they remain low overall, so the loan can be made for little cost.

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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; however, 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.

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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. Interest rates remain relatively low — the December 2022 interest rate is 5.2% — although interest rates continue to rise to counter inflation; 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 this strategy before rates increase further.

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Charitable lead trust (CLT)

CLT can be leveraged 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 now, especially given the expectation that interest rates may rise in the near future.

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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.

Additional business related tax changes

Several business-related provisions of the 2017 Tax Cuts & Jobs Act (TCJA) were modified or temporarily suspended by the CARES Act. Significant provisions reverting back to TCJA treatment include the reinstatement of the limitation on excess business losses, the elimination of carrybacks for certain net operating losses, and the Section 163(j) interest deduction limitations, among other changes.

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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 decline in 2022 from historical highs in 2021, converting to a Roth IRA may be more attractive because the taxes would be based on the current fair market value of the assets held in the IRA.

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Considerations for a family office

The purpose of a family office is to facilitate and oversee the wealth planning of a family so that short-term needs are adequately met in tandem with achieving the family’s long-term goals. Often, families leverage a family office structure to coordinate services such as estate and tax planning, investment and legal services and other administrative activities, all in one place, to maximize privacy and efficiency. Learn more about the different family office structures and functional capabilities to consider when setting up a family office, and ways to address common family office challenges.

Family office functions

First, start with understanding your strategy and desired legacy as the foundation. Then, align the other functional capabilities of your family office to support your family’s vision.

Business continuity and succession planning for a family business

Sound planning is key to a successful transfer of ownership and control in a family business, but it can be a daunting task. When families align individual legacy to shared purpose they are more likely to make decisions that benefit their long-term success. Learn more about the three main types of succession (leadership, board and ownership), and key planning considerations for each.

Three-circle model of the family business model

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Frank Graziano

Frank Graziano

Personal Financial Services Leader, PwC US

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