End of Year Planning Amid Uncertainty

2020 has been anything but routine, and end of year planning is no different.

In a typical year, end of year planning follows a familiar routine – make sure regular donations and gifts are made before the end of the year, use up all those Flexible Spending Account funds, max out retirement contributions if you haven’t already. But as has been the case in just about every way, 2020 is a little different. With questions remaining about what changes we may see in 2021 and beyond, there are some things we will be taking into consideration along with our clients. As always, these are individual decisions that should be made in consultation with your wealth planning and tax advisors, depending on your situation.

Definitive Answers Will Not Be Coming in 2020

With the transition to the incoming Biden administration still in its early stages and the two Georgia Senate runoff elections not scheduled until January, potential policy changes are difficult to predict. We know what President-elect Joe Biden’s campaign tax proposals contained, but what remains to be seen is how likely it is that his administration will be able to implement those plans as proposed. If the Republican candidates win one or both Georgia runoff elections, Biden will face a Republican-controlled Senate unlikely to pass any sweeping changes. Even if the Democrats win both seats and have majority control of both the House and Senate, it will be with such slim majorities that they may find tax legislation to be a tempting negotiation tactic that could be used as leverage to win Republican agreement on other issues deemed more pressing.

With the COVID-19 pandemic rising to its worst levels yet in many parts of the country, much of the Biden administration’s day one plan revolves around managing the virus and the resulting impact on individuals and small businesses. Reversing the 2017 corporate tax cuts is the only tax or investment-specific policy mentioned among the first 100 days’ priorities, all of which suggests that tax policy is not likely to be a focus until the third quarter of 2021 at the earliest. In that case, even any significant changes that may come about should Democrats control the Senate are likely to be delayed until 2022 or later.

While this does not mean the changes will not happen down the line, it does mean that for many individuals, the prospect of immediate and meaningful policy changes does not have to control their planning over what’s left of this year.

Work to Minimize Regrets In The Event Of a Surprise Outcome

In a landscape that remains unsettled, one approach that can help bring clarity is to look at options in terms of what you would regret doing or not doing if the outcome you do not expect were to happen. Things that were probably in your financial plans at some point in the relatively near future might be good candidates for fitting in this year if you are able. Otherwise, consider the potential upside and downside of any new plans should policy take an unexpected path.

To Gift Now or Later?

For people planning on making large gifts to family members, there may be no reason not to do it in 2020 on the off chance that proposed changes to the gift and estate tax exemptions go into effect in 2021. These are assets that should be gifted at some point, so there may be no reason not to go ahead and do it when you can be confident that the conditions are favorable. That said, it is important to note that policy around taxes and estates is rarely static for long, and if you were planning on gifting some years in the future, there likely will be more changes and opportunities to come. Trying to take advantage of what may be an immediate opportunity in a way that puts a strain on your finances now may not actually be a net gain.

Any gifting strategies that you would be starting from scratch and require the help of estate planning attorneys, CPAs and other professionals, such as establishing a trust, may be challenging to get done in the limited time left in 2020. This is a busy time of year, and many attorneys and advisors are booked out and unable to take on additional major projects until next year. Smaller changes to your plans, such as moving assets into an already established trust, are much easier and more likely possible. Remember also that there are a range of investment vehicles that can achieve similar goals independent of the gift and estate tax exemption, and those will be waiting for you in 2021 if need be.

Rates Are Low and Unlikely to Get Lower

Despite the many remaining policy questions, one thing that we can be reasonably sure of is that the Applicable Federal Rate (AFR) – the rate used to determine interest rates on many private loans, especially those among family members – is as low as we are likely to see for some time. The December 2020 short-term AFR is set at 0.15%. This is in stark contrast to the December 2019 rate of 1.61% and the December 2008 and 2007 rates of and 1.36% and 3.88%, respectively, even in the midst of the global financial crisis.

Rates shown are for transactions covered by Internal Revenue Code section 1274(d) and assume annual compounding.
Source: Internal Revenue Service. Index of Applicable Federal Rates Rulings. November 2020.


Given all of the above, now may be a good time to revisit any existing promissory notes with your advisors and attorneys to see if it may be beneficial to update them to take advantage of the current low AFR.

Considering any of these life changes?

  • Retirement typically means lower taxable income, limiting the impact of future tax increases aimed at the highest earners.
  • Relocating could impact your state tax outlook, as well as what kind of deductions may be available to you.
  • Changing jobs, whether to cut back on work to spend more time with family or pursue a new passion, may decrease taxable income in the short term and open up a new slate of tax considerations if you have started a new business.
  • Marriage and divorce can change your tax situation significantly. Marriage also opens up some additional investment and wealth transfer vehicles that you might not have previously considered.

Look at What Changes May Be In Your Future

The one variable in all of these considerations over which you have some control is your life plans for the coming years. While policy changes can certainly have a hefty impact on your tax situation and what planning options you may have available, changes to your income and lifestyle can play just as much of a role, if not more. Think through what the next few years may hold for you and consider if any changes like those listed could be in store.

If you see significant life changes on the horizon or have recently undergone some of those significant changes, make sure you have shared that news with your Wetherby team and other advisors so that we can consider it when offering guidance for the next few years and beyond.

As much as the remaining uncertainty may not be the ideal situation, remember that investment and estate planning look at the long term, not just the next month or even necessarily the next year. Your Wetherby team is available to answer any questions you may have before the end of the year and will be ready as always in 2021.

Have a healthy and happy holiday and a joyous new year!


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