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With the change in administrations, 2021 promises to bring new challenges and opportunities to the estate planning arena. How can families, especially those led by women, manage their wealth effectively into the future amidst unexpected changes?
Susan Travis, a Mercer Advisors Client Advisor and Regional Director, joins host Doug Fabian to discuss both the known and unknown changes to wealth management in 2021 and beyond.
Listen as they discuss:
Presenter: Today, on the Science of Economic Freedom podcast, we talk about wealth and tax strategies under the new administration, with Sr. Wealth Advisor Susan Travis.
Narrator: The Science of Economic Freedom is intended as an investor education resource. Views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio. This program is sponsored by Mercer Advisors, Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission who delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.
Doug Fabian: Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones. Today, we want to help you identify your next step. I wanted to begin by talking about some 2021 topics that we’re going to be recording on the Science of Economic Freedom podcast. There’s a lot going on in the world, a lot going on in the financial markets, and so I’m absolutely going to have Don Calcagni, Chief Investment Officer for Mercer Advisors, join us again, to talk markets, and to talk specifically about factor investing.
One of the things that’s happening, and those of you who have been longtime listeners to the Science of Economic Freedom know that, since the election, we have seen a resurgence in value investing, a resurgence in value investing. And I want Don to come in and explain what is value, how do you get value exposure in your portfolio, why is it important. At Mercer Advisors, we like to tilt our portfolios towards value. And I think it’ll be an interesting subject for us to discuss.
Second, I want to talk about interest rates. Wow, we were at rock bottom interest rates, short-term interest rates, still extremely low mortgage rates, near record lows. But what will the future hold in terms of interest rates? And when you talk about interest rates, you have to also talk about inflation. So, we’re going to tackle that subject. I also want to continue to talk in all aspects of personal finance with our audience. And that brings us to today’s subject, tax and estate strategies.
Now, the rules of this money game are constantly changing, but sometimes you need to even anticipate change. Now, let me set this up for you. We had a very contentious election, no sense in going over that. We do have a new administration. We have had continued economic support, by the federal government, to our economy because of the pandemic, now at almost $5 trillion, and that equates over the long term, in our opinion, to higher taxes. Now, we had no changes to the tax code, since the new administration took over, but we want to anticipate that interest rates in the years ahead could be different. And that’s what we’re going to talk about today.
So, we’re going to talk about the subject of wealth planning and tax strategies, and discuss what you can do today to start to anticipate those things. Sometimes it’s better to declare a capital gain, and pay the taxes when you know what the tax rates are, and certainly for 2021, we know what the tax rates are. And you’re doing that in one sense, because in the future taxes might be higher.
Now joining me today is one of our senior wealth managers. She is Susan Travis. Susan works out of our Houston offices. She’s a certified financial planner. And she really is a specialist in helping families manage their wealth, and helping families manage wealth from generation to generation. So, Susan, welcome to the Science of Economic Freedom podcast.
Susan Travis: Good afternoon, and thank you, Doug, for allowing me to join you and address today’s topics on wealth, tax, and estate planning strategies.
Doug Fabian: Awesome. Before we jump into our subject, tell us a little bit about yourself. Maybe how you got into the business. How would you describe what you do to someone you had just met?
Susan Travis: Well, I actually started in the trust administration side of finance back in 1987. And that allowed me to get to know and understand clients not just through their investments, but through their eyes and their concerns for the generations both above and below them. I saw how each person, often in the same family, all have different priorities. And then, also led me to see where comprehensive planning helped clients through their life events. And I wanted to be a part of that. Financial success isn’t just about what investments you make, it’s about how you put all the pieces together. So, I work with clients to review and update their balance sheet every year.
Now, Doug, I know you talk about the balance sheet on many previous podcasts, but I just want to reaffirm with you, and our clients and anybody listening, how vital that is as a first step to allow us to plan, to strategize, and move forward successfully through every client’s life events, no matter where they are in life. We review the balance sheet every year, and it’s this review that gets us on the same page, so we can begin to strategize together. We review goals. We review cash flow, which then gets into the detailed life events, which determines or reaffirms asset allocation and solidifies the tax strategies and estate planning that we do for clients. It’s all tied together. And that’s why I’m in this business, and I love helping clients.
Doug Fabian: Awesome. A great description of what you do. Thank you for sharing that. Now, Susan, we have a special initiative in play at Mercer Advisors. We call it Invest Hers. Tell us what we’re doing in the company, too. I’ve talked to the Science of Economic Freedom podcast audience before about this. This is an initiative directed at women. Talk to us about it.
Susan Travis: It is. Investors’ initiative was designed a couple of years back now to support women’s unique wealth management needs. Nearly two-thirds of American women are breadwinners or co-breadwinners. Women control 72 trillion globally, and 95% of women will be their family’s primary financial decision maker during their lifetime. Investors does things like these podcasts and webinars, to bring issues to the table that we need to focus on, on promoting women’s financial success.
Doug Fabian: That is great. Thank you. Today’s podcast is going to be tilted towards assisting women with wealth and tax issues, but I want to say this content serves all who care about managing their wealth. I’ve mentioned this to the men in the audience before when we’ve done a podcast tilted towards women. Every man in the world has a mother. They may have a sister, they may have a daughter, they have women in their lives, and if you care about them, and you care about their money, one of the things we want to encourage you to do, and it could be your wives as well, is to listen to this podcast, because this podcast is going to talk about some relatively elementary aspects of wealth management, but also some very sophisticated aspects of wealth management.
That statistic you just shared with us, Susan, 95% of women are going to be the primary decision maker at some point in time in their lives, and mostly, this have to do with life expectancy. So, that’s a burden that many women are not prepared for today. And we, as a company, Mercer Advisors, really want to help women get more prepared. So, I wanted to tell everybody what I’m going to tell them. Let’s go over our agenda today. We’re going to talk about some recent tax law changes. We’re going to talk about some proposed tax law changes. We’re going to talk about some changes that are relevant to women, and then we’re going to talk strategies, “What should you do?” I’m a big believer in action steps.
When you’re done listening to this podcast, what should you do? I hope you do something. Because we always say at the beginning of the show, we want to help you identify your next step. So, what is the next step for you in terms of your future wealth management needs? So, Susan, let’s jump in. Let’s talk about the SECURE Act. This is recent tax law changes. The SECURE Act was passed in 2019. And it was right at the end of 2019 and then boom, the pandemic hit. So, a lot of people, “Gee, SECURE Act, what was that?” So, what tax law changes were made in the SECURE Act we want our audience to understand?
Susan Travis: Well, I’d like to focus on three key retirement requirements that changed with that legislation. Because you’re right, Doug, when the pandemic happened, one of the things that the government did or enacted was the fact that in 2020, you did not have to take a required minimum distribution. Well, now we’re in 2021, they haven’t extended that. So, we have people that need to think about taking required minimum distributions, again. Now, requirement distributions start at 72, instead of 70 and a half. A lot of people think about that 70 and a half, and may automatically go and pull some money, that will change your tax picture immediately. Don’t do it if you don’t have to. But it also allowed for the continuation of qualified charitable distributions. Those can be done at 70 and a half. So, what does that mean?
Those qualified charitable distributions can help you reduce your ordinary income. That is fantastic, especially if you’re going to give to charity anyway. Now there’s a cap on how much you can give directly out of an IRA. It’s $100,000. And you also have to make the payment directly from the custodian to the charity for it to be qualified. But again, it’s something worth looking at and worth doing. Another change, and this is huge, was that non-spouse inherited IRAs must now be distributed within 10 years from the death of the grantor. Now, there’s some exceptions. But this changes the person that inherited the IRA, it changes their tax picture. But it also changes your estate planning.
What this says to me is, we need to look at, if we should do more Roth conversions. Now everybody’s picture is different. So, you really need to talk to your advisor about that. But a Roth IRA, you’re paying the tax. So, when your next generation inherits, at least they’re inheriting something that’s already had the tax paid on it. That’s a much better way to give to the next generation, and your cash flow can handle paying the tax now. And then the third item, in regards to this, were contribution age limits. So, there’s no more limits on that. You can continue to contribute into your 70s and 80s, which is really important for business owners.
Doug Fabian: Okay, Susan, let’s put you into the wealth advisor role for a moment. We’ve got these three changes, slight change in the RMD. We have the QCD, the qualified charitable distributions from the IRAs, as a strategy. We have now the change on the inherited IRA distribution schedules. What are you coaching clients on? What do you read, review with clients? What are the ways we deploy some strategies in light of these tax law changes?
Susan Travis: Sure. Well, first, we want to determine if a client has a charitable intent. Because if they do, there’s some options here to really be able to offset current income in big ways. For instance, let’s say you sold a business. You have a huge tax year, you’re charitably inclined, but you’re not even sure which charities to give to. And there’s a lot of clients like that. So, I may talk about a donor-advised fund for them. You can put a large amount in this donor-advised fund, and then you can take years to decide which charities you want to give how much to, but you give it in that year when you have a high income tax event to offset the taxes. That’s one way. I can go on with lots of strategies, Doug, here, if you’d like.
Doug Fabian: Well, I want you to hit once again, and you touched on it briefly. Talk about Roth conversions. This is a strategy that we’re very focused on with clients. I think many times people think “I make too much money. I can’t have a Roth.” They don’t understand the rules. But when does a Roth conversion make sense for a family? Go through the logic at a high level on that?
Susan Travis: Well, you hit on one of the biggest misunderstandings about Roth to start with, and that is people think that they can’t do a Roth conversion because they make too much money. There’s contribution limits based on your income, but there isn’t a limit on Roth conversions. Roth conversions is more how much you can stomach paying the tax now. So, what we do for clients is we look at various scenarios. We will project out doing a Roth conversion for the whole amount, and then we may break it up into pieces. The important thing is now we are in probably the lowest income tax brackets that we are going to be in. And we can show over a lifetime, whether it’s just 10 years, or if it’s 40 years, how much tax we can save clients by doing Roth conversions now. And oftentimes, that savings gets into the millions of dollars.
Doug Fabian: Great. So, one other aspect of the SECURE Act was some changes regarding 529 plans. Explain those to us.
Susan Travis: Sure, if you’ve ever had an advisor say the 529 plan isn’t for you, it’s time to relook at that. They have become better. Funds can now be used to pay for fees, books, supplies, and equipment for certain apprenticeship programs, up to $10,000 in total, not annually, can be withdrawn to pay off student loans. Then, of course, K-12 education continues to be available for 529 plans. So, one thing that’s not changing is the price of college continues to go up. The annual growth rate is 6.8%. So, 529 plans have become even more of an important planning tool for parents, grandparents, aunts, and uncles, anyone that wants to help out with college education costs in the future.
Doug Fabian: So, let’s talk about the future of tax and estate laws in America. Now, today, we know there are no new tax laws that have been passed by the Biden administration, but there are some proposed changes. In addition, there is a change coming that is under the radar of most families, and that is the sunset provision or expiration of the $11.7 million exemption from estate taxes that exists today. But in 2026, that exemption is going to revert to the old rules, which is approximately 5.5 million.
So, let’s start there since this is factual. This is a change that is factual. As I’ve been talking with wealthier families, I think that this is the change that people should be looking at now. So, Susan, question to you, what should families with wealth of $10 million or more today, and this is total wealth now, what should they be considering to manage the potential of a future estate tax liability?
Susan Travis: Families with 10 million of assets or more, they can consider many different planning avenues. We would say that our primary goal is making sure the client is taken care of. Sorry, Doug, but I’m going to go back to that balance sheet again. We want to put together projections to make sure each client is going to have financial security and freedom. All right, from there, we need to take into consideration many details, and it starts at what state you live in. Is it a common law or a community property state? That, in and of itself, will dictate how your property needs to be titled, and what state documents you’ll need. From there, we need to look at the type of assets you own. Is most of your wealth in qualified accounts? By that, I mean IRAs and 401ks. This will determine what planning is best for you then.
Now there are options to set up family structures to involve the next generation. And there’s multiple ways to coordinate charitable gifting during your life or at your death. What I like to do is put together a chart for clients that shows how much goes to each facet at their deaths. Because when you think about it, there’s only three places that your wealth can go. The first is to family, friends, and individuals. The second is to charity. And the third is to government. So, once we get to know the client and what their primary goals are, then we’re going to make recommendations on what fits them. Oftentimes, we can optimize how much goes to the family, how much goes to charity, and not have it go to the government. So, every family is different. There’s lots of techniques, and it really is dependent on what your family situation is.
Doug Fabian: Susan, I brought up this example of 10 million for a specific reason. First of all, I had a conversation with a wealthy prospective client. These folks had about $18 million of net worth. And God bless, they’ve done a great job of building wealth for their family. They’re in their 80s. But when I asked him about future estate taxes, they said that their wealth doesn’t fit the tax structure. Married couple. They have $23 million of exemption. Their estate is under that. And then I brought up the issue of the sunset provision. And, they began to go, “Really? Is that really going to happen? I didn’t know that.” So, I feel like there’s a knowledge gap here. And one of the things with estate strategies, especially if you’re talking about family limited partnerships, or you’re talking about some more sophisticated gifting, planning, gifting to the next generation, that you can’t do it in days. It takes time. You want to plan it out right. You want to understand it before you implement it. These kinds of things. So, here it is 2021. 2026 might seem like a long way away, but time flies.
So, I bring this subject up to remind the audience. And again, even if we put a conservative number of 2% or 3% on a family’s future wealth-building endeavors, could be more, could be less. But most likely their estate is going to grow in the next 5 years, in the next 10 years, and the next 20 years. So, we want to be ahead of this. So, ladies and gentlemen, this may be an action item for you to have a conversation with your wealth advisor to revisit your estate structure. But one thing that is for sure is there’s going to be a change in the exemption come 2026. Now, President Biden is also proposing additional changes to the estate laws. Susan, explain what those are.
Susan Travis: Nothing is set in stone yet. But we have seen numbers go from what is currently the 11.7 or 23, over 23 million per couple, back down to 3.5 million. Also, in addition to that, the basis step up may go away. In other words, if your family has a large block, a very low basis stock, in the past, at death, the estate got a step up in basis on the market value of that stock, and so the people that inherited got a market value and a tax basis that were approximately the same. If we do away with that, then the next generation is going to inherit that potential capital gains tax to have to pay on all of these assets. This is huge. And as, Doug, you have said, this is something that’s under the radar, but could have a huge impact on every family.
Doug Fabian: This is absolutely something, ladies and gentlemen, we want you to pay particular attention to again. These are proposed. Nothing has happened yet. Then we’ll continue to update you on this. So, Susan, let’s let’s talk about the additional changes being proposed by this new administration. Let’s also remind the audience that Congress just passed a new stimulus package of $1.9 trillion. This makes the amount of money borrowed to support the economy during the pandemic to $5 trillion.
So, the next big issue that the country faces is how to pay for all this borrowing. In our opinion, opinion of Mercer Advisors, it could come from higher taxes. That is our view. So, let’s talk about the proposed changes by the Biden administration to tax laws. And again, ladies and gentlemen, we’re putting this in the context of proposed, but we want to start thinking about this so we can do some long-term planning. So, Susan, what changes first?
Susan Travis: Well, let’s start with the individual and married filing jointly tax brackets. The change in the bracket doesn’t start until you get to $400,000 in income. Basically, what happens is the 35% bracket ends quicker, and it jumps up to 39.6. We were at 37 before. Also, for people that have over $400,000 in income, they will have to pay a 6.2% Social Security tax. It phases out, currently. It does not phase out for those over $400,000 in income. Other changes would include the standard deduction would drop significantly, and it would be indexed for inflation going forward, as well as personal exemptions. However, right now, there is no personal exemption, so it brings back in a $4,150 personal exemption.
Right now, there’s a $10,000 limit on itemized deductions for taxes. There’ll be no limits. So, that is key for our listeners, because this will be especially helpful for people that have large homes or high tax states, where many of our clients were hitting that $10,000 limit. Currently, there’s no limit on itemized deductions. There will be a limit going forward. And then capital gains rates. Right now, this is on people with income over a million dollars. But if you sell a business in a year, there’s life events that happen that this could happen to people, the capital gains rate goes from 20% to 39.6%, which is the highest ordinary tax rate. So, with these changes, there are some positive things in here. Being able to deduct more real estate taxes than you could in the past. Some more people will probably itemize deductions going forward. And with the reintroduction of that personal exemption, families with many children would also benefit.
Doug Fabian: Wow, these proposed changes are serious. Susan, give us a feel on the capital gains tax increases. I mean, we’re right now at the lowest capital gains tax rates in our lifetimes. 15% people who make over a million, is it, Susan? That goes to 20%. But what is the Biden administration proposing relative to capital gain rates?
Susan Travis: Again, it’s for people that make over a million dollars that the capital gains rate will go up to 39.6%. Now, the 3.8% net investment income tax is going to still be there, too.
Doug Fabian: So, there will be no break on capital gains for the wealthy, if these changes were to go through. So, this is obviously serious changes and significant to our client base, and we’re bringing it up for people to start thinking about, “Okay, is there some change that I should make to my portfolio? Are there some assets that I should sell?” Because one of the things that we have in the current environment, we know what the rates are, and President Biden can’t wave a magic wand and make these changes that have to go through the Senate. And so, that’s a battle for another day, but we’ll certainly be monitoring that situation for our clients. So, Susan, let’s switch gears a little bit. I want to talk about today’s topics of estate and tax planning in the context of women, and why are these subjects of high relevance to women?
Susan Travis: Well, there’s many reasons actually. We’ve touched on a few of them. Women tend to live longer. The average age that a woman becomes a widow is actually in her 50s. I know this personally. I became a widow when I was 41, and even though I’m in the financial services industry, this is a very tough emotional time to go through. And so, most women are going to have to go through this, and they need a trusted advisor that can think about all these different things that they should be doing with their financial picture. And it doesn’t matter how old you are, as I just stated. You need to be able to navigate all the choices that you have. But we don’t expect you to stay on top of all the changes in the tax law.
For instance, HSAs, there’s probably a lot of young people that think, “Oh, I don’t need to go to the doctor. I’m not going to put money in an HSA.” Well, meet with an advisor, and we’re going to point out to women and men that maybe you should put the maximum you can in an HSA health savings account. Because that reduces your income, and it gives you effectively, whatever your tax bracket is, it gives you that much of a deduction or a discount, I should say, on medical expenses. It’s no longer use it or you lose it. So, you can turn an HSA account into another savings plan for medical expenses perhaps in your retirement. You need to think through all these things, and there’s just too many nuances of everything that’s out there, because nothing is ever just cut and dry and doesn’t change.
Doug Fabian: Susan, I want to mention that an HSA account, it’s almost like a Roth IRA. I mean, you have the tax-free growth, tax-free withdrawal. You can even contribute. If you are contributing to a Roth IRA, you can sometimes contribute more to an HSA. Sometimes we talk about the three buckets of taxation relative to our investments and our balance sheet. They are the taxable, the tax deferred, and the tax free. The tax free is where we usually have the Roth IRAs, but we also have the HSAs. And I’ve been watching how HSA have just becoming more… They were esoteric, not very many people had access to an HSA, but many more companies are giving access, and self-employed people can create access to an HSA. So, it’s absolutely something that people should be looking at.
Susan Travis: Doug, I’ll go one step further and provide you an example. Let’s say you put the maximum $3,600 a year in an HSA from the age of 30 up to 65, and let’s just say we have a 5% growth. That HSA is $325,000 when you’re 65. That is a pocket of reassurance of medical costs in the future. So, that may even say, “Hmm, maybe I should pay for medical costs out of pocket now and really save on that HSA.” That isn’t for everybody, but that’s why you look at each individual situation and take that into account. It’s a huge benefit that people probably don’t even give a lot of thought to.
Doug Fabian: Great. So, Susan, I always like to talk about action steps, and what should our listeners be doing regarding our broad subject, tax and estate strategies, wealth strategies? What should they be going through? Take us through the process.
Susan Travis: Well, first, I would say, don’t try to stay on top of everything by yourself. Get a trusted advisor and put them to the task of helping you put together that balance sheet and strategizing with you. This should include current income tax strategies and planning for you and your family’s future. We can break that down into tax strategies. Again, depending on your age, definitely contribute the maximum that you can into your 401k, because even with the changes that are coming with that, it still says that is a very good way to save.
Then on the other end of that, making sure that you have the proper estate plan documents in place. Again, it’s how much your net worth is, but what Doug alluded to before with the change in the lifetime exemption, it is going to go down. So, let’s use it while we have it, and let’s figure out the best way to use that. I’ve done spousal lifetime access trusts. I’ve done charitable trusts. I’ve done family limited partnerships. There’s a lot of different techniques to reduce your estate and benefit your family, not to your detriment.
Doug Fabian: Susan, let’s also put on the list just to revisit that 529. You really piqued my interest with the 529 comments today. Sometimes, I think that that’s a savings plan option that gets overlooked, so what should listeners do regarding 529s?
Susan Travis: We do projections. How many children, grandchildren, you want to provide an education for? And is it in the K-12 private school? Is it undergraduate? Is it graduate? Also, remember that you can change the beneficiary. So, we also try to project how much each child is going to need, how many years it is until they’re going to need it, because we don’t want to over fund them. What we find is sometimes children get scholarships, children don’t go to the college level that the grandparent may have wanted us to project for, and so being able to change that beneficiary is key. Now, those other changes and additional advantages that I’ve pointed out are now available on 529s, really make it worth revisiting.
Doug Fabian: Well, Susan, you have given us some great information, great action steps. Thank you so much for lending your expertise to the Science of Economic Freedom podcast, and I just want to say thank you for joining us today.
Susan Travis: You’re more than welcome. I love doing this, and I think that’s what makes Mercer Advisors really special is we have a lot of people that went into financial planning because they wanted to help clients succeed. And we’re allowed to do that, and so, yes, please call us if we can help.
Doug Fabian: Well, ladies and gentlemen, I also want to encourage you to visit merceradvisors.com, specifically the Insights page. One of the things that we’re doing on a quarterly basis is we’re doing a very detailed webinar for clients, and that’s something that we post. It’s absolutely free, available to the public out at merceradvisors.com and at the Insights page. And also, I want to ask you to subscribe to the Science of Economic Freedom podcast. You can do that on your smartphone, just click Subscribe. Anytime we do a podcast update, it’ll notify you that there’s a new podcast to listen to, so that’s something we’d love to have you do.
For all of the men in the audience, I mentioned it earlier, I’ll mention it again, please pass along the link to this podcast to your loved ones, the moms, sisters, daughters in your life that you feel would benefit from today’s conversation. And lastly, send me an email. Email address is [email protected], and ask your questions, and give me show topic ideas. We’re looking forward to the next time we get together here on the Science of Economic Freedom. Have a great day.
Narrator: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio. This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.
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