With both economic and market factors affecting wealth planning, now is a good time to reassess your wealth planning goals for 2023 and beyond.

Economic Factors

The question of how inflation and rising interest rates could impact wealth plans remains top of mind for many of us. Although inflation seems to be cooling as the Federal Reserve has reduced the pace of its interest rate hikes, inflation spikes over the past year have significantly increased certain living expenses — making it vital to take a closer look at any life transition decisions this year or next. For instance, if you are planning to retire later this year, you should reexamine the new costs of your fixed and discretionary expenses.

We suggest reanalyzing asset sufficiency to cover retirement years, given elevated spending levels and higher borrowing costs. For Glenmede clients, an effective way to test sufficiency is by performing or revisiting a comprehensive Goals-Based Wealth Review. The review examines the probability of maintaining lifestyle goals during heightened market volatility, including inflation and interest rate fluctuations.

Market Factors

Although many investors are optimistic the markets can continue their early momentum, they still appear relatively expensive, and that may impact some wealth planning techniques. However, most of the planning techniques we recommend focus on the long term. If market performance in 2023 is muted or more volatile compared to longer-term averages, do not be dissuaded from embarking on planning today. For example, waiting for a market correction to occur to make gifts into long-term trusts may yield little benefit. Generally, the longer the planning horizon or the duration of a planning technique, the lesser the impact an expensive market will have on the technique’s overall success.

However, market volatility can also provide some near-term opportunities. With a market or asset class correction, planning techniques such as asset swaps with grantor trusts, Roth IRA conversions or grantor retained annuity trusts (GRATs) could be deployed to take advantage of lower asset values and reap the rewards of a market rebound.

Favorable Estate Planning Environment

After spending a couple of years analyzing and preparing for tax legislation aimed at curtailing estate planning techniques and raising income tax rates, we find ourselves in a familiar and favorable tax planning environment. It now appears the current lifetime gift and estate tax exemption will not be reduced until January 1, 2026. Given this extended opportunity, we believe it is important to not become complacent but rather to act this year.

Knowing that changes to tax legislation are proposed regularly, we continue to watch for the introduction of bills relevant to our clients at the state and federal levels. Of special concern are several proposals that appeared in the House version of the Build Back Better Act in late 2021. Though these provisions did not ultimately become law, some would have eliminated planning techniques that derive their benefit from a trust’s “grantor” status. A grantor trust is specifically drafted in a way that causes the income of the trust to be included on the grantor’s personal income tax return. This trust design also allows for sales between the grantor and the trust without income tax recognition. Grantor trust treatment can result in substantial tax savings for the trust to preserve more assets for future generations. Other proposals in the bill would have imposed significant surtaxes on trust income. A 5% surtax would have kicked in on trust income over $200,000, and an additional 3% surtax would have been levied on trust income over $500,000. Should like proposals be reintroduced and passed, sophisticated tax planning opportunities involving trusts could be drastically reduced.

Given the uncertainty in the future legislative landscape, should you still be using trusts for your estate planning? The simple answer is yes. Trusts provide many nontax benefits, such as creditor and divorce protection, fiduciary oversight, guidance for beneficiaries and stewardship of assets for the next generation and their descendants. Moreover, if a trust agreement is flexibly written, trustees will have the ability to be strategic in their decision to make distributions of income to beneficiaries, and sales that have already occurred to existing grantor trusts may escape application of new laws. Hence the importance of taking advantage of opportunities that exist in the current legislative environment.

Be Proactive

Uncertainty surrounding market events or future tax law changes should not prevent you from being proactive in your current planning. We note three areas of focus for income tax strategy:

• Manage your portfolio while being tax-aware:
  • Create a capital gains budget for appreciated portfolios.
  • Utilize exchange funds, options, asset swaps or gifting to complement outright asset sales when managing a concentrated or low-basis portfolio.
• Consider converting existing IRAs to Roth IRAs to diversify tax treatment during retirement and eventually for your heirs.
  • Consider family circumstances
  • Shift income where possible to generations in lower tax brackets.
  • Make trust distributions to beneficiaries with lower income tax rates.
• Meld philanthropic goals and tax planning:
  • Plan for tax-efficient charitable giving by using appreciated securities.
  • If you are over 70 ½, take advantage of qualified charitable distributions from IRAs.
  • Use donor-advised funds to time income tax charitable deductions to coincide with high income years.
  • Consider charitable lead or remainder trusts when attempting to meet both legacy and philanthropic goals.

Once these areas of focus have been addressed, take this opportunity to make sure you understand your estate plan. Review everything from beneficiary designations to the executors and trustees named in your estate planning documents. If significant changes have taken place in your life or more than a year or two has passed, re-run your Goals-Based Wealth Review. Now is the time to prepare for uncertainty ahead and capitalize on current planning opportunities.