There are several pieces of proposed legislation that could significantly change tax rates and policies for both federal income and transfer (estate/gift/generation-skipping transfer tax) taxes.

While these pieces of legislation are still just proposals and implementation is uncertain, it is important to prepare and not to overreact. However, having a plan in place is worthwhile if some of those changes become law and if those changes would impact your current planning for clients. Below is a partial list of some of the proposals and the potential planning opportunities. It is not meant to be a comprehensive review of proposed legislation: think of it as a provisions snack.

Income-Tax Provisions

1. Raise the top marginal rate from 37% to 39.6% and lower the income threshold.
   
   
2. Raise the long-term capital gains top rate to 25% (effective as of the date of publication).
   
   
3. Additional 3% surtax for ultra-high-income taxpayers (more than $5 million modified adjusted gross income).
   
   
4. Tax long-term capital gains at ordinary income rates for taxpayers with adjusted gross income (AGI) in excess of $1 million for single filers and $2 million for joint filers. This would be exclusive of the personal residence exemption.
   
   
5. Tax unrealized capital gains at death more than the limits of $1 million for single filers and $2 million for joint filers as realized gains.
   
   
6. Apply the 3.8% net investment income tax (NIIT) surtax to pass-through business income for those earning $400,000 or more.

As with any income-tax provision, the ability to control the timing of income recognition is key. Utilizing tools such as increasing pretax retirement-plan deferrals, maxing out Health Savings Account (HSA) contributions, and revisiting deferred compensation amounts can help control wage income. For portfolio income that is not required for ongoing living expenses, a nonqualified deferred annuity can be used for particularly tax-inefficient assets. Additionally, strategic use of charitable gifting and itemized deductions may be beneficial.

Estate-Tax Provisions

1. Include all grantor trusts in a taxable estate. The new provision would cause any trust treated as a grantor trust for income-tax purposes to be included in the grantor’s estate for estate-tax purposes (new IRC Section 2901). Establish and fund an intentionally defective grantor trust (IDGT) before year-end.
   
   
2. Treat all sales between an individual and his or her own grantor trust as being the equivalent of a taxable sale to a third party (new IRC Section 1062). This provision is likely to impact trusts created after enactment.
   
   
3. Accelerate expiration of temporary exemption increases from 12/31/25 to 12/31/21. May want to consider filing form 706 for portability of deceased spouse’s unused exemption amount (DSUEA) in cases where filing was not required; there would be extended filing for portability up to two years after death.

Retirement Provisions

1. Prohibition on Roth conversions—effective after 12/31/31.
   
   
2. Prohibit conversion of after-tax money in an IRA or qualified plan, which effectively eliminates “backdoor” and “mega-backdoor” Roth conversion strategies effective after 12/31/21. Inquire about in-service distribution availability or if a triggering event has occurred.
   
   
3. Required minimum distribution (RMD) requirements on large IRA accounts if more than $10 million and $20 million and over income thresholds ($400,000 for single filers and $450,000 for married filing jointly).

As a reminder, these are still proposed changes and may not make it into final legislation, if there is any. The key is to be prepared and in a position to act should any of the proposed changes become law and would have a meaningful impact on planning for your clients.

This material is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. Clients should consult with their accounting or tax professionals for guidance regarding their specific financial  situations.

Pacific Life refers to Pacific Life Insurance Company (Newport Beach, CA) and its affiliates, including Pacific Life & Annuity Company. Pacific Life Insurance Company is the issuer in all states except New York. Pacific Life & Annuity Company is the issuer in New York.

This material is educational and intended for an audience with financial services knowledge.

For more information about retirement-planning, please contact our Retirement Strategies Group at RSG@PacificLife.com or (800) 722-2333, ext. 3939. PacificLife.com