On-Demand: Year-End Tax & Investment Strategies | Planning for Individuals & Families

For those who meet the criteria, you'll receive a CPE certificate from EisnerAmperU at EiesnerAmperU@eisneramper.com within 14 business days of confirmed course attendance. Today's speakers are Marie Arrigo, partner EisnerAmper, Karen Goldberg, principal EisnerAmper, Marc Scudillo, managing officer EisnerAmper Wealth Management, and Robert Levin partner EisnerAmper. I will now turn it over to Marie.
Marc Scudillo: Thank you Marie. I appreciate that. What we're going to cover over the next few minutes includes the market updates, and there's some interesting things that have been occurring. So it's exciting to see that. Creating an investment strategy that works for you, we always like to try to pull it back as to what's most important to take away so you could plan for yourselves, and planning should always be done first, and we'll finish off with that. Any one of these topics could be a 20 minute topic or longer, but we'll keep it short and I'll move it fast.

As you know, the last three years actually have been seeing historic contrasts, and of course we're here in Manhattan so any background noises that you're hearing, I apologize for that. So in 2017 part of the historic trends that we saw over the last three years was actually that 2017 was the first year that we saw all 12 months of positive rates returns in the stock market. That was actually followed by having the third time in history that both the stock and the bond markets almost had negative rates of returns for the year. And now in 2019 we are finishing it off and hopefully it continues this way. We're in the eight best markets in both the stocks and bonds that we've ever seen in history as well.

So we're running right now on the longest bull market in history. However, it's important to keep in mind that although the bull market timeframe is the longest, the actual bull market increase is not as high as it's been in history. The 1990 bull market actually posted over a 417% increase while we're over a 330% increase from the lows of 2009. You'll see the various rates of returns for the various indices. We have access to those right online nowadays, but it's important. The S&P 500 Index, as an example, over the last 10 years has been averaging a 13.24% rate of return. Keep that in mind for a little bit later in the presentation because we'll reference back to that.

Struggling has been some of the emerging markets and even the low rates returns over the international markets over the past years. What's happened, we've had massive drops in 2018, which was caused by the fears of economic downturn, trade wars, as well as rising interest rates. However, with the rising interest rates in 2019, we then saw a three decreases in the interest rates where the Fed Reserve now has the interest rate range of about 1.5 to 1.75% and we're kind of in a wait and hold position right now. We're still having positive growth. Third quarter GDP, annual rate of increase was 1.9%. Some economists are feeling that it may slow down slightly but it's still positive nonetheless, and the Consumer Price Index inflation is in check at 1.7% and unemployment, still at historic lows as well.

Around the world, we're seeing that even their unemployment rates are coming down. Unemployment rate for the Eurozone, United Kingdom, Japan, anywhere between five to 7% decreases in the unemployment rates there. And the GDP for China is estimated to be 6.3%. With all of this stated, many people are feeling that we have highs in the markets and our P/E ratios are now starting to become too expensive. It's important to see in that right hand quadrant of this graph is that the current P/E ratio as a percentage of the 20-year rolling average, we're actually only about 10 to 11% off of what the average P/E ratio is over the last 20 years. One of the higher, more appreciated areas is actually the small cap growth arena where it's about 139% of what the 20 year rolling average is.

To put that into perspective, back in 2000, March of 2000, the P/E ratio was 27.2 times versus in 2007, it was 15.7 and now we're at 16.8%. So you can see that in this graph, but the next graph actually shows it even where the 25 year average is the middle dotted line. We'll show you that we're really not overinflated from a P/E ratio perspective. Knowing that, we still have bonds that are going to be providing the stability in clients' portfolios. Yields have not, because of the low interest rate however have not been the primary reasons for many clients nowadays for having bonds as part of their portfolio. And what you'll see is the impact, on the right hand side of this graph, is the impact of a 1% fall in interest rates. How you see actually the total return price rate return that happens as interest rates fall, the price of bonds actually are going up. They're inversely related.

Try to keep in mind though that that opposite is also the case, is that as interest rates begin to rise, the price return of bonds will start the fall, and right now with the low interest rate environment, there's not a lot of interest that will be received to absorb that increasing interest rate effect. So really bonds as part of a portfolio is designed to be a low correlation to the stock market, reduce your risks, provide additional stability to the portfolio because volatility is going to continue and is actually expected to increase. You'll see here, this is something that we call the measles chart, where you see those red dots along the wave representing each year the entry year decline in a given year.

And that means that in any given year, for example, in 2019 the market did drop 7% during the year. Last year it actually dropped 20% in the fourth quarter, and that wiped away all of our gains in that particular year, and then some. But that volatility, to dampen that volatility is going to be important to make sure that you maintain the diversification, and that's what bonds are going to be there for, as well as other types of stable investments.

It's important though as you're looking at the volatility in the markets that we do not try to time the market. And so if you remember, I said over the last 10 years in one of our earliest slides, the S&P was averaging 13%. If we took that timeframe out over the last 20 years, the actual S&P 500 was closer to 6% average rate of return over the last 20 years. Just an interesting point to note. But if you missed 10 of the best trading days, you would actually cut your rate of return to 2%, and then it gets worse as you miss more days of the best trading days in the markets. And we always like to point out, and what's interesting is that six of the best 10 days occurred within two weeks of the 10 worst trading days. So you never know when you're going to, if you get out, when you're going to get back in.

And what we found is that it's important to make sure that you stay consistent with the rebalanced approach, not only being balanced, but rebalancing along the way. Chris, over the last 20 years, if you had a portfolio that was 60% stocks and 40% bonds, you had an average of 6.2% rate of return versus that 6% rate of return just in the S&P 500 Index, or a 5% rate of return in the bonds. Having the blend of both actually gave you a better rate of return with lower risks in the stock market. And what we found and what we hear often now from clients is that there's this familiarity and recency bias that's coming to light here where the S&P 500 Index is that blue line right across the middle of the graph here. And all the rest of those dots are the colors of other different types of markets that one could invest in.

And because the S&P has been the higher performing over the last four or five years, people tend to seek for that and tend to overweight and desire to go more towards that type of investment. We just want to remind people that history has shown is that there's many different colors and many of those colors have performed better than the S&P 500 Index over time. And by having all these different colors as part of your portfolio, you actually smooth out the rate of return. And that includes diversification among the different colors as well as the rebalancing over time. And that's what this graph is showing you, is that having the diversification of the different colors of the markets gives you a smoother rate of return in the middle. But how do you determine how to invest?

We feel that taking a strategic behavioral approach for clients allows them to better stay invested in good times and bad times with the markets. And the different behaviors revolve around, what we've found is four different types of behaviors. Some clients really are seeking for their investments to be a focus on performance. Seeking that higher performance rate of return over the benchmark, and a longterm investment focus needs to be consistent with this type of strategy because that benefits of the out-performance comes with some trade-offs. It may have some higher management costs. You will certainly have higher volatility that's associated with the market, and you may even have lower tax efficiency because of the transactions that occur within that type of strategy.

Tax minimization is also another strategic behavior we found some clients focused on with their investments, is that they're looking for their investments to minimize the tax output and increase the after-tax rate of return. So this may have its benefits in an after-tax strategy, but again, need to think of the possible trade-offs, which could include higher management costs, possibly a reduced tracking error to a benchmark, if that's what one is using, there's no protection on the downside, and we're not necessarily outperforming the market on a free tax basis.

The last two behaviors that people often have when it comes to investing is protection. Protection is one where the client is saying, "I've made my nest egg here and I'm looking to really preserve that value, and I want to mitigate the amount of risks and the severity of the ups and downs in the markets." And what you have here against some of the trade-offs with that type of investing philosophy would be the higher management costs, potentially the minimizing the tracking error with a particular benchmark, no substantial out-performance typically is found in that type of an arena, and there's less tax efficiency often with a protection mindset.

However, the last behavior is the low cost tracking. The low cost tracking is where the client is saying, "I just want to make sure that I minimize the internal expenses of my underlying strategies that I'm putting into place." And what those often lead to is, again, you could see that they kind of ... these different behaviors do not necessarily diverge from one another. The lower the cost tracking that you'd want to have in the cost of the underlying investment, the less the protection that you'd have or the less the out-performance that you'd have. And the more protection that you want, again, the less that you would have the opportunity for out-performance. That whole risk reward.

Deciphering which one is going to be the most appropriate for you is important so that you could make sure that you're able to ride out the volatility and the variability that happens inside the markets. And when you do this, what you'd want to do is make sure that you do it in a context of planning. All too often, people equate investments to planning, and the reality is investments is a piece of the planning puzzle. What we found is that those that have a very clear definition of what they're trying to achieve within their financial plan have an easier time deciphering what the investment should be doing for them, and then they should be also benchmarking those investments, not to a random index, but to that which is most important to them and their goals. That way you stay more consistent in all the times that the markets ... because we are going to see increased volatility along the way.

But that also means that you need to take into consideration protecting those investments, to have a great investment strategy along the way. But if you don't have your assets protected, then other avenues and other things could come in and attack those goals of yours and tax those investments. So we want to make sure that you're taking it into consideration, is not on new goals, the investments for protection as well as the tax efficiency along the way.

And then lastly, when it comes to investing, we wouldn't be complete unless we said all past performance is no indication of future results. So here we are, just providing our disclosures and disclaimers and any questions, please feel free to type them in and hopefully we'll have time at the end of the session to answer them. Thank you.
Moderator: We have now reached polling question number one. "I feel a market correction is more likely to occur over the next 12 months." A, false. I'm sorry, A, true. B, false. Please remember in order to qualify for your CPE certificate, you must remain logged on for at least 75 minutes and respond to five out of the six polling questions. We'll give everyone a few more seconds to respond.
Marc Scudillo: This is a good research question as to how people are feeling out there.
Moderator: We are now closing the poll and sharing the results.

Marc Scudillo: So 80% of the people feel like there's going to be a correction over the next 12 months. Interesting. Thank you.
Robert Levin: Thank you Marc, and good afternoon, or good morning everyone, depending on where you are. Today, I'm going to talk about some income tax considerations for individuals as we head into year-end. As a result of the TCJA, year-end planning certainly has changed a little bit. It's still extremely important but certainly different. I know I spent most of my career focused on state and local taxes and break even analysis with regards to AMT, and now I think we're much more focused on things like investing in qualified opportunity fund, excess business losses, qualified business income deduction, and other areas that didn't exist just a few years ago.

Being that it's only the second year of tax reform, I think it's important that we revisit some of these changes, and what changed, not only from 17 to 18, but what has changed now from 18 to 19 and what has stayed the same? So we'll start with tax rates. Rates did not change from 18 to 19. Still seven brackets, top rate is still 37%. However, the ceiling and the floor with the bracket change went up slightly. The AMT exemption also went up a little bit. As I'm sure most of you are finding, there are very few taxpayers that are actually still in the AMT. Obviously this is a great deal to do with the SALT cap and the elimination of the miscellaneous itemized deductions, but the increase exemption plays a part as well.

Child and family tax credits has largely remained the same from 18 to 19. Retirement planning limits, IRA contribution stayed the same from 18 to 19, but 401(k), 403(b) and profit sharing contributions went up a little bit in 19 and are also scheduled to increase again in 2020. Remember as we're heading into year-end, certain plans may need to be established, and some even funded by 12/31. So if any of your clients or business owners or have self employment income and are interested in setting up a retirement plan, this could be very time sensitive.

I'm going to skip over the next couple of pages and fast forward to page 34, and I want to focus a little bit on carried interest. It's obviously a big area, especially for those with clients in the alternative investment space or those who are in the alternative investment space. Unfortunately after nearly two years, we're still waiting on some final guidance with how to treat some of the one to three year gains, specifically the pre-imposed 12/31/17 gains. And I think one of the biggest areas of confusion in preparing 2018 tax returns was the K-1 footnote under Section 1061. And this was a general footnote that was on a lot of the K-1s but didn't necessarily apply to all the partners that received the K-1.

This determination of what should have been re-classed really should be made at the partner level. It's really intended for the GP of the fund who is receiving the incentive. So I'm looking back, I'm wondering how many re-classes were made in error because the footnote was on the K-1 even though it may not have been applicable to that particular partner. This is something that you really need to pay close attention to here at year-end is it can significantly impact two, four estimates and then 415 extension projections. Sorry.Page 35 is just a recap of some of the modifications to deductions under the TCJA. Not much has changed from 18 to 19, but I think it is a good idea to revisit these because a lot of these changes were the deductions that have really been around for a long time and are still very ingrained in a lot of our minds. So again, I think it's a good time to revisit. Obviously SALT, state and local taxes and real estate taxes are limited to $10,000. Mortgage interest is limited on interest up to $750,000 of acquisition indebtedness. Charitable contributions, that increased, for cash contributions, from 50% limit of AGI to 60%. Personal casualty losses, repealed except for declared disasters. Medical expenses change slightly, it's now a 10% of AGI threshold for 2019 and beyond. Miscellaneous itemized deductions, gone. Alimony is no longer deductible for a divorce or separation measurements executed after 12/31/18. Well, moving expenses, Pease limitation, both repealed and gambling losses survived and still are deductible up to the extent that you have gambling winnings.
Moderator: We have now reached polling question number two. "The top individual income tax rates in 2019 have blank from 2018." A, increase. B, decrease. C, stayed the same. Please remember in order to qualify for your CPE certificate, you must remain logged on for at least 75 minutes and respond to five out of the six polling questions. We'll give everyone a few more seconds to respond. We are now closing the poll and sharing the results.

Robert Levin: I'm going to spend the next several minutes talking about a few areas that were new in 2018 and have had a significant impact on a number of taxpayers. I'm talking a little bit about the QBI deduction, excess business losses and qualified opportunity funds. Unfortunately, this is going to be a really quick, high level discussion. As Marc mentioned earlier, I think each one of these items in itself can be a two-hour session. So we're just going to touch on these things and obviously we can answer any questions at a later time in more detail.

First is the QBI deduction. As most of you are aware, there's now a 20% deduction for taxpayers that have Qualified Business Income from pass-through entities or sole proprietorships. This deduction does have some limitations and you also need to determine whether or not the income is from a specified personal service business or not. So beginning tax years after 12/31/17, there will be a 20% deduction for taxpayers who have qualified business income from partnership, S corps and sole proprietorships. This 20% deduction is limited to the greater of 50% of W-2 wages paid by the pass-through entity or sole proprietorship or 25% of wage income plus two and a half percent of the unadjusted basis of all qualified property.

The limitation does not apply for income levels below 160,700 for single taxpayers or 321,400 per joint taxpayers. You'll get that 20% deduction without any regard to the above limitation. And the second part of that limitation computation, the 25% wages and the two and a half percent limitation, being that it's the unadjusted basis of the assets of a real home run for real estate partnerships, REITS and PTPs.

What's a specified personal service business? There's a pretty long list of that just in general and include law firms, accounting firms, financial services, consulting. Somehow architects and engineers slipped through that crack and are part of that group. If you have income from a specified personal service business and are not able to avail yourself of this deduction, you can get the 20% deduction if your income, your taxable income, is below those thresholds, 321,400 married filing jointly and 160,700 if single. At those levels, the deduction starts to phase out and then it's phased out next hundred thousand on married filing jointly and 50,000 if single.

The 20% is not allowed and arriving at AGI, but it does reduce taxable income. And you can also take advantage of this 20% QBI deduction even if you do not itemize your deductions. I'm not going to go through the next page in detail. You can certainly look that over. This is just a good, very basic example of how the deduction works.

Well, one last thing with regards to the QBI deduction. As you are heading into year-end planning and doing planning year-end planning for yourself or for your clients, you have to look, and again, this is ... the first time we got to deal with this year-end, being that 18 was the first year that we had this, as to whether or not there were any QBI losses that carried over from 18 as this could have an impact on any QBI deduction that you may think you're going to get in 2019. So again, something you need to look at closely. Something that never existed before this year.

Next thing I want to discuss, again, something brand new for 18, is excess business losses. In the past, when it came to business losses or losses through K-1s, we focused on passive versus non-passive, basis and at-risk. Well those three items are still of utmost importance and we still need to focus on those three things. We still now also have this limitation with regards to excess business losses. Even when you get past passive, non-passive basis in our risk pools. Beginning in 2018, business losses and we're limited to 500,000. That's now up to 510,000 in 19, and that's for married filing joint. It's 250 and 255 for a single tax payers.

So basically what you would do is take the excess of all your business losses and to the extent that those exceed all of your business income by more than $510,000, you would be limited to $510,000 as a deduction in 2019. Any loss above that, would be carried forward to 2020 as a net operating loss. And remember beginning of tax years after 12/31/17, NOLs are no longer allowed to be carried back and they're limited to 80% of your taxable income.

Again, as we're heading into year-end planning, we have to see if the taxpayer has an NOL as a result of an excess business loss they had in 2018. This is very important because in the past we've had ... Well now we have taxpayers that could have had significant taxable income in 2018 and paid significant taxes, but still have an NOL as a result of the excess business loss. And that's not something we're used to seeing, so.

Again, on page 41, I'm not going to go into detail on this, but this is, again, a good example of how the excess business loss limitation works. I want to just spend a few minutes looking at this and then we'll move on.

The next thing I want to discuss is a topic that has been a really hot item and continues to be a hot item, and that's investing in qualified opportunity funds. So basically what investment in qualified opportunity fund allows you to do is take the gain from the sale of an unrelated party sale, whether it's the sale of public traded securities or gained through a K-1, you can take that gain, and as long as you invest it in a qualified opportunity fund within 180 days of the sale or exchange, you can defer that gain until the sale of the qualified opportunity fund interest or December 31st 2026, whichever is sooner.

The gain, when it is finally recognized, will retain the same character as the gain when it was deferred. One important thing to note that gains that are coming through partnerships are deemed to have occurred December 31st. So if you have a K-1 in 2019, that is a gain you have until the end of June of 2020 to make that investment into a qualified opportunity fund.

In addition to the deferral of the gain, there also is a 10% reduction of the original deferred gain if you hold that qualified opportunity fund interest for at least five years prior to sale or December 31st, 2026. If you hold it for seven years prior to the sale of the interest, then there's a 15% reduction of the deferred gain. And if you hold it for 10 years, not only do you have a deferral until 2026 and a 50% reduction in the gain, but you would also have no gains on the sale of the investment in the qualified opportunity fund investment. Basically at that time, the basis of that investment will equal the fair market value of the investment as of the date of the sale or exchange.

One very important thing to note that is time sensitive with regards to a qualified opportunity fund, that if you do not invest into a qualified opportunity fund by December 31st 19, you obviously can still do it after that, but anything after 12/31/19, you'll not be able to take advantage of the 15% gain reduction. And the reason is that you will never be able to get the seven year holding period requirement after 12/31/19 because the provisions expires 12/3126. So you can still qualify for the 10% gain reduction. Just not the 15% reduction. How much of an impact that 5% makes, that may or may not be meaningful, and that really depends on the size of the gain that you defer.

I'm going to kind of skip over the next few slides. Again, these are just examples of the significant tax benefits that investing in a qualified opportunity fund can have. Just remember that while the potential tax benefits are overwhelmingly fantastic, the economics of the investment need to be the driving force as a bad investment could outweigh any tax benefits that these QOFs could have. Personally we've had this discussion with a lot of clients over the last year or so, and everyone loves the idea, but in reality, I've seen very few clients actually pull the trigger, as I don't believe that any of them have really found any investment opportunities that make significant sense for them. So again, make sure that that's the driving force behind this and not that the tax benefits.

I'm going to spend the last few minutes just talking about some things that we should be looking at as the year is winding down. A lot of these things we should be looking at every year regardless of the recent tax law changes. As we mentioned before, and as everybody's pretty aware, especially those in the high income tax States such as New York and New Jersey, the state tax deduction is now limited to $10,000. There was a lot of talk about a year ago or so about work around, about contributing and making charitable contributions to local municipalities and getting a charitable contribution deduction. And they would turn around and then reduce your real estate taxes by certain amounts. That, not surprisingly, was shot down by the IRS.

Mortgage interest limitation now reduced to $750,000 of indebtedness. So, again, something else to look into, whether or not it may make sense to pay some of that mortgage down. The interest that you're paying on loans above 750, coupled with no tax benefit, it may be more beneficial to pay a little bit of that down.

One thing that we always look at year-end is charitable contributions. This is a great time to look at whether or not you should maybe consider bundling up some charitable contributions if you're somebody who's really on the border with regards to itemizing and you may not itemize. You're going to get the standard deduction of $24,400 if you're married filing joint. So if you're not going to hit that, you may want to consider doing two years worth of charitable contributions at once. That way you can take advantage of at least maybe itemizing every other year.

The other things to consider at year-end is use of donor advised funds. That's a good way to make a larger donation upfront and get a big deduction and one shot at year-end. And then those funds can be dispersed to other public charities over time and it doesn't need to be done immediately. And then lastly, consider what is the right asset for you to donate? Whether it's cash or artwork or long term appreciated securities. And that really depends on your individual circumstance. In most cases it's beneficial to donate long term appreciated securities rather than cash. But again, you need to look at that on an individual basis.

A couple of other things want to talk about as we, again, wind down the year is consider whether it makes sense to do a 529 plans, HSAs, or other flexible spending arrangements that you may be, your employer may have available to you or you may be able to get on your own.

Lastly is required minimum distributions from qualified plans. This is an important one for those of you who are 70 and a half or older. Please make sure you don't miss this. The penalties for not making required minimum distributions can be quite significant. A few other things you can do with those year-end IRA distributions that are great when you're doing your planning is, if you're short in quarterly estimates from earlier in the year, you can take a distribution, withhold on that distribution, and not only could it possibly cover those quarterly estimates, but any withholding even in December would be deemed pro-rata. So it could eliminate any shortfall and maybe eliminate or at least reduce any estimated tax penalties.

Also another thing to consider, and again, this should be made on a case-by-case basis, but does it make sense to make a direct charitable contribution in lieu of an RMD? So with that being said, I think we're running a little bit short on time and we're ready for our third polling question.

Moderator: We have now reached polling question number three. "Which of the following is considered a specified service business for purposes of the QBI deduction?" A, architects. B, accountants. C, engineers. Please remember in order to qualify for your CPE certificate, you must remain logged on for at least 75 minutes and respond to five out of the six polling question. We'll give everyone a few more seconds to respond.

We are now closing the poll and sharing the results. And the correct answer for this is B, accounting.
Karen Goldberg: So next we're going to talk about estate and gift tax considerations with respect to the year-end. Next slide. I'm going to start off by running through the estate and gift tax exclusions and exemptions for 2019 and the new ones that just came out for 2020. The annual gift tax exclusion, the amount that you can give to an unlimited number of individuals each year, remains at 15,000 as it was in 2019. So 2019 and 2020 it's 15,000. For a married couple, they can give away 30,000 to an unlimited number of individuals.

The annual gift tax exclusion for gifts to non-US citizen spouse was 155,000 in 2019, it's increasing by $2,000 to 157,000 in 2020. The gift and estate tax basic exclusion amount in 2019 was 11.4 million per individual, 22.8 million for a married couple. That amount is being increased in 2020 to 11,580,000 per person. Of course, double that for married couples. The generation-skipping transfer exemption that mirrored the basic exclusion amount, and so it was 11.4 million in 2019, just like the basic exclusion amount, is increasing to 11,580,000 in 2020. Next slide.

So now let's talk more about the double basic exclusion amount. If you don't already know that exclusion amount was increased in 2018 from 5 million plus some indexed amount to $10 million in 2018. In 2026, it reverts back to the 5 million plus indexed amount. However, it could happen sooner if perhaps we have a democratic president between now and then. In order to use the basic exclusion amount, the entire 10 million plus basic exclusion amount so it's not lost, the client must use the entire amount because when a client makes a gift, he's due to use the old 5 million plus indexed amount before he uses the new increased amount. So if an individual makes it gift of $5 million plus whatever the indexed amount is in 2019 and then it doesn't do anything else in 2026 when it goes back to that indexed amount, everything will be lost. There'll be no exemption available for that individual.

If a spouse dies, well, the basic exclusion amount is doubled and a portability election is made. It appears that if the surviving spouse dies when the basic exclusion amount has been reduced, that portable basic exclusion amount won't shrink to the lower basic exclusion amount in effect at the time of death of the surviving spouse. Next slide.
Moderator: We have now reached the fourth polling question.

Karen Goldberg: So now we come to question number four. "How much is the gift and estate tax BEA I in 2019?" A, 5 million. B, 10 million. C, 11.4 million. D, 22.8 million. Please remember, in order to qualify for your CPE certificate, you must remain logged on for at least 75 minutes and respond to five out of the six polling question. We'll give everyone a few more seconds to respond.

Moderator: We are now closing the poll and sharing the results.

Karen Goldberg: The answer is 11.4 million. The 22.8 is doubled for a married couple, but in effect it's 11.4 million in 2019. So now we have this double basic exclusion math and generation skipping transfer tax exemption. Our clients should be taking advantage of that, and let's discuss a few ways they can do that. So let's say a parent has made a gift to a child and they really, between us and them, they really don't intend for the child to ever pay it back. Now's the time to forgive that loan. They have the increased exemption. Now's the time to just get rid of it so that it's not an existence at their desk well potentially as an estate tax.

And if someone might come back and then say, "It was a gift when the loan was made because there was no intention to ever pay it back, let's clean this all up." If parents have made gifts to, or let's say may gift some sales, but they sell to a defective grant or trust, there's an outstanding loan between this trust that's for their children and grandchildren, now may be the time to forgive that loan. Get rid of this outstanding obligation.

Perhaps a married couple in 2012 set up trust to take advantage of the $5 million exemption before it was supposed to go back down to a million and maybe they set up spousal lifetime access trust. This would be a good time to top off those trusts with another 5 million plus exemption amount. If you don't have to incur any additional fees, hire attorneys to help you with it, just top off those trusts or any other existing trusts that you have. You could use both your basic exclusion amount and your increased generation skipping transfer tax amounts.

If a client has a life insurance policy in a trust that requires large premiums, more that can be covered from gift tax, they see the annual exclusion amount allowable for gifts to the trust. And if the premium's so large that they would potentially cause the use of increased exemption, now is the time to pre-fund those. Let's pre-fund those trusts using increased exemption before it goes away. Now that the exemption is increased, it's quite large, it's over 20 million, fewer individuals are subject to federal estate tax as though individuals may be subject to state estate tax, a lot of individuals are no longer subject to federal estate tax. Now's the time to reconsider life insurance needs. But if you're going to do that, remember that the exclusion is scheduled to be decreased in 2026 to half of what it is now, and maybe even sooner if perhaps we have a democratic president.

Finally, what I find a lot of my clients are doing is using the increased generation-skipping tax exemption to make late allocations to existing trusts, to shelter them from the generation skipping transfer tax, and the property eventually gets in the hands of grandchildren. Another popular way to use the increased generation skipping exemption is to use it to allocate to the property remaining in a graph at the end of the graph term, very popular. I'm doing a lot of allocations. They're timely allocations because at the end of an estate tax inclusion period, a lot of clients are taking advantage of their increased generation skipping transfer tax exemption in this way. Next slide.

Even if a client does nothing, this new double basic exclusion amount in generation skipping transfer exemption can just have an unintended impact on their current wills and trusts, revocable trust. So let's say a client has provided for a credit shelter trust upon his death and when he set it up, the basic exclusion amount was $5 million. Now the basic exclusion amount is over 11 million. When the individual size, if the basic exclusion amount is still double, a lot more could end up in that credit shelter trust than he intended, and maybe his spouse isn't the beneficiary of that trust. He could in effect be disinheriting her, or perhaps a lot is going into this credit shelter trust and it's all for, let's say, children of a first marriage. And what he intends is to leave the remaining property to the second wife in trust for his new family. But not only would he be disinheriting his surviving spouse, but also his new family, which may be his own biological children.

In addition, the generation skipping tax exemption is doubled, as we know, so clients oftentimes leave the GST exemption amount in trust for grandchildren. And maybe before it was okay to leave 5 million plus in trust for them, that maybe the client no longer wants to leave 11 million if he dies when the basic exclusion amount is 11 million plus, doesn't want to leave 11 million plus to grandchildren. He'd rather leave it to his own children. So even if a client does nothing, since the basic exclusion amount, GST exemption are now deviled, everyone needs review their current estate plan. Next slide.

What I've been telling clients now, everyone's thinking about the large basic exclusion amount and they want to do something but they're sort of just thinking about it and thinking about it. But you know what? Now's the time to do it before that asset that you want to transfer using the increasing exclusion amount has appreciated. Now rather than later. If in addition, by making a gift during life, that gift may be eligible for gift tax valuation discount that it may not be entitled to if an individual dies owning the same item. So let's say an individual has a closely held business and does nothing. The entire closely held business is includable in is estate, no estate tax valuation discount, the entire asset's subject to estate tax.

If during life he makes the gift of 49% of that closely held business using the increased exemption exclusion amount to a trust, you know what? And did 49% of the trust, there's evaluation discount, I'm transferring it. He says, "I still have 51%. I won't get evaluation discount upon my death for the 51% but then in case, I'll give 2% to my wife and we can structure my plan so we'll both get discounts."

So there's a lot of lifetime planning that you can do with this increased exclusion and generation skipping exemption that you should do now. And I can tell you, you don't want to be part of the rush in 2025 when everyone's rushing to set up trusts to use the increased exclusion and exemption because there'll be most, I can assure you, it'll be much more expensive to do it that point in time when the attorneys are being brushed with all of this additional work.

Finally, the basic exclusion amount is 22 million, you have an older couple, they may say, "I don't really to do any estate planning," but there are other reasons for doing estate planning, isn't just to minimize taxes. And I should say here, even if there's no federal estate tax, it could be a state estate tax. You might want to do planning to minimize state estate tax. But estate planning is still necessary for non-tax reasons. I mean a client wants to be able to direct where a business goes. It may not be worth 20 million, it may be worth 5 million. Who do they really want to be running that business? What age do they want their children or grandchildren actually to receive funds if something should happen to them? So there are many other reasons to do estate planning. So it isn't off the table even, with the increased basic exclusion amount and generation skipping exemption. Next slide.

I wanted to run quickly through the income tax changes that happened because of the Tax Cuts and Job Acts, and we're all pretty familiar with them because we went through one tax filing season, but just a reminder, state and local taxes, just like for individuals, are capped at $10,000. Trust and estate is eligible for the 20% QBI deduction. That's a good thing. And then excess deductions, or I should back up and say miscellaneous itemized deductions, for trusts and estates are not permitted, just like for individuals.

And then there's the question of those excess deductions that a trust or estate has on termination. When they pass out to the beneficiary, they're generally treated as 2% miscellaneous itemized deduction that would not be permitted on an individual's income tax return. However, there's some question whether these deductions, which right now the only excess deductions that you could have in the case of a trust or estate are trustees fees, accounting and legal fees. When they pass out to the beneficiary, are they 2% miscellaneous itemized deduction? Because they're not 2% miscellaneous itemized deductions when they're reported by the trust or estate.

The IRS has issued a notice saying they're looking at this, they're not so sure. They're a 2% miscellaneous itemized deduction apparently in the hands of the beneficiary. So they're revisiting this and they're supposed to get back to us, obviously not soon enough for last tax filing season, but hopefully we'll hear something relatively soon. For 2019 we may have to go back and amend returns, but that's out there. Next slide.

I mentioned that a client may not need to do planning to reduce the federal estate tax, but individuals who live in certain States may be subject to estate tax, such as in New York. New York's estate tax exclusion is quite large right now. It's 5,740,000 in 2019. We don't know what it is yet for 2020. It's indexed for inflation, but if an individual's estate sees that 5,740,000 it's going to be subject to estate tax because this exclusion phases out once an estate exceeds 5% of that, and it phases out pretty quickly. So an individual with an estate close to that amount should consider doing planning to save New York estate tax. Next slide.
Moderator: We have now reached polling question number five.
Karen Goldberg: It's our polling.

Moderator: Which of the following is false? A, GST exemption in 2019 is 11.4 million per person. B, 10,000 deduction cap on state and local taxes applies to trust and estate. C, NYS BEA is the same as the federal BEA. D, increased BEA can cause havoc to an existing estate plan. Please remember in order to qualify for your CPE certificate, you must remain logged on for at least 75 minutes and respond to five out of the six polling questions. We'll give everyone a few more seconds on. We are now closing the poll and sharing the results.
Karen Goldberg: So the results, the New York state basic exclusion amount is the same as the federal basic exclusion amount is not correct. That is false. Thank you.

Marie Arrigo: So the next topic is on philanthropic planning and opportunities. And Rob had talked a little bit about this before as part of the income tax considerations for individuals. So now we're just going to take a little bit of a deeper dive. So those other planning, again, should be incorporated with income tax planning. And if you think about it, charitable deductions are more valuable in the year with a higher marginal income tax rate. So therefore proper planning involves looking at timing of when you should make those charitable contributions to obtain your optimal benefit. And typically you at least look at a two year period in terms of determining timing. However, this is much more complicated as a result of the Tax Cuts and Jobs Act as itemized deductions are limited or eliminated as we've talked about before. And there are some things, other things, that we need to consider in that respect.

So the first thing I wanted to talk a little bit more about is the adjusted gross income, AGI, limitations on charitable giving. The maximum deduction an individual is allowed for charitable contributions is really based on a couple of factors. One being the individual's adjusted gross income, second, the type of property given. And third, the status of the exempt organization. So if you make contributions to public charities, and let's say you're giving cash or ordinary income property, that amount is 50%, but also 60% for cash only. If you give appreciated capital gain property, it's 30%. Same percentages apply for a private operating foundation. Those are private foundations that actually qualify as doing direct charitable activities, much like a public charity. And non-operating, or grant-making private foundations, those limitations are slightly less, at 30% and 20% respectively.

So any excess amounts contributed over what is deductible is carried forward to the subsequent five years and would be subject to the limitations for that period. So if Debbie Donor makes a cash donation to a public charity, of $3 million for instance, and her AGI is 4 million, her charitable deduction is 2.4 million, which is 60% of the 4 million. And since Debbie made a contribution to a public charity, she can deduct up to the 60% and the excess amount of the 600,000 is carried forward for the next five years.

And whether you're able to take your charitable contribution in the subsequent year, it really depends on the tax circumstances in that year. And so you have to consider that your carry forward could be lost in a subsequent year if in fact, even though you had that charitable contribution available, perhaps you must take the standard deduction because that's higher than your total itemized deductions and you've essentially lost that carry over. So you have to consider all of this in your planning.

And you have to also understand that current year contributions go against the AGI limitation before the carry over. Now Rob mentioned before that you can use bunching of charitable deductions in one year so that you can get over the threshold for itemized deductions. You can also use a donor advised fund or a private foundation, and let's say you front load your contributions in year one, you're able to take a deduction because you're over the threshold for the standard deduction, and then perhaps then you don't contribute to your DAF or your private foundation in a couple of subsequent years, but rather then you let those entities make out grants to your charities. So that's another consideration.

TCJA increased the percentage of the AGI that can be deducted for cash contributions to public charities and other tax exempt organizations, such as donor advised funds, private operating foundations, and even grant making foundations if they qualify under an out-of-corpus rule or pass through to a conduit foundation. And the thing to consider in all of this is, what if a donor contributes other types of property to different types of charities, not just public charities? Well, because of the way the new law provision was inserted in existing law, which was section 170 of the code, the 60% limitation may not be available in all cases. 170 is pretty complex and there's an interrelation and interaction of the various categories of donations with one another. So the best way to explain this is by example.

So we're back with Debbie Donor again, and now she wants to make the following gifts to charities in 2019. So she wants to make a $70,000 cash donation to a public charity. She wants to make a 20,000 cash donation to her family's private non-operating foundation, and then she wants to donate short term capital gain property with a fair market value of 50,000 and a tax basis of 40,000. Her AGI is 200,000. So what do you think, what the 2019 charitable contribution deduction will be for Debbie?

If you said 100,000, you would be correct and there is an excess contribution carry of 30,000. So let's analyze how we get there. Your cash contributions to public charities are limited to 60% of the AGI and 60%, and so 70,000 that was contributed is less than the 60,000 so the entire 70,000 is deductible. The second traunch is to look at the short term capital gain property. Now first of all, what is that deduction? It's going to be limited to the lower of the fair market value or the basis. So fair market value was 50,000, the cost was 40,000. So 40,000 is what we're talking about as the maximum deduction for this type of property. However, looking at the calculation, you first multiply the AGI of 200,000 by 50% and then you reduce it by the 70,000 that's already deducted from the cash contributions from the first item.

So 30,000 to 40,000 deductible and $10,000 is going to be carried forward to a future year. The third in that item that she wanted to donate was cash to a private grant-making non-operating foundation. And that's limited to the lesser of 60,000 which is 30% of the AGI amount, and zero, which is the difference between the combined 100,000 already being deducted and 50,000 the AGI. So none of that 20,000 to the private foundation is deductible in the current year and will be available in a subsequent year.

So here's the summary. Cash of 70,000, I'm able to deduct 70,000 for the public charity. The short term capital gain property, 40,000 is the contribution, 30,000 is deductible. Nothing for the cash for the private non-operating foundation and the total deduction is 100,000 and so the percentage of the AGI is 50%. So here even though we started out thinking we could deduct 60% of AGI for the public charity because that amount was less than that 60% max, everything reverts back to 50% and the carryover is 30,000 in the subsequent year.

How could she have gotten 60% if she, instead of donating 70,000, donated 60% of the 2,000 AGI or 120,000, then say she donated 120,000, she would've gotten that 60%. But then all the other items, the short term capital gain property and the private foundation contribution would be carried over to a subsequent year. So what this really proves is that you need a computer program and what to figure this out.

The next item I wanted to mention is the charitable deduction for payment for higher education institutions. So prior law allowed a deduction of 80% of the amount paid by a taxpayer too for the benefit of an institution, but for the fact that he or she received the right to purchase tickets for seating of the athletic events of the institution. Well TCJA basically put a kibosh on this law and it's no longer deductible. And we're up to a polling question.

Moderator: We have now reached polling question number six. "Which factor would you not consider when determining the maximum charitable deduction?" A, the type of property donated. B, the type of charity receiving the donated property. C, the individual's taxable income. D, the individual's AGI. Please remember in order to qualify for your CPE certificate, you must remain logged on for at least 75 minutes and respond to five out of the six polling questions. We'll give everyone a few more seconds to respond. We are now closing the poll and sharing the results.
Marie Arrigo: So the answer is C, the individual's taxable income. That would not be a factor when determining the maximum charitable deduction a person can take in a year. So moving along. The next item to mention is, in our repertoire of philanthropic planning, is using longterm appreciated property to fund the charitable contributions in a year. Rob also mentioned this earlier and here we have Debbie busy again donating. Now she's donating stuff that she owned for 10 years with a fair market value of 100,000 and cost of 60,000. If she decided to sell the stock and then donate the proceeds, she would have a tax savings on the contribution of 100,000 times, let's say 37% the highest tax rate now for individuals. But then she'd have a cost of a capital gains tax, and this is just the federal, could also be a cost on the state level too. 40,000 is the capital gain, and you would take it at 23.8%, which is the 20% long term capital gain rate plus the 3.8 net investment income tax rate.

So her tax savings is 27,480, but if she had in fact donated the stock directly, as long as it's housed for more than a year and it's considered longterm, then you are good and you would get a full deduction of $37,000. So again, something very simple like that can actually yield very good results.

You also want to make sure that when you're doing your planning, that you make sure that you transfer wherever it is you're transferring well prior to the end of the year. If you get kind of too close to the end of the year, you may have intended, let's say, to take your deduction in 2019, but let's say the transfer gets effectuated with a broker in 2020. You have a nice charitable contribution for 2020. So again, I always say the devil's in the details. So you need to really pay attention to your requirements so that you're able to make sure that whatever you intended actually happens in the year you intended. You never want to use securities where the fair market value is lower than the cost. That deduction would be limited to fair market value and you'd lose the benefit of a charitable loss, so better to sell then, recognize the loss and then donate the proceeds.

If you held a stock for 12 months or less, the deduction's limited to the lesser fair market or the basis. And if you donate property that's inventory or subject to depreciation recapture, that deduction's also limited to the lesser fair market value or basis. So these are rules that we've gone through in prior years, but this is meant to really be a refresher of what you need to consider when you're making a donation. In the case of artworks, if you donate let's say a painting to a museum, because that museum is using that painting for its exempt purpose, you would be allowed a fair market value deduction. But if you donated the painting to, like the American Red Cross or The Salvation Army, even though they have the painting prominently displayed in the lobby, that is not their exempt purpose, to display artwork. And you would be limited to the lesser fair market value or basis.

Also keep in mind that charities that dispose their property within three years of receiving it, what that does is that the donor is required to include his ordinary income for the year of the disposition, the difference between the charitable deduction original was taken and the donor's basis.

Fractional interest are also a good planning technique for artwork. Here you are able to make a gift of an undivided portion of property to a charity with its exempt purposes such as let's say an artwork donated to a museum. So the way it's computed is that the initial deduction is computed by multiplying the fair market value by the fractional interest combined and that subsequent deduction limited to the less of the fair market value at this time of the deduction, subsequent deductions are limited between the lower of the initial valuation and subsequent one.

And here again we have an example of interest in a painting valued at 400,000 for three months. And let's say the painting is we paint for the rest of the year. Your charitable deduction is limited to 100,000, which is 25%. That's three over 12 times the 400,000. If in a subsequent year you go and you do another 25% but let's say the fair market value increases to 500,000, you are still limited to 25% of the contribution, or 100,000.
So IRA and also IRA distributions as charitable deductions for those who are age 70 and a half or older are able to transfer portions of their accounts to qualifying charities tax-free while satisfying all or a portion of their requirement and distribution. And you have up to $100,000 that you can donate directly to charity. Must be a public charity, cannot be a DAF or a private foundation or a supporting organization. And the distributions are reported on the returns but they're not included in the computation of the taxable income or tax of the individual.

This technique has become really actually ... really has increased attractiveness because of the Tax Cuts and Jobs Act as this is a way of effectively giving to charity and still getting a benefit for it. The next item to briefly mention are the charitable remainder trust, which is a trust that provides an income stream to non charitable beneficiaries during this term of the trust where the remainder is then distributed to the charity. There are two types of CRTs, an annuity trust that pays a fixed percentage of its initial trust value resulting from a $6 annuity, so that's call it a CRAT. And then the CRAT is where you have a unit trust where you have paying a fixed percentage of the trust annual fair market value at the end of the year. The unit trust allows you to make additional contributions into the trust. They're awesome.

Other legalities and considerations which are listed here. The advantage of doing a CRAT is it allows you to diversify your portfolio. You're able to defer the capital gain and create an income stream and annuity stream and receive in a year, establish a charitable deduction for the present value of the remainder interest that goes to the charity.

The CLT is the mirror image of the CRT. That's the charitable lead trust where your annuity is paid upfront to the charity and non charitable beneficiaries receive the remainder interest and this can effectively be a way of transferring future appreciation to heirs. CLTs can be set up as a grantor trust and or a non-grantor trust and that will have an implication in terms of who is paying the income tax if it's the grantor, if it's a non-grantor trust, it's the trust itself.

And deductibility of a charitable deduction for CLT would be available if it's set up as the grantor trust. So other philanthropic options to briefly touch upon is the private foundation, legal entity set up with its own set of books. You have to apply for exempt status with the IRS, and once you get exempt status, you have to register with the state attorney general your annual filing. There are all kinds of requirements and rules and regulatory considerations. If you mess up on that, you get penalized. And you must distribute at least 5% of your average non-charitable assets each year or be subject to penalties. And there's a 2% tax on net investment income, which can be reduced to 1% depending on the level of charitable disbursements and grants over a period of years. So you have to say no, but why would you want a private foundation?

Many people like it because you can control who you're giving to, which charities are going to be getting the grants. You can control your investments and it's sort of a family legacy type situation. The donor advised fund on the other hand is much, much simpler to administer. All you have to do is make your donations to set it up. And your donor can recommend charitable preferences but the fund is not required to follow them. And there's no tax on the net investment income. There's no annual filings. It's just an easier vehicle to utilize. So that's our summary of as the Tax Cuts and as Jobs Act as it impacts the various areas of income tax planning and estate planning and year-end planning. I think at this point we have some time for a couple of questions. Marc, did you get a couple of questions?
Marc Scudillo: Sure. I did actually. We'll start with a question that we received. What would happen, we've discussed what happens if you miss the 10 best trading days. Someone had asked what happens if you miss the 10 worst trading days? And I know there was a study done a number of years ago, I think back in 2017, didn't go over a 20 year period from a total of a 20 year, but year-by-year, if you actually missed the 10 worst best trading days each year since 1990 through 2017 you would have almost a 40% average annual rate of return, which is pretty high. Conversely, if you miss the 10 best trading days of each of those years, remember the effect that that would have is that you would actually have been down negative almost 13% rate of return. And as I stated earlier, six of the 10 best trading days over the last 20 years occurred within two weeks of the 10 worst trading days. So really the timing effect is very, very challenging to try to time, getting into the best trading days and missing out on the worst trading days. If anyone figures that out, give me a call and let me know.

Second question that we had was, if someone has been out of the market recently and was looking to invest, should they be getting into the market now? And that's interesting, and we do see that question often. And investing is really a discipline process. It's something that needs to be kept in mind. And this process consists of of a few key elements, which actually we helped provide a complimentary meeting to develop this process for you. And one of which is, you have to know your strategy. Know what you're trying to achieve. What is this money going to be used for and what's the percentage rate of return that you're going to need? And take that into consideration along with what your investment behavior is that we were discussing, which includes whether you're seeking for the highest amount of performance, and you're willing to take the risk associate with the preservation aspect that you're looking from your portfolio of protection, tax efficiency, or you're looking just for the lowest cost.

You combine that with then the ability to create the appropriate amount of diversification based upon those key elements there. And in developing that with our clients, we say then you always need to be prepared. So if the market does have a downturn, and who knows whether it's going to be within the next 12 months, two years, three years, we're not sure of that. There's still a lot of positive economic news that's out there that's driving the the market still going forward. But what you can do to take advantage of a market downturn is keep in mind that you're going to have that diversification. So when you think about the market downturn, are you just thinking about the S&P 500 Index? Again, diversification is key.
But you'd also want to rebalance, and rebalancing among those different colors of the markets is going to be very important, especially when the markets have those changes that take place. And lastly, look to see if you could seek for tax efficiencies.
Moderator: Thank you Marc. Rob, did you have a couple of questions to answer?
Robert Levin: Yup, sure. Let's start with the first one. Can NOLs be offset against wage income or any other business income? The answer is absolutely. Yes they can. NOLs can be used to offset either those, it can also be used to offset capital gains interest dividends. Just remember one of the big changes was they can't be carried back, they have to be carried forward. And the NOL deduction is limited to 80% of your taxable income. So you can't offset all of your income like you may have been able to in the past.

And another question I have is with regards to timing of the sub contributions and when they have to be made. So fortunately sub contributions are not ultra time sensitive right now. They don't have to be created or funded by December 31st. They just need to be established and funded by the due date of your tax returns. And that includes the extended due dates. So if you do file on time by April 15th, you need to make that sub contribution before you file the return before April 15th. If you extend your return, then you have to file by the earlier of the date you file your return or October 15th if you're filing your return on the last day.
Moderator: Great, so I think that we're about out of time. If there's any additional questions please feel free to reach out to us. Our email addresses are there and we thank you for your attention. We hope you enjoy today's webinar. Please look out for a follow up email with a link to the survey and presentation. For those who meet the criteria, you'll receive your CPE certificate within 14 business days of confirmed course attendance. Thank you for joining us today.

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