Posted by Robert L. Arone

This year is quickly coming to a close. For many of us, December 31 cannot come soon enough, as 2020 has been anything but a walk in the park.

The first quarter of 2020 brought a worldwide pandemic. Not only did this raise concerns about everyone’s health and safety, but it also fundamentally changed the way we all live. Many people found themselves either working from home or out of work. Additionally, the pandemic created market volatility that impacted many people’s investment and retirement accounts. Along with the pandemic, many areas of the country experienced severe natural disasters such as hurricanes, earthquakes, and fires, leaving many without homes. Lastly, the 2020 presidential election proved to be just as unprecedented, with many states taking days after the election to count all of the votes.

While there is reason to be optimistic that 2021 will bring a COVID-19 vaccine and the promise of returning to some level of normalcy, it is unlikely that this return to normalcy will occur on January 1, 2021. In the meantime, life marches on. Clients are just as busy as ever supervising kids attending school and other activities (in-person or virtually), moving their families to different cities and states to pursue new employment opportunities or adapting to new work environments, and adjusting their approach to their investments. With so much going on in their lives, your clients need helpful reminders that with the close of the year, there are certain steps that should be taken, or at least considered, to help them prepare for whatever 2021 may bring.

Maximize Contributions to Retirement Accounts

This year brought plenty of employment disruptions for many clients. These disruptions may have resulted in clients changing jobs and establishing new 401k accounts with new employers, or they may have caused some clients who were making regular paycheck contributions to their retirement accounts to alter or even cease their contributions with the uncertainty in the job market. As a result, many clients may not have maximized their annual contributions to their retirement accounts in 2020. Depending on their current employment status, it is quite possible that they failed to restart making such contributions and will miss out on the opportunity to maximize annual contribution limits.

Tax Return Preparation

December is the perfect time to remind clients to pull together tax records in preparation for filing their 2020 tax returns. The sooner that clients begin to get a sense of what their tax bill is going to be for 2020, the sooner they can prepare to write a check to the IRS or carefully plan how to use their refund if entitled to one. In either case, a gentle reminder to your clients to prepare now for tax season can be an easy but effective way to add value to your professional relationships with them.

Clients can begin gathering the following information and documentation in preparation for filing their tax returns:

• Social Security numbers and birthdates for everyone who will be listed on tax returns
• W-2 forms, any 1099 forms, bank or financial institution tax statements, miscellaneous income records (e.g, gambling or lottery winnings)
• Property tax payment records
• Charitable donations
• Receipts for medical expenses and health insurance coverage records
• Business expense records
• Mileage records
• Home office expenses

Last-Minute Gifts

Clients frequently forget that they can gift money or property up to a certain amount per person each year ($15,000 in 2020) without incurring any gift tax liability and without the need to file a gift tax return. This annual gift tax exclusion amount is noncumulative, so it is a use-it-or-lose-it tax benefit. Because the pandemic has caused financial hardship for many people, utilizing the annual gift tax exemption may be a great way for clients to financially assist their families and friends without incurring a tax liability. And despite some of the recent presidential election drama, it appears increasingly likely that Joe Biden will be inaugurated as the forty-sixth president in January, which presents a distinct possibility that the lifetime unified gift and estate tax exclusion amount will be decreased in the near future.

Clients who have significant wealth should consider leveraging this annual gift tax exclusion in 2020 as a part of an ongoing strategy for reducing the size of their estate and thereby avoiding future estate taxes. Although writing a check for $15,000 to each child or grandchild annually is one way to use this tax benefit, it may not be the best way. Forming a trust can add significant benefit to this kind of gifting strategy.

For example, forming an irrevocable life insurance trust continues to be a highly effective way to leverage the annual gift tax exclusion by using the annual cash gifts to purchase life insurance on the individual making the gift. At the trustmaker’s death, the life insurance passes income tax-free to the trust and can then be managed and used on behalf of the trust beneficiaries in a much more protective and strategic manner.

Even if your clients are uncertain about using a trust for such gifts, they will undoubtedly be grateful for the reminder to consider using this annual gift tax exclusion before the year ends if it makes sense for them to do so.

Is It Time to Review Your Client’s Estate Plan?

This year also brought significant changes to the law surrounding retirement accounts and how to coordinate them with a client’s estate planning. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in late December 2019, had a major impact on estate planning for those clients with significant savings in tax-deferred retirement plans. No longer can required minimum distributions from an inherited IRA be stretched out over the lifetime of the person inheriting the IRA. Unless a beneficiary is a spouse or otherwise qualifies as an Eligible Designated Beneficiary, the retirement account must now be paid out within ten years of the plan owner’s death. Although this received some attention in the media early in the year, it paled in comparison to the COVID-19 pandemic coverage, so it is not surprising that many clients are still unaware of these changes and how they could impact their estate planning.

With all of the changes that 2020 has brought, it is more critical than ever to remind clients to review their estate planning documents. If it has been a few years, the client should make sure the plan still reflects the client’s wishes. We are happy to meet with clients to do a review, especially if the client or the client’s loved ones have experienced any of the following life changes:

• Marriage or divorce
• Birth or death in the family
• Moving
• New job
• Retirement or loss of employment
• Acquiring new accounts or property

For clients with a trust-based plan, performing a thorough review of the clients’ financial accounts before the end of the year to determine how the accounts are titled and how the beneficiary designations have been made can not only help catch mistakes and accounts left out of a living trust, but also underscore the importance of consolidating accounts and management of those accounts. You can become a truly valuable resource to your clients as you consolidate the management of their financial accounts and maintain the necessary coordination with their estate planning for years into the future.

Beyond these changes, there remains a great deal of value that you can bring to the professional relationship you have with your clients by gently reminding them to review their estate plans to ensure that the decisions made years ago still reflect their current wishes.