Tips To Help Achieve A Negative Tax Result

As the tax rules change financial, advisors are responsible for weighing the different tax implications of their advice. Recently, there has been a change of conventional thinking regarding trust strategy. It was believed that assets should be held in a bypass trust. The rational behind the bypass trust was to have the assets grow out of the estate. However, with higher capital gains taxes the opposite might be more accurate. Many people say that equities should be held in the spouse’s name and bonds should be put in a bypass trust. However, the yield for bonds is flat and interest rates are rising. As a result, the increase in rates would have a negative impact on bonds.

In the current economy, many wealthy people have turned to fixed-income substitutes such as master limited partnerships in oil, or sovereign debt funds. A person with these substitutes might want to consider holding them in a bypass trust. Nonetheless, the trustee making this decision would still face challenges. Trustees owe a duty to all beneficiaries not just the spouse. Additionally, provisions in the will are not enough to offer a fiduciary only investing in these asset types.It will be up to the financial advisor to alleviate the negative income tax result. According to financial advisor Martin Shenkmen, any combination of the following might help with that goal:

1. Modify asset location decisions to favor investments generating cash flow in an individual client’s name to cover income tax costs, or non-income-producing assets (such as growth stocks) in the trust, to lessen the income tax burdens added by the trust.
2. Favor tax-advantaged investments, such as tax-exempt bonds and insurance products inside the trust. If life insurance is to be used, be certain that the trust is suitable for holding the insurance since it may not have been designed with that purpose in mind.
3. Harvest gains and losses more aggressively and coordinate planning to reduce the income tax burden.

See Martin Shenkman, New Take on Trust Strategy, financialplanning.com, May 1, 2013.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.