Financial Planning

MACPA’s 36th PFP Conference: Tax planning ideas, and much more

BY SETH HAMMER, CPA, PH.D.

The MACPA’s 36th annual Personal Financial Planning Conference, held virtually on Oct. 26, 2021, featured nationally renowned tax expert Robert Keebler, who shared his “best of the best” tax planning opportunities for 2021 and wealth transfer and estate planning strategies for large IRAs. Joining Keebler at the conference was a slate of experts who presented a wide range of personal financial planning topics, including ones that addressed the evolving issues of mutual fund vs. ETF utilization, PFP technology issues, and other matters of high relevance to the CPA providing personal financial planning services. Keebler’s presentation of tax planning opportunities was comprised of eight sections:

• Bracket management • Income smoothing • Income shifting • Reducing taxable income

• Specific strategies for reducing NIIT • Wealth transfer

• IRC section 199A planning • 10 more “must-know” strategies Many of those “must-know” strategies had broad applicability. For example, “Two-Year Installment Sale” is an income smoothing strategy that serves to keep modified adjusted gross income below the threshold at which it becomes subject to the tax on net investment income.

The basic operation of the “Two-Year Installment Sale” strategy is that a parent who is holding an asset with a large built-in capital gain sells it to a non-grantor trust for the benefit of his or her children, and then takes back an installment note. As a result of the sale, the trust receives a stepped-up basis in the asset and the seller, by spreading the recognition of gain over a two-year period, can potentially avoid the tax on net investment income by keeping net investment income below the applicable threshold. Keebler advised, however, that when implementing this strategy, as well as many of the others, it is important to be cognizant of and closely apply the applicable federal tax rules to ensure that the action will achieve the desired tax treatment. He noted that in this specific case it is essential that the buyer wait at least two years and one day to sell the asset to a third party. Otherwise, the seller, under IRC Section 453(e)(2), would not be allowed to defer the gain. While Keebler’s presentation focused primarily on federal tax planning strategies, he also addressed some — such as “Nevada Incomplete Gift, Non-Grantor (NING) Trusts” — that may be particularly relevant for residents of Maryland and other high income tax states. The potential benefit of this strategy is that taxpayers, by transferring assets to a trust in a state that does not tax trust income, can avoid income tax in their home state.

Again, as with the previous example, he noted it is essential to implement the strategy in accordance with strict adherence to federal guidelines and rules. For example, in this case, to avoid resident state taxation, the trust must allow discretionary distributions without it being deemed to be a grantor trust. PLR 201310002 may provide the framework for those advisers considering implementation of this strategy. Alex Jenkins of Avantis Investors presented “Mutual Funds and ETFs: Comparing and Contrasting,” a program that provided analyses of the similarities and distinctions between the two forms of investing. While many investors may be drawn to ETF investing by what are often lower costs, as compared to mutual funds, it may not always be immediately clear as to what is driving this cost advantage. The higher costs for mutual funds holding comparable assets to those held in an ETF can be largely attributed to mutual fund costs such as commissions, bid-ask spreads, and the opportunity costs of holding cash. Alternatively, ETFs largely avoid cash costs by redeeming shares in-kind through “authorized participants.” Jenkins also noted that while there has been a modest uptick in managed ETFs, the vast majority are still passive investment vehicles. A key factor here is the regulatory structure of ETFs, which requires total transparency regarding investment holdings. This total transparency rule, which requires that the ETF disclose daily all its holdings, may place actively managed ETFs at a strategic competitive disadvantage with actively managed mutual funds, which are not subject to that same disclosure requirement. The MACPA’s Advanced Personal Financial Planning Conference is already at work preparing for the 2022 Conference. Details will follow soon.

Seth Hammer, CPA, Ph.D., is an accounting professor at Towson University.

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