Avoid “impetuous planning.”
Don’t freak out ahead of the election and implementing planning strategies that don’t make sense. It is easy enough to avoid a repeat of the giving mistake of 2012: Don’t give away more than you can afford. But a fear of increased income taxes by a new Congress could prompt people to change plans that still make sense.
One strategy to avoid is selling stocks and paying capital gains tax now, out of fear that the capital gains tax rate could go up next year. There is value in those unrealized capital gains, even if the prospect of the tax rate’s jumping to more than 40 percent from 20 percent is daunting.
Do not change investment plan based on what might happen. If it makes sense along a 10- or 15-year time period, then it’s fine - it all ties back to what is your long-term objective.
What to consider?
In life, having an acceptable hedge is always a bonus.
Roth I.R.A. conversions can fit in here. A good hedge would be to convert some portion now and more after the election. Another strategy would be to see how the public markets respond to the election. If stocks go down, complete the Roth conversion then; the lower market value will translate into a smaller tax bill.
There are risks. Income tax rates could actually fall, and you could end up paying a lot of taxes you don’t need to pay.
People looking to transfer money to heirs can make a loan to a trust now and then, depending on how the election goes, keep the loan in place or forgive it. If the loan is forgiven, that amount will count toward their gift exemption.
The ultimate flexibility for couples is to create trusts that move the money out of one spouse’s estate but maintain the other spouse’s access to it. Called spousal lifetime access trusts, they can act as a safeguard against changes to a tax strategy that could backfire.
One downside, though, is that your spouse could die or divorce you, shutting off your access to the money. The money will go to other beneficiaries named in the trust.