Ultra-wealthy turn to trusts to plan for potential tax hikes

Wall Street is encouraged by the prospect of a divided government

The ultra-wealthy have been preparing for potential tax increases based on President-elect Joe Biden's proposals – and there are some tangible ways advisers can help clients mitigate losses.

There are two proposals in particular that have caused concern among the country’s richest households, lowering the basic exclusion amount for the estate tax and raising the long-term capital gains tax rate.

Biden’s plan would tax long-term capital gains at the same rate as ordinary income.

Marianela Collado, certified financial planner at Tobias Financial Advisors, told FOX Business that she is cautioning her clients against taking drastic measures and triggering a lot of gains this year – noting that there will be opportunities for loss harvesting moving forward.

But there is one strategy she is working with her ultra-wealthy clients on – and that is potentially moving some money into a charitable remainder trust.


A charitable remainder trust allows people to make contributions that are partially tax-deductible, though the trust is irrevocable.

Assets, including stocks, real estate and cash, that are donated to the trust are tax-exempt when the trust is sold, which allows contributors to preserve the value of an appreciated asset as opposed to having to pay large capital gains taxes all at once.

“It’s a really popular tool to smooth out the capital gain recognition and possibly lock in current rates,” Collado said.

The beneficiary of the irrevocable trust will receive a lifetime income stream, and putting assets into the trust removes them from your estate, too. If a donor chooses, payments can be deferred leading to a guaranteed retirement income stream.

A person is eligible for the charitable income tax deduction, which reduces current income tax obligations, when they make the contributions.

But if you choose to use this vehicle there is a stipulation that when you die, the remainder of the trust is distributed to charities of your choosing.

Collado said she would only recommend this strategy to the wealthy, noting that it is likely not even suitable for someone with a net worth of $5 million.


Biden’s plan also calls for raising income tax rates on the wealthy, but capping deductions at 28%, which is another reason why this trust could be particularly valuable for charitably inclined individuals.

For people who think they may need cash within the next year or two, Collado said that situation may call for taking capital gains in the near-term.

Wall Street is encouraged by the prospect of a divided government after anticipating a so-called blue wave of Democratic candidate victories that would have led to control of the White House and a majority in both chambers of Congress.

Investors see the results of the election as positive. A Biden administration may have trouble pushing through its agenda, including tax hikes on the rich and increased regulations, because the Democrats' majority in the House is expected to shrink and control of the Senate is still too close to call.