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23 HARTFORDBUSINESS.COM | JUNE 28 2021 FOCUS: Wealthiest People Once you've made it — here's how to keep more of your wealth By Martin Daks Special to the Hartford Business Journal P resident Joe Biden's tax proposals have received a lot of attention, especially in the wake of his call to hike personal income tax rates, reduce estate tax exemptions, and take other steps to help fund his multitrillion-dollar infrastructure plan and other goals. Any tax hikes on the wealthy will likely affect a significant number of residents in Connecticut, which was ranked No. 3 in the nation when it comes to millionaires, according to the most recent Kiplinger report. The Hartford Business Journal spoke with some local CPAs to find out how the wealthy try to reduce their tax bite — and what Biden's proposals may mean for them. "In general, there are several taxes that the wealthy strive to minimize," said Brenden Healy, a tax partner in the Hartford office of Whittlesey, a regional CPA and IT consulting firm. "Federal and state income taxes probably get the most attention. However, the estate tax, or 'death tax' and gift taxes — which are transfer taxes — can also be problematic for the wealthy." Their tax-minimization strategies often involve "deferring income to a future tax year — assuming tax rates stay the same or do not increase — or taking advantage of tax-saving incentives under the law," he added. "If a wealthy taxpayer earns their income through wages, such as an executive at a nonprofit or a for-profit company, there may be ways to defer annual bonuses or to maximize deferred-compensation plan funding." But Biden has floated ideas about increasing the highest income tax bracket to 39.6%, which could flip the traditional tax-deferral strategy on its head. "Generally, you defer income when it makes sense and take advantage of tax incentives available," Healy noted. "If however, we know that tax rates will increase, maybe in 2022, the taxpayer should consider accelerating income if possible to take advantage of the lower 2021 tax rate, which generally tops out at 37%." Of course, individuals have different objectives that CPAs consider when they're suggesting a strategy. For some, it may make sense to transfer assets to an entity they can control, like a family limited partnership (FLP) which can offer protection against creditors and potentially reduce gift and estate taxes while maintaining control over the management and distribution of the FLP's assets. "They may also set up trusts for the benefit of their loved ones," Healy said, referring to an estate planning fiduciary arrangement under which the donor's specified assets are held by a third party, or trustee, on behalf of one or more beneficiaries. Trusts can be designed to allow the assets to be shielded from estate taxes upon the donor's death. Growing interest in trusts Healy said there is currently a relatively high federal estate tax exemption of $11.7 million for individuals, or $23.4 million for a married couple, but there have been discussions about reducing that to $5 million or less per person. If the exemptions are decreased, there will probably be more interest in shifting wealth through trusts, he said. For business owners "it is critical" to explore tax incentives to reduce income tax costs, he added. "Tax credits like the research and development credit, the new employee retention credit and other tax incentives can permanently save money for businesses," Healy said. "Other options for a business owner may involve temporarily deferring income — if it makes sense — such as changing an accounting method for tax filing purposes." Connecticut residents in particular tend to get hit hard by high state income taxes, according to organizations like the Tax Foundation, which ranks the Constitution State in the top 10 nationwide. Healy said his clients are concerned about this issue, but they're not exactly breaking down the doors to leave the state. "We're constantly talking about this with clients, but it's important to quantify any potential tax savings before you seriously consider relocating," he noted. "Sometimes the savings do not outweigh the financial and emotional costs of moving out of Connecticut. Also, the issues of physically moving out of the state compared to establishing new residency for tax purposes can be very different. Like many other topics in the tax world, it's complicated." Specific tax planning strategies may vary depending on an individual's circumstances, but there are some "fundamental planning concepts for taxpayers with a net worth of $1 million or higher," according to Jay Sattler, managing tax principal at the West Hartford office of Clifton Larson Allen, a national wealth advisory, accounting and consulting firm. Sattler said individuals and businesses are always dealing with a shifting tax code, especially as changes associated with the 2017 Tax Cuts and Jobs Act continue to kick in, and with the prospect of some rollbacks and other changes under President Biden. A second look "Wealthy individuals may wish to engage in sophisticated tax planning with different trust and other vehicles to expedite their specific wishes and goals," Sattler said. "For example, an irrevocable trust [where the donor generally gives up control of the assets placed into the trust] may provide estate tax savings for the trust creator-donor and liquidity for the beneficiaries." One such trust is a grantor retained annuity trust (GRAT), under which the donor, or grantor, contributes assets that are likely to gain in value to a fixed-term, irrevocable trust. Under a GRAT, the grantor generally retains the right to receive an annuity stream over the trust's term and, at the end of the term, the assets will be distributed to the grantor's heirs or other beneficiaries. In some cases, a business may be placed in a trust, or a limited liability company, as a way to shield assets from creditors, he noted. Some of Biden's proposals — including steeper tax rates on Brenden Healy Jay Sattler PHOTO | PIXABAY NATTANAN23