7 notable developments for advisors with wealthy clients

February 1, 2023 12:42 PM

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New "portability" rules allowing a surviving spouse more time to file for an estate tax benefit, the possibility of further interest rate hikes this year affecting estate planning strategies, and an increase in audit rates for higher-income individuals are among the latest developments that are impacting how advisors are working with wealthy clients.

Read our roundup for more on these and other stories that advisors should be watching.

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You’ve won the lottery - now what do you do?

We know the odds are a million (or many millions) to one against it, but in our wildest dreams we have all imagined winning the lottery.

If such a windfall comes your way, from an income and tax perspective, should you take a lump sum upfront or annual installments over several years?

The lottery presents an interesting foray into how people perceive money. Their attitudes, and decisions, can impact their tax bills, and advisors can help them save the most.

Read more:

The Powerball's wild card: How behavioral finance alters the jackpot

Advisors get advice on managing athletes and creatives

"Momma's boy" took on new meaning for advisors at the Association of African American Financial Advisors (Quad-A) Vision conference when Gary Charles, CEO of nonprofit racial equity organization Advancement of Blacks in Sports, gave his top tip for working with athletes: "Get close to the momma."

Charles was joined by seven other panelists from the worlds of financial planning, sports and entertainment to share their insights and advice for advisors with athletes, musicians and actors as clients, including how to maintain the highs and lows of their profession, why it's vital to build a sense of trust, how to manage an overnight fortune and more.

Read more:

12 tips for financial advisors on working with athletes, actors and entertainers

IRS gives wealthy more time to file for estate tax benefit

Form 706 may not be top of mind for most people when it comes to their tax returns, but for certain wealthy Americans, it could be time to get acquainted with the estate tax return document.

The current estate tax exemption for individuals will fall to $6 million in 2026, but under IRS "portability" rules revised in July 2022, a surviving spouse now has five years to lock in the exclusion of a deceased partner for their benefit by filing Form 706, avoiding paying as much as 40% tax on any excess amount.

Ironically, the locking-in process is only available to surviving spouses who don't need to file an estate tax return as the value of their estate is below the threshold. But to activate portability, an estate tax return must be filed, even though it's not required.

Read more:

The move that protects everyday millionaires from the estate tax hit in 2026

Ultrarich revise estate planning in wake of higher rates

HNW individuals are carefully re-evaluating the estate planning strategies they use to transfer their wealth to the next generation following several increases to the benchmark interest rate last year.

"It's making people think about the strategies they haven't used in the past, and it's making us think a little bit harder about things that have been sort of no-brainers," said Bryan Kirk, director of financial and estate planning at Fiduciary Trust International.

With many tax strategies inextricably linked to interest rates and further increases in the benchmark rate distinctly possible, advisors and their ultrarich clients are already on guard.

Read more:

Rising interest rates cause pain for estate planning moves used by the ultrarich

Up close and personal — Goldman’s new approach to the wealthy

"The Amazon of personal finance" is how Cynthia Loh, head of product for the Personal Financial Management Group at Goldman Sachs, described the investment bank's goal for the mass affluent at the FP INVEST conference on technology in wealth management.

"If you're an advisor and say you have 100 clients, there's only so much a human can do in 24 hours a day," said Loh. "But leveraging technology, you can have that association that's much closer."

Loh is now focused on providing the firm's advisors with the digital tools they need to deliver top-quality personalized service and take exceptionally close care of their growing number of mass-affluent clients.

Read more:

How Goldman Sachs plans to conquer the mass affluent space

IRS numbers reflect increase in audits for wealthy

IRS figures show that you are more likely to be audited if you are in a higher income tax bracket. Still, there has been criticism that the IRS isn't auditing high-income taxpayers often enough.

"Audit rates for income categories between $500,000 and $1 million doubled to 0.6% [in 2019]," said the IRS. "Audit rates for the $1 million to $5 million category more than doubled to 1.3%, and taxpayers earning more than $10 million jumped four times — reaching 8%."

The IRS claims it is already working hard to increase audit rates for higher tax brackets, but it could do more if the agency were not being hampered by resource constraints.

Read more:

IRS tries to boost audit rates of wealthy

Dividing crypto assets equitably when client couples separate

When a client couple decides to go separate ways, assets inevitably must be separated. If this is challenging at the best of times, when crypto is involved, the situation can become difficult very quickly.

"Given the legal ramifications of engaging in financial fraud during divorce proceedings, spouses do not frequently participate in such behavior," said Sean M. Cleary, the founder of his eponymous law offices. "But when they do, using bitcoin or one of the other popular cryptocurrencies can be an ideal way to conceal assets."

Cleary has a prescription to help advisors get through, from locating the assets and recovering the funds to dividing the spoils and negotiating a settlement between the warring spouses.

Read more:

Hunting for hidden crypto assets in HNW divorce settlements