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Best HNW client strategies for tax law changes

LAS VEGAS – In mid-April, Leslie Geller, wealth strategist at Capital Group, received about 15 calls from friends who hadn’t understood what had occurred with their tax filings following the recent tax law changes.

Why did they owe money? Should they get new accountants?

While the modifications have caused clients angst, there’s a bright side for advisors.

“The good news is these changes have brought about a lot of planning opportunities,” Geller said in a presentation at the Investment & Wealth Institute’s annual conference in Las Vegas.

While clients’ individual circumstances may vary, Geller, a former estate planning attorney, says advisors should have these strategies on their radar for HNW clientele:

Qualified Small Business Stock
For tech entrepreneurs looking to exit a venture, or for second- or third-generation clients who received an inheritance, QSBS opportunities could now be more lucrative.

Clients can receive exemptions on up to 100% of capital gains from these investments, versus 50% before the tax law changes. The exemptions are capped at either $10 million, or up to 10 times the basis of the shares sold. For example, an individual who purchased $2 million in shares could exclude gains of over $20 million, according to Geller.

“It’s a little aggressive, but definitely something to explore,” she said. Through incorporating IRC Section 351, Geller says there may be potential to exclude as much as $500 million in gains.
Opportunity Zones
An opportunity zone investment could be explored for Gen X clients with a highly appreciated asset who want to diversify.

Created under the new tax law, opportunity zones are a vehicle where clients can invest in economically distressed communities within all 50 states in the U.S. Now advisors can recommend clients sell a highly appreciated asset and roll over that gain into an opportunity zone investment, which could potentially defer gains until the end of 2026, according to Geller.

“Not only can you defer that gain, but if you hold that gain for long enough, seven years or more, you get a 15% step up in basis,” Geller said, adding: “If you have held it for 10 years, when you sell that investment, you do not have to recognize any further gain. That’s a really, really big deal.”

Still, Geller warns advisors to be careful, as opportunity zones are new. “It’s definitely an alternative investment,” she said.

Guidance has been scarce on details about opportunity zone investing. A second set of clarifications elucidates that the investments are not limited to real estate and that clients can roll over investments from one opportunity zone to another without an inclusion event.

“Do your diligence, but I think this is a really interesting area to watch right now,” Geller said.
Charitable Remainder Trust
A potential opportunity for Gen X clients with a highly appreciated asset is to transfer it to a CRT. If the client is aggressive and wants to maximize the benefit of the appreciated asset, this may be something to consider.

The advisor could sell the highly appreciated asset within the trust and will not have to recognize the gain until it is taken out of the trust. “This doesn’t exclude gain. It defers it,” Geller said.

Geller says CRTs are a flexible option. Advisors can control the amount and timing of distributions.
Spousal Lifetime Access Trust
A SLAT could be used for clients looking for estate planning options who may be hesitant to give up control of the assets. “This is a great way for them to give away the assets but still retain a safety net,” Geller said.

By placing an asset in a SLAT, the appreciation and value of that asset is removed from the grantor’s estate, but the grantor still has indirect access through their spouse’s discretionary interest.

Geller warned advisors to consider potential outcomes. “You want to make sure the trust has provisions for what happens if the marriage ends,” she said. In addition, if advisors make a SLAT for each spouse, they should make similar provisions so that one spouse is not more advantaged than the other.

In addition, the validity of the trust will not be recognized if two spousal SLATs do not have substantial differentiations between them.

Specifically in California, SLATs could be one way to protect assets from an estate tax that has been proposed.
Moving
Another opportunity for older clients is moving to a different state or city with better tax opportunities. While proposing a client move may at first cause a laugh or two, the numbers may speak for themselves, according to Geller.

“A lot of baby boomers are in the stage of life where [moving is] actually a possibility,” she said, adding: “The one caveat is you really have to move.”

Geller said it is critical to make sure that clients move absolutely everything, from pets to cars, and change all forms in order to avoid liability. “There have been cases decided on where your vet[ernarian] is located,” she said.