Freaking out over looming tax increases for your wealthy clients? You might not need to tear up their retirement plans just yet.
Many rich Americans may have less cause than they realize to fear President Biden’s proposed tax hikes, which threaten to slash long-standing benefits for investment profits and estates passed on to heirs. Advisors say that affluent clients can deploy some simple strategies to blunt their impact — or simply ride out any changes until tax laws likely morph again several years down the road.
“High net worth clients are at a point where they can recognize capital gains in 2021, cash out their investments and live comfortably for the next four years,” says Laura Zwicker, the chair of the private client services group at law firm Greenberg Glusker in Los Angeles. “They can time things and wait out the swing” in tax rules.
Advisors say their strategies work best for the approximately 10 million American households living in “
Their thesis is that a world in which a 23.8% capital gains tax no longer exists is a world that can potentially be avoided, either partially or largely. Biden wants to nearly double that rate, which falls on investment profits cashed out after at least one year, to 43.4% for those making $1 million or more.
Before (or while) panicking, clients should realize that “even if the capital gains rate goes up this year or next year, it’s not going to be that way forever,” says Karl Schwartz, a CPA and CFP at Team Hewins, an RIA in Miami. “For someone with a longer time horizon, you may wait it out.”
Likewise with a world in which inherited assets are no longer taxed based on the value at which they were first acquired by a now-deceased owner, and instead are taxed on their much higher value when an heir receives them. Biden’s proposal to
Wealthy clients are worried because Biden’s proposed hikes, which include raising the top individual rate to 39.8% for those making more than $400,000, from the current 37%, are the most sweeping in a generation. His changes threaten to upend retirement plans by cutting into core sources of income that have fueled exponential rises in wealth at the top end of the net worth spectrum, thanks to the massive stock rally of recent years.
The White House’s proposal, now making its way through Congress, has “ginned up an awful lot of anxiety,” says Michael Repak, a vice president and senior estate planner at RIA and broker-dealer Janney Montgomery Scott. Still, he says that the key is to focus on “keeping income under that $1 million” and to plan to sell stocks or hard assets in installments over years, instead of all at once.
Here are three relatively simple steps that advisors say can ease wealthy clients into managing curbs to the best tax breaks in decades:
Relax
You probably have more money that you actually need. But “if you need the cash for cash flow, you can borrow from your portfolio,” says Jody King, a lawyer and CPA who is vice president and director of wealth planning at Fiduciary Trust in Boston. “Or let the investment risk ride, and wait it out to 2024 or 2028.”
Start giving assets away now
Many advisors recommend wealthy clients chip away at their taxable estate by giving to heirs chunks of money or assets that are just under the current
Set up a trust to move money out of your estate
Biden has talked about — but not formally proposed — rolling back the level at which estate taxes kick in, from today’s cutoff of $23.4 million for married couples (over $11.7 million for individuals), to $7 million and $3.5 million. In any case, the current levels, created during the 2017 tax overhaul, are set to expire at the end of 2025.
Certain trusts can move money out of an estate without having it count toward today’s record-high levels. For example, a
Fiduciary Trust’s King says there has been a “frenzy” of clients doing this amid concerns that the current exemptions will revert to their Obama-era levels. A similar benefit can be achieved with a grantor-retained annuity trust (GRAT), which lets high net worth individuals give their heirs the tax-free appreciation on assets years down the road, all while the grantor receives an annuity. With a GRAT, “your goal is to get the entire original trust value paid back to you in an annuity, leaving the appreciation to transfer to your beneficiaries without incurring any gift tax,” says a
The big takeaway, says Scott Brady, the head of product development and strategy at Columbia Threadneedle Investments, is that while panic isn’t warranted, attention must be paid. “The ability to customize a portfolio not just through the investment lens but also the tax lens,” he says, “is really becoming a priority.”
