Presidential election campaigns are trumpeting a proposed wealth tax. Are high-net-worth clients worried about protecting assets?
Most wealthy clients can’t believe that someone “is actually proposing such a tax, let alone trying to get a handle on how someone could implement it,” said Bruce Primeau, CPA/CFP, president at Summit Wealth Advocates in Prior Lake, Minn. “The IRS is going to have to be the ones to police that tax and they are dramatically understaffed the way it is. It would be an absolute nightmare for [tax preparers] to try to handle the accounting for such a tax.”
Steve Aucamp, managing director at Tiedemann Advisors’ Washington, D.C., office, said some clients have been concerned about retroactivity of any changes in the tax laws, which would be detrimental to any planning now.
“High-net-worth clients are opposed to the tax but don’t yet believe it’ll be enacted,” said Jeffery Neher, a CPA with CNC Financial Group in Wenatchee, Wash., who added that strategies being considered “just in case” include alternative investments, where valuation methods have a tendency to undervalue the asset or are more difficult to value.
Presidential candidates’ proposals comprise not only a wealth tax but also increases in income and capital gains tax rates, as well as a decrease in estate tax exemptions. Counter moves, according to Tiedemann Advisors, include:
• Transferring assets upstream to parents or downstream to children
• Spousal lifetime access trusts (SLATs)
• Charitable bequests to reduce estate taxes
• Moving trusts to tax-friendly jurisdictions
Family partnerships, limited liability corporations and tiered entities all create the opportunity for valuation discounts. “The same methods used to reduce an estate for federal estate tax would be used,” Neher said. “Since most high-net-worth clients are already using these techniques for estate planning, they’re more prepared to act on wealth reduction.”
Other investment solutions to maximize after-tax investment return and reduce or defer capital gains include opportunity zones and energy infrastructure.
Meanwhile, a charitable remainder trust will allow a taxpayer to receive an income stream from assets while removing the assets from their estate, avoiding both estate taxes and any wealth tax, according to Aucamp. Clients should take advantage of the increased estate tax exemption from the Tax Cuts and Jobs Act to preempt a potential reduction in the exemption.
He added that strategies to mitigate a potential increase in income taxes can include the following:
• If a taxpayer has tax-inefficient alternatives (hedge funds) in their portfolio and won’t need the liquidity of those assets, they may consider private-placement life insurance, which shelters income from those assets.
• If a taxpayer is investing passively, consider actively harvesting losses while tracking an index.
• Advisors should hold tax-inefficient investments in nontaxable accounts.
“For the uber-wealthy, these planning ideas will only scratch the surface,” said Steven Wittenberg, director of legacy planning in SEI’s private wealth management group in Oaks, Pa. “Others will do nothing and hope that the pendulum will swing back, laws will change and new ways to shield assets from taxes will come to the surface.
“The area that provides the greatest current opportunity to plan around are death taxes for the wealthy,” he added. “High-net-worth clients are beginning to focus more on estate and gift planning to reduce exposure with a long-term view.”
How will people react to a wealth tax? “My guess is that folks are going to look at moving or holding more of their assets outside the U.S. so those assets are off the radar,” Primeau said.
Aucamp noted that significant changes to the status quo typically require one party to control both the White House and Congress, and we don’t know how things will shake out in the 2020 election.
“Planning is critical but it isn’t time to panic,” he said.
