Wealth Managers And Their Clients Wait Nervously For The Tax Hikes That Will Finance Democrats’ $3.5 Trillion Spending Plan

Following the passage by the Senate of a bipartisan $1.2 trillion infrastructure deal, focus now shifts to a massive $3.5 billion “human infrastructure” package. This will only be passed through the budget reconciliation process by Democrats. The infrastructure deal only contained a few controversial payfors –burdensome new tax reporting to the crypto industry and an earlier end to the Employee Retention Credit –financial advisers and others in wealth administration are ready for tax hikes for the wealthy, which President Joe Biden has said will allow them to fund their economic agenda. The final form of those changes is unknown, but advisors are working with clients to calm their fears and preparing them to face worst tax consequences.

However, the firm has encouraged patience. The political picture is a big part of the conversation. Democrats still hold unanimity in Washington, D.C., but with a narrow majority in the House of Representatives and a close 50-50 split in Senate.

Powell, a Los Angeles-based RIA that manages $39.6billion for clients, anticipates tax increases but does not believe they will rise to the levels discussed during the Democratic primaries. Although Powell sees capital gains taxes rates increasing, he cautions clients against telling them to make big moves to protect their market gains. They could then be subject to retroactive tax increases.

Powell says that people often make the mistake of focusing on minimizing or avoiding taxes and making poor investments. People who worry about taxes or are inclined to make foolish decisions about their investments strategy to reduce taxes should be reminded that the best way to avoid investing-related taxes is to place all their money in a box and put it under the covers.

He says, “I try not to make people fall for the error of letting their tax tail wag their investment dog.” “I have always believed that investors make the biggest mistake when allowing their emotions to affect their decision-making about investment decisions. Fear would be the most dangerous emotion.

Matt Sommer is a senior managing director at Janus Henderson Asset Management Shop, managing assets worth $350 billion. He says it’s still too early to provide specific advice regarding a client’s tax situation. There is still value in planning. One area that he is closely watching is the repealing of step-up. This tax benefit incentivizes wealthy people to keep their highly appreciated assets up to the point they die. Then their assets will get a step up in basis to current market value. This means that their heirs could sell the assets and not pay gains tax.

He is also looking into provisions that would allow the inheritance of appreciated properties to be deemed a sale, creating an immediate capital gain tax bill, even if the heirs don’t want it. It is possible that the exemption from estate taxes, which was temporarily increased from $5 million per person to $10 million per individual by the 2017 Tax Cuts and Jobs Act, could be reduced before its expiration in 2026. After inflation adjustments, the exemption from the estate- and gift taxes for 2021 is $11.7million per person.

Sommer said that estate planning attorneys were still busy despite the uncertainty. They helped clients draft trusts in case of tax changes.

Sommer is particularly interested in the possibility of a rise at the highest income tax rate, from 37% down to a previously proposed 38.6%. This could make Roth Roth 401ks as well as IRAs attractive. Also, charitable gifting could be of interest.

Sommer’s primary focus is the increase as mentioned above in the highest income tax rate, long-term capital gains changes, and then move to step up.
Alvina Lo (chief wealth strategist, Delaware-based Wilmington Trust) says that taxes have always been a matter of if and when they will change.

The general areas of potential changes, such as changes in the capital gains tax rate, the top marginal rate, and step up, are known. However, Lo points out that tax planning is all about the details. Wilmington Trust, which oversees $17.5 million in client assets, advises clients not to rush to sell to avoid capital gains taxes hikes. But they also counsel them to be open-minded to taking some risks and urging them to do so in a focused manner. They also recommend gifting. This is a carryover from prior advice.

Lo claims that Lo’s team has been working with professionals and attorneys to create plans that can be implemented quickly upon the passage of new legislation. Lo acknowledges that there will be much anxiety surrounding the final bill and the revelations about its tax changes. However, Lo also believes that there might be some relief from the additional certainty and the possibility of realizing that reality will pale compared to the doomsday tax scenarios investors saw pushed by Bernie Sanders or Elizabeth Warren.

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Robert Scoble
Robert is the assistant managing editor for HC News, overseeing coverage of markets, companies, strategy and business leaders. Originally from Boston, Scoble began his journalism career in 1997 & now resides outside New York.

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