By John Drachman
“He’s going to raise your taxes,” President Donald Trump repeatedly said of President-elect Joe Biden. However, this isn’t true for most households, according to a Wharton School analysis.
It’s the 1.5% of households that earn more than $400,000 a year that will likely be subject to rollbacks from the Trump-supported Tax Cuts and Jobs Act (TCJA). These households include:
- High net worth individuals: The most commonly quoted figure for membership in this club is around $1 million in liquid financial assets.
- Very high net worth: These individuals typically have a net worth of at least $5 million.
- Ultra-high-net-worth individuals: These lucky few have investable assets of at least $30 million.
Wealthy families are particularly concerned that an overhaul of the estate and gift tax exemption may be in the future – after they roughly doubled the amount they could transfer either over their lifetime or in a bequest without being subject to the 40% estate or gift tax. “For tax nerds, it’s like our Super Bowl,” said Alison Hutchinson, managing director at Brown Brothers Harriman. “There are lots of conversations with people who are interested in getting everything set up and ready to go (before Biden is inaugurated).”
The Tax Policy Center has estimated that Biden’s tax plan could reduce the amount people can bequest tax-free upon their death to $3.5 million while limiting tax-fee gift transfers to $1 million. Another Biden proposal includes eliminating a TCJA provision that lets heirs receive assets valued as of the date of death – in which case an heir who sells the assets immediately would pay next to nothing in taxes.
Despite the wealth hullabaloo over potential tax liabilities, many accountants advise against rushing to transfer assets or make other adjustments. The first priority, they counsel, is to develop a plan.
- Build your team: Organize calls with your CPA, attorney and financial advisor for a discussion about your situation. “Make sure everyone is in close reach, in case you need to take action,” said Mark Bradford, wealth director of Bryn Mawr Trust Wealth Management.
- Draw up your balance sheet: Where gifting is concerned, there’s more to think about than a transfer of ownership. You’ll want your financial planner to prepare a statement that lists both assets and liabilities before developing projections that show what’s required to maintain your living standard. Once you subtract that cost-of-living from your assets, you can think about gifting away the remainder.
- Strategize lifetime cash flow: Projected cash flow assumptions should include retirement income from pensions, Social Security and other sources cash flow needs. Review the numbers with your financial advisor or financial planner to make sure you haven’t left anything out.
- Finally, stay nimble: “Put your plan in place with the intention that you could pivot regardless of what happens with the tax laws,” said Pam Lucina, chief fiduciary officer at Northern Trust Wealth Management. “The overall point is to retain the maximum flexibility” – and not just react to proposed plans that may change over the near term.
The advice needs of wealthy individuals are certain to grow in complexity in the days ahead. For the wealthy few facing taxation questions beyond the reach of their current advisor’s expertise, it might even be time to explore the services of a family office.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.
