Financial advisers hear the growing national buzz that the wealthy should be paying more in taxes, and many are prepping clients for the possibility that they soon will be forking over more to Uncle Sam.
Financial advisers hear the growing national buzz that the wealthy should be paying more in taxes, and many are prepping clients for the possibility that they soon will be forking over more to Uncle Sam.
Some advisers have long expected the government to go after the richest Americans, and for years have recommended proactive tax-planning strategies such as selling lucrative investments while capital gains taxes are low. These advisers said that clients are beginning to understand such moves better and are starting to implement them.
Others said that it is too soon to make strategic portfolio shifts or other asset management changes, as there aren't any detailed tax proposals out there that stand a chance of passage. Even these advisers said that clients are concerned and ask questions about what will happen.
“Everybody has been discussing this issue, and wealthy individuals are certainly worried about taxes,” said Walter Primoff, director of professional adviser groups for Altfest Personal Wealth Management. “Nobody likes to pay more in taxes.”
Nevertheless, wealthy individuals such as Warren E. Buffett, President Barack Obama and actor-economist Ben Stein in recent months have called for America to boost the tax burden for the nation's most financially fortunate.
Altfest advisers are always helping clients coordinate with their tax professionals on minimizing the piece owed to Uncle Sam, such as helping clients donate appreciated securities instead of giving cash to favorite charities, Mr. Primoff said.
But he warned against detailed tax planning before any laws are even near passage.
“If you call something in advance that doesn't happen, you can actually be doing the wrong thing,” Mr. Primoff said.
If tax rates do increase, municipal bonds with their tax-exempt gains will be a more attractive investment for many people, he said.
Adviser Craig DuVarney, who runs an eponymous firm, said that he expects taxes will increase for upper-income Americans.
“The writing has been on the wall for the past four years that tax rates for the wealthy are going to increase,” he said. “Dealing with rising income tax rates is part of every annual review meeting that I'm conducting with clients.”
When faced with the prospect of rising taxes, moves such as converting traditional individual retirement accounts to Roth IRAs, which grow tax-free, become more attractive, Mr. DuVarney said.
He has been encouraging such a step for years.
Of course, the conversion requires clients to pay a tax bill this year on the gains earned in the traditional IRA, which some clients resist, Mr. DuVarney said.
However, as the chatter about increasing the burden on the wealthy builds, clients are becoming easier to persuade, he said.
“The definition of tax planning is to pay the least amount in all taxes over the rest of your life, not just paying the least you can this year,” Mr. DuVarney said.
When adviser Jim Karabas considers wealthy clients' financial plans, he always assumes that their taxes will be higher in the future as part of his conservative approach to asset management.
If capital gains taxes rise, accounts with high turnover and tax-deferred accounts would be less attractive, said Mr. Karabas, managing director of Vestor Capital Partners LLC. He keeps his clients' portfolios' turnover rate low, at about 30% a year.
Clients who have firms that they may want to sell down the road may be tempted to do so now while tax rates are historically low, but that could be a mistake, according to Steven Aldrich, chief executive of Outright Inc., a small-business consulting firm.
Don't worry about maximizing taxes when considering a sale; just focus on getting a buyer willing to pay the greatest value for the business, he said.
“The price of the business will adjust based on the tax structure,” Mr. Aldrich said.
POLITICAL TENSION
Because the political tension between Republicans and Democrats in the coming election year isn't going to subside, most tax planners don't expect any law changes until at least 2013, said adviser Lauren Locker, owner of Locker Financial Services LLC.
She already recommends that clients who are looking to take out a lump sum to buy or build a house, or for other reasons, consider doing it earlier rather than later if they will have to pay capital gains on some of the investments that they are cashing out. The 15% long-term capital gains rate is the lowest it's been since 1950.
“It's very difficult to plan for something we only think is going to happen,” Ms. Locker said. “An increase could be minor.”
Meanwhile, many advisers are uneasy about which “wealthy” people politicians and others are talking about when they seek to raise taxes.
“We have a concern about the taxes on the wealthy, but really middle-income earners are going to be affected if we have tax increases across the board,” Ms. Locker said.
Some who think that they are solidly in the middle class might be surprised to find that they are considered wealthy.
Mr. Obama's jobs plan introduced in September would allow the Bush tax cuts to end as of 2013 for couples who earn at least $250,000 a year and singles who earn at least $200,000. Those taxpayers also would see their deductions for mortgages, charities and state taxes limited to 28%.
Those who live in expensive cities such as New York and San Francisco wouldn't consider those cutoffs a definition of wealthy.
In the discussions over making the wealthy pay more in taxes, “sometimes clients need to be reminded that they are in the cross hairs of that discussion,” Mr. DuVarney said.
lskinner@investmentnews.com
