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The Proper Path to Integrated Wealth Management, Pt. 2: High-End Tax Planning

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Preservation and growth of invested capital, tax planning and wealth transfer are common wealth management goals of high-net-worth wealth owners. Integrated wealth management employing the collaborative efforts of a multi-disciplinary team (MDT) of professionals (investment advisory, tax, estate planning, philanthropy and risk management) can achieve efficiencies and increase the probability of reaching these goals in the oversight and management of a client’s wealth. 

In our previous posting, we discussed the value of trusts, with a focus on GRATs. In this installment, the second in a series on how an MDT can provide integrated wealth management to HNW clients, we will focus on high-end tax planning. 

How can an integrated wealth management approach result in better tax planning? We can answer that question by enumerating five broad benefits. 

Benefit #1: Prepping for Quarterly Tax Payments
An MDT, working collaboratively, is able to monitor a client’s investments and income receipts (salary, bonus, dividends, rents, royalties and realized capital gains or losses) throughout the calendar year, and perform real-time tax planning computations.This enables the tax professionals on the team to precisely compute the client’s quarterly estimated tax payments and make adjustments throughout the year, thereby avoiding unnecessary tax overpayments.

Benefit #2: Tax Loss Harvesting, and More
The investment advisory team members, armed with the client’s specific current tax information from the tax team members, can proactively consult with and advise each underlying asset manager of the target amount of losses the manager should attempt to affirmatively recognize (tax loss harvesting) in the client’s portfolio to minimize the recognition of net capital gains for the entire taxable year among all managers. Conversely, if the client has current year portfolio losses or capital loss carry-forward positions, each asset manager can be advised of its ability to recognize gains in the portfolio (and target amounts) that can be offset by the losses. This overall oversight of the portfolio provides much more precise tax optimization than managers operating in isolation. 

Benefit #3: Philanthropic Planning
Charitable deduction planning is an important consideration for the high net worth. Clients seeking to maximize their ability to give in a tax-effective way must be aware of giving limitations.

Charitable gifts are allowed and limited in relation to adjusted gross income (AGI). Gifts of cash may be deducted up to 50% of current year’s AGI if given to public charities; the limitation is 30% of AGI for gifts to private foundations. Gifts of appreciated long-term capital gain property are deductible at their fair market value up to 30% of AGI, if donated to a public charity. Appreciated long-term property gifts to private foundations are further limited to 20% of AGI and then only if the property given is qualified appreciated stock, a specifically defined type of property meaning publicly traded securities for which price quotes are readily available on an established stock exchange. 

For wealthy clients seeking to maximize their giving in the most tax-efficient way, a goal that is often coupled with a desire to endow a family foundation, the MDT must employ these opportunities strategically. This means using the client’s most highly appreciated assets in the portfolio for charitable gifts.

Precise timing of charitable gifts to offset high income years and higher taxed income can best be achieved with the collaborative efforts of the tax team members’ projections of income and the investment advisory team members’ knowledge of where the client’s low-basis assets reside. Ideal planning can result in achieving the client’s charitable goals with the least after-tax cost. 

Benefit #4: Strategies to Minimize Tax Bills
Differences in tax rates from year to year can provide the MDT with challenges and opportunities to minimize the client’s tax bill by accelerating income, if possible, into a lower tax year if rates are poised to increase, as we now see in 2012 looking forward to 2013 when the Bush-era tax cuts are due to expire. The 2012 long-term capital gain tax rate of 15% is scheduled to increase in 2013 to 20% (plus up to 3.8% of additional tax under the so-called ObamaCare legislation.) Qualified dividends, currently taxed at 15%, will be taxed as ordinary income (up to 39.6%) in 2013, plus be subject to the 3.8% additional healthcare tax, resulting in rates as high as 43.4% after 2012. 

Opportunities to recognize gains in 2012 that would otherwise be taken in the next 12-18 months may be advisable. 

Benefit #5: Ongoing Monitoring and Planning
Providing all these benefits doesn’t happen in isolation; the tax planning team should size up the client’s tax situation going into a new tax year and monitor and fine-tune the planning as the tax year progresses. Usually, there is a significant push to “true up” gains and losses and charitable gifts in the fourth quarter of the year.  Frequent consultation among the MDT members can optimize the results. 

The next installment in our series on the Proper Path to Integrated Wealth Management will address wealth transfer strategies.