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For HNWs, One Advisor May Not Be Enough

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Tax season is over for most Americans but not for many high-net-worth taxpayers. If they’ve invested in alternatives like a business partnership, there’s a good chance they had to file for an extension because they hadn’t received the partnership’s K-1 form reporting their share of the business’s income, deductions or credits.

High-net-worth individuals can have “very complicated returns that require lots of information,” says Adrienne Penta, head of regional trusts and estates at Brown Brothers Harriman.

Gift taxes are another complication for these taxpayers. Like all taxpayers, they have to pay taxes on any gift valued at over $14,000 (for 2014) but they have the option of applying that value to the $5.43 million federal gift tax exemption, which is the same as the federal estate tax exemption. Taxpayers can gift during their lifetime or afterward as part of their estate, but either way there can be more complications because many state have their own estate tax — only Connecticut has a state gift tax — and their exemptions usually aren’t as large as the federal one.

“If you’re a Massachusetts resident, you have a $5.43 million federal estate tax exemption but only $1 million for the state,” says Penta, “and many states have an estate tax but not a gift tax, so it makes sense to make gifts during one’s lifetime.”

Her solution to all these complexities for HNW taxpayers: multiple advisors who are experts in their respective fields: an accountant to file annual income taxes; an estate planning attorney for estates and gifts; and an investment advisor.

“For high-net-worth individuals doing a number of different types of planning, it really takes a village to get the reporting done correctly,” says Penta, who is an estate planning attorney.

But having different advisors isn’t the only solution. Each advisor has to communicate with the others. The investment advisor, for example, needs to let the accountant know about capital gains collected from the sale of investments, and the estate tax attorney and accountant need to be consulted about investments or gains gifted in a particular year. Ideally the estate planning attorney would be the one filing the gift tax report because there “can be many complications based on the type of gift made,” says Penta. There are many types of trusts, which often have their own individual impact on estates and taxes. (The living trust network website lists 28 different kinds of trusts.) Finally, the individual taxpayer needs to let his advisors know about investments and gifts made or other developments that could impact his income taxes, estate planning or financial planning. 

And now that April 15 has come and gone, it’s time for all those advisors and high-net-worth individual to plan for the next tax season. “Every year, no matter how simple or complicated a tax return is, there are things to learn on how to plan over the course of the current year,” says Penta.

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