What You Need to Know
- Advisors should ask clients for a complete asset inventory, including investment and retirement savings accounts.
- Opening accounts for a client's beneficiaries will allow the money to grow while removing it from the estate.
- Very wealthy clients can reduce their tax liability through strategic giving.
Whenever there’s a change of administrations in Washington, people immediately wonder what effect it will have on their tax bill. With the Democrats holding the White House and majorities in both chambers of Congress, those concerns are even more pronounced this year.
In response to the COVID-19 pandemic, the federal government borrowed more than $6 trillion, including $1.9 trillion in the most recent bill. In addition, President Joe Biden is proposing $2.3 trillion in needed spending on infrastructure and nearly $2 trillion in investments in child care, family tax credits and other domestic programs that would be paid for by tax increases on wealthy individuals and families.
We don’t know what other changes to the tax code will be proposed, but we know that some of the provisions of the Trump tax cuts will sunset in 2026.
As a result, advisors should be planning now for how future tax increases will affect clients. That’s why the key is always financial planning, where the advisor can add the most value for clients.
1. Take an Asset Inventory
In an ideal world, an advisor would manage or advise on all of a client’s financial assets, but that’s not often the case. Advisors should ask clients to provide a complete asset inventory, including investment accounts, and 401(k) or other retirement savings plans.
Life insurance policies are an often-overlooked asset that need to be included. An insurance policy valued at $1 million or $2 million could push the value of an estate past the current $11 million threshold. If the exemption reverts to $5.5 million or lower, the value of an insurance policy could become an even bigger factor.
Real estate is another area that needs to be looked at carefully. While most people realize that their home has appreciated in value, they often don’t consider what that means to the value of their estate. If there’s a vacation house or other properties, those need to be taken into account as well.
Getting an inventory and starting the conversation is good for advisors because they provide a valuable service by raising the issue. It also gives the advisor an opportunity to see what other assets the client may have for future management opportunities.
2. To Gift, or to Bequeath?
Potential tax changes can present an excellent opportunity for advisors to have meaningful discussions with clients about the future.
For example, we know that the estate tax exemption, which is $11.7 million for 2021, will revert back to $5.5 million in 2026 if Congress takes no other action. But there has been talk that the Biden administration has considered cutting it back to the 2009 level of $3.5 million.