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Financial Planning > Tax Planning

4 Steps to Prepare Clients for Tax Hikes Under Biden

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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.

Once the asset inventory has been taken and the advisor has a clear picture of the client’s true net worth, they should discuss gifting strategies, such as giving to heirs during their lifetime rather than simply leaving a large inheritance, taking advantage of the $15,000-per-year ($30,000 for a married couple) gift allowance.

The advisor could help a client open accounts for their beneficiaries that allow the money to grow while removing it from the estate. For example, a client could give money to their children or grandchildren to open up a Roth account, which would compound tax-free because tax has already been paid. 

Such a move can be a win-win situation. Advisors often lose assets when a client dies because the heirs don’t know about them. The children haven’t been part of the family money discussion and may even feel that the advisor opposed them or urged their parents not to gift for fear of losing those assets.

Some advisors might avoid the strategy for that very reason, but it’s a shortsighted approach. Helping parents set up accounts for their children and grandchildren helps develop relationships with future generations and demonstrates to the next generation that the advisor is truly on their side. It’s when those heirs move their accounts to another advisor that the loss of assets is really felt. 

3. Give It to Charity, or Uncle Sam?

By seeing the scope of the client’s assets through the inventory, the advisor can assure Mom and Dad that they have enough money. It’s the same thing with philanthropy. Most people want to be generous to causes they support, but they have to know they can afford their philanthropic impulses. 

For very wealthy clients who have assets they don’t need to support their lifestyle, advisors should suggest reducing tax liability through strategic giving.

The goal should be for the money to grow in the beneficiary’s column of the ledger, not the donor’s, because that just makes the estate bigger and compounds potential problems down the road.

4. Another Important Step 

Other proposals being floated call for a removal of the step-up in basis, which could result in significantly larger tax bills for many clients. Proactively, advisors can suggest that clients gift securities that have appreciated in value now, while they are still subject to current capital gains regulations.

The recipient could then sell that stock and be subject only to current, lower capital gains taxes. The downside of that move is that it would take away the compounding value of those assets. That’s an issue that advisors and client should look at carefully to determine the best strategy in each situation. 

When advisors unearth these kinds of potential tax issues, they are providing great value by getting clients to think about issues they may have been avoiding. The tax bill for all the government’s recent spending will eventually become due. It’s up to advisors to see that their clients are paying their fair share, but not a penny more. 

Kenneth Van Leeuwen, CFP, is managing director of Van Leeuwen & Co., a wealth management firm he founded in Princeton, New Jersey, in 1997.


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