With higher taxes for the wealthy looming in Democrats’
Larger advisory firms, like
Smaller firms without their own staff tax gurus are turning to other resources.
Jonathan Duggan, a wealth advisor at Hemington Wealth Management, a $756 million independent firm in Fall Church, Virginia, recently dialed into a webinar hosted by Dimensional Fund Advisors, a $653 billion asset manager in Austin, Texas, to get up to speed. Still smaller advisors are relying on press reports and trade publications for details about how the proposed bill is faring, confident that tried-and-true planning moves can be made regardless of where it lands.
Whatever the approach, this is a moment for advisors. As House Democrats struggle to push through tax increases by Thanksgiving, including a 5% to 8% surcharge on millionaires and trusts with income over $200,000, advisors are increasingly focused on the tax component of gaming out their clients’ finances.
“The traditional investment advisor space of investment management and asset allocation is becoming commoditized and that wirehouses and others that cannot offer tax strategies are at a competitive disadvantage,” said Scott Bishop, the executive director of wealth solutions at Avidian Wealth, a $3.2 billion independent firm in Houston. Bishop, who is a certified financial planner (CFP) and a certified public accountant (CPA), added that advisory firms that offer in-house tax advice have “a significant advantage” over those that can’t.
The tax advice issue can get blurry with traditional brokers at Wall Street wirehouses. Under a former standard known as the
What’s clear is that amid potential tax hikes by Congress to fund the Biden administration’s scaled-back climate and social policy agenda, investors need substantial, not incidental, advice. Jude Boudreaux, a senior financial planner with the Chicago and New Orleans offices of The Planning Center, a fee-only advisory firm based in Moline, Illinois,
Here’s what some of your colleagues and peers are doing as they field calls from clients worried about tax increases:
Sallie Mullins Thompson, who is a CFP and an accountant in Washington, D.C., said that “most advisors don’t understand taxes unless they are also CPAs.” With taxes “the biggest drag on people having the money they need or want,” she said she walks each client through the tax impact of her recommendations. Moves she’s recommending now include
There’s a lot to consider. The roughly $2 trillion House bill, which lawmakers hope to vote on
The legislation would
Also new in the bill is a proposal to raise the $10,000 SALT cap on state, local and property tax deductions to $72,500 starting in tax year 2021, when people file their returns next April. The current cap is due to expire come 2026, but the bill would extend the higher limit through 2031. The proposal would also expand a 3.8% tax to include business income from partnerships, limited liability companies and other pass-through entities.
Jeffrey Nauta, a CFP and chartered financial analyst at Henrickson Nauta Wealth Advisors in Belmont, Michigan, said that this month, his firm hired an wealth advisor with experience in preparing tax returns. “We’ll continue to build out that department,” he said, adding that “we have a better handle on our clients’ tax planning, and we’ve cut down on little things like botched back-door Roth IRA reporting and missed 529 deductions on state tax returns.” Investors who do a backdoor Roth conversion that sidesteps income limits on Roth plans take or open a traditional IRA, then convert it to a tax-free Roth. They have to
Hemington Wealth’s Duggan said that for firms without tax specialists in-house, working with outside accountants is key. “Financial planners are always on the lookout for CPAs being proactive about tax planning strategies,” he said. Meanwhile, he added, the Dimension Funds tax webinar “was really solid — I got a lot out of it.”
Lyle Wolberg, the CEO of Telemus Capital, a $3.2 billion independent advisory firm in Southfield, Michigan, said that the job of the firm’s chief wealth officer, Andrew Bass, a former director at accounting firm BDO Seidman, is not to advise clients on wealth in terms of their portfolios but rather wealth in terms of what kind of tax bills they might owe.
Vince Clanton is a principal and investment advisor at Chancellor Wealth Management, a two-person advisory firm (the second advisor is Vince's son, Scott) in Atlanta. With around $95 million in client assets and two principals, the firm has no in-house tax experts. Vince keeps up on the tax proposal by reading business magazines and trade publications. “Occasionally we’ll trip over something we’re not sure about, so we’ll call CPAs we work with to get clarification,” he said.
He’s relying on mainstay strategies, including having wealthy clients make sizable charitable contributions to a donor-advised fund using their leftover balances in retirement accounts that face required minimum distributions. That way, the client gets a deduction on top of the standard deduction. One married couple put $20,000 into a donor-advised fund. With their $10,000 deduction for mortgage interest and a $10,000 SALT deduction, the couple had $40,000 in deductions. That’s roughly $15,000 over their standard deduction.
Some accountants and lawyers, generally conservative lots by nature, share Clanton’s wary approach. Rob Cordasco, the founder of Cordasco & Company, an accounting firm in Savannah, Georgia, said he didn’t recommend investors make preemptive tax moves based on the proposed law, “since the risks are too great” that the proposal will dead end.
Meanwhile, Toby Mathis, the founding partner of Anderson Law Group in Las Vegas, argued that “quite a few advisors are using the various proposals to convince clients to make changes to their planning when they would be better served to wait and see.” He added that “I do not know how advisors can do a good job anymore without a working knowledge of the tax code.”
