During his campaign, candidate Biden pledged higher taxes for the wealthy. Now with Democrats in control of Congress, President Biden is preparing to follow through.
If the administration is able to pass its economic plans, it would be the first major tax hikes in the United States since 1993. The tax plan will feature a tax hike on corporations and wealthy Americans and be coupled with relief for middle-class households, according to Bharat Ramamurti, deputy director of the National Economic Council. The administration is looking to encourage major companies to boost U.S. investments while targeting those who saw a windfall during the Covid-19 pandemic.
Forbes spoke with the nation’s Top Advisors from our rankings to find out how they are preparing their clients for the inevitable changes. Here’s what they had to say:
Randy Garcia,
Founder, The Investment Counsel Company
Las Vegas, Nevada, Assets Under Management: $1.3 billion
Garcia has been telling clients that tax hikes are not a question of “if” but a question of “when,” a stance he has held since the election results were announced. He’s suggested paying long term capital gains on securities this year, before any potential changes to the rules. Some of his clients who are taking a more pessimistic outlook to potential tax changes are looking at Roth IRA conversions, worried that the tax free benefits will no longer be generationally transferable.
But Garcia says recent comments from The Federal Reserve and Chair Janet Yellen about the sensitive state of the economy means big tax changes may not be imminent. He’s paying attention to changes that the White House and IRS can make without Congress. Among the most pertinent are how valuations are handled in trusts used to pass on wealth as well as potential changes to a popular tax strategy, 1031 exchanges, which allow a reinvestment of real estate proceeds to be reinvested tax free within certain restrictions.
As far as taking a look at allocations and portfolios, Garcia says that that “horse is already out of the barn” as much of the market is tuned into the same rumblings that he and his clients have heard.
Randy Conner President, Churchill Management Group
Los Angeles, California
Assets Under Management: $6 billion
Conner has been surprised that this issue has been “stealth,” overshadowed in the minds of clients and the markets by Covid vaccine rollouts, the massive stimulus bill and bullish prognostications for GDP in the second half of this year.
He expects to see a drop in small cap stocks whenever this legislation passes and makes its way into markets, the inverse effect of what he observed in the aftermath of the 2017 Tax Cuts and Jobs Act.
For clients that took advantage of the market downturn last March as a buying opportunity, those gains are nearing classification as long term versus short term capital gains. The timing of potential tax changes and the age of those investments will guide decisions on when to realize those gains nearly a year after what Conner said was a “really good tax harvesting opportunity.”
Conner says of tax hike chatter that “if this surprises you, you’ve been asleep.”
Jeff Grinspoon Partner, VWG Wealth Management
Vienna, Virginia
Assets Under Management: $1.4 billion
Grinspoon says some of his clients sold their businesses last year to get out ahead of potential increased capital gains taxes.
While the current sky high estate tax exemption of $11.7 million per person is set to revert to $5 million in 2025, Grinspoon anticipated changes long before the expiration. For that reason, he’s been advising clients who are passing down between $5 million and $11.7 million in inheritance to accelerate their gifting to children.
If Democrats lower the exemption to $3 or $3.5 million, as has been floated, that urgency would filter down to a less affluent group of clients. However, Grinspoon says that he is waiting for more clarity before making additional changes.
“As far as allocation goes on corporate taxes, I still see equities as the best house in a bad neighborhood when compared to fixed income and other opportunities,” he says.
Lori Van Dusen, CEO, LVW Advisors
Pittsford, New York
Assets Under Management: $1.8 billion
Van Dusen doesn’t think it is a “wise idea” to put out a stimulus package of $1.9 trillion and raise taxes in the same year, but believes it’s a strong possibility and is worried that it could have a negative impact on markets.
“There are lots of positives [in the market] in terms of liquidity, economic outlook, accomodative fiscal monetary policy and low inflation,” she says. “This tax legislation, depending on what it looks like, could be rough for the market.”
Van Dusen has been busy planning for the sunsetting of the “pretty generous” estate tax rate even before recent chatter about tax hikes, and is now preparing for a potential negative impact on markets.
“Our advice has been to be prepared for more volatility,” she says. “We've already done as much planning as we can possibly do, specifically advising clients to do accelerated gifting and take advantage of the current estate tax law.”
“What we are telling people is that it is likely that if you earn over $400,000 a year, you're going to see a tax hike, and if you earn over a million dollars a year, capital gains are going up,” she says.
Jeffrey Fratarcangeli, Managing Principal, Fratarcangeli Wealth Management
Birmingham, Michigan
Assets Under Management: $1.8 billion
Fratarcangeli says that he was relieved there wasn’t a “fire drill” in December in advance of 2021 tax changes, and expects there won’t be a tax hike until 2022. Fratarcangeli, whose eponymous firm is part of the Wells Fargo Advisors Financial Network, sees corporate tax increases as a disadvantage to global companies and has shifted to small and mid value companies in anticipation.
A tax hike in the aftermath of a pandemic has made estate planning discussions easier and more salient, according to Fratarcangeli, owing to a renewed awareness of mortality and a proactivity to front run tax changes.
After a decade of strong market returns and a bull run in the last six to eight months following the March meltdown, Fratarcangeli says that the early discussions on tax planning are a necessary reminder for many clients why they need professional financial advice.
Jason Katz, Managing Director, UBS Wealth Management
New York, NY
Assets Under Management: $3 billion
“The rollout of Covd vaccines has had everyone happy and distracted, but in the last 24 hours, I’ve seen the email and call volume pick up with respect to this issue,” he says. “My view during the campaign, which is largely my view now, is that when you have half of the GDP last year coming from monetary and fiscal stimulus, and you have deficits in excess of a trillion dollars, you're going to have to pay for it in one way, shape, or form.”
With all these changes considered, Katz says it is important not to let the “tax tail wag the investment dog.”
“The pre-emptive planning we've been doing at the margins is focusing on some of the higher income paying investments and higher turnover investments inside of tax deferred accounts and encouraging clients to make more tactical changes to be more long term oriented to reduce the tax friction of trading often,” he says, adding that he is bullish on municipal bonds as a result of the proposed tax changes.
“I don't think many clients are happy to hear about this talk, but I can't imagine many are very surprised by it,” Katz adds. “If you have a thoughtful long term financial plan, and you allocate assets appropriately in certain types of accounts you invest for investment cycles versus election cycles.”
This article originally appeared on Forbes.
