Strategy

Election Impact: Looming Tax Hikes And Uncertainty Haunt Wealth Managers

Charles Paikert, Contributing Editor in New York City, 18 September 2012

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The specters of rising taxes and continued political and economic uncertainty have become front-and-center issues for wealth managers as the US presidential election swings into high gear.

This is part two of a mini-series on the presidential elections. To view part one, outlining the candidates' different tax plans affecting HNW clients, click here.

The specters of rising taxes and continued political and economic uncertainty have become front-and-center issues for wealth managers as the US presidential election swings into high gear.

“We’re getting a lot of questions about what to do now,” said Carol Kroch, head of wealth planning for Wilmington Trust Company. “Our mantra has been: ‘Regardless of who gets elected, don’t expect to know all the answers immediately after the election.’”

With the Bush tax cuts set to expire in 2013, upper-income clients face higher income taxes, as well as increased taxes on capital gains, investment income and dividends, and a steep cut in estate tax exemptions. While President Obama strongly supports these changes, his Republican challenger, former Massachusetts governor Mitt Romney, just as vigorously opposes them. (See here.)

Indeed, despite Romney’s vow to repeal all gift and estate taxes, the current $5 million estate tax exemption for individuals ($10 million for a married couple) is set to drop to just $1 million on January 1, while the top tax rate will rise from 35 per cent to 55 per cent.

Ticking Clock

As a result, wealth managers have been busy advising wealthy clients on their options, including considering selling a business this year instead of next, using alternative vehicles such as grantor retained annuity trusts, and, of course, making gifts to take advantage of the tax benefits of the current law before December 31.

“Clients are deciding whether they can afford to give money to their children before the end of the year, and we’ve been very busy counseling people,” said Jeff Maurer, chief executive of New York-based Evercore Wealth Management. “Clients are gauging how much they need to live and it’s a tough time to do that because returns from portfolios are not what they used to be. We’ve seen people with $50 million who don’t think they can afford to give $5 million and people with $25 million who think they can.”

Clients considering making gifts or transferring an estate this year need to have appraisals done as soon as possible, said Kroch, who is also a managing director overseeing charitable trusts for Wilmington. “They need to inventory their assets and see what needs to be appraised, because the clock is ticking,” she said.

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