Preparation For Tax Changes Is Crucial, Tiedemann Says

Advisors should help clients plan now for whatever estate, gift and income tax changes might be in the offing under the new Democratic-controlled Congress and the Biden administration, James Bertles, managing director of Tiedemann Advisors, a national financial services and wealth management firm, said in an interview today.

Because of the need to address the growing federal deficit, the federal government will have to consider ways to raise more money, but no one can predict when any changes might be made or when they would be enacted, Bertles said. That requires planning in advance.

“Our clients are talking about year-end planning” even though it is not the end of the year, Bertles said. But because Democrats control both houses of Congress and the presidency, changes in estate and tax laws are likely to occur this year. “The changes could be made retroactive to Jan. 1, 2020; they could go into effect during the year, or they could go into effect Jan. 1, 2021. Clients, and lawyers and accounts we work with, are asking questions of us now.”

Among the changes that would bring in more money are raising estate, gift, transfer and income taxes, among others, and lowering exemptions, Bertles said.

While changes might be inevitable, drastic moves may not be in the offing. “The Biden administration will be careful because they will not want to slow down the economy,” he added. “Advisors are telling their clients they may want to take advantage of their options now.”

Wealthy clients who can make some changes now fall into two groups, Bertles said. Those who have more money than they need to live on may want to consider giving away money to heirs or charities now, while they have more flexibility and before gift and estate tax exemptions from taxes are lowered. Others may want to use other strategies that allow them to use the funds now to live on but then enable them to give the money away in the future under current rates.

For instance, the person wanting to make a gift to an heir can structure a forgivable loan that can revert to a gift if tax laws remain favorable in the future, he said. Another tactic would be to use what is known as a dynasty trust, where the recipient has nine months to decide whether to accept the gift or return it. That decision can be made based on whether the taxes are more or less favorable after nine months have elapsed.

From an investing standpoint, decisions have to be made with the idea that income taxes for the wealthy may increase in the future, he said.

“For instance, in November and December of 2020 we were advising some clients to accelerate income into 2020 with the thought in mind that income taxes may go up,” Bertles said. “Most investors do not want to take a lot of risk, so the strategies advisors are looking for are the safer ones that protect the client.”

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