Tax and estate planning are in play at the moment as a new US administration and Congress settles in. We talk to the firm Anchin Private Client about what HNW individuals can and should do.

Over recent weeks, and as the Joe Biden administration – and Democrat-led Congress – has settled in, wealth advisors have naturally shifted attention to what’s going to happen to taxes. The economic costs of COVID-19 and the associated lockdowns are enormous. There has been a push for a wealth tax, for example (and not just in the US – Singapore is also considering the idea). We have spoken to several financial advisors who say capital gains tax is going to be a battleground. Estate tax exemptions, which were doubled under the Trump administration, are likely to come back down. Another point that seems to come out is that there are big differences in how single people - as opposed to those in specific relationships - can be affected.

Whatever happens, it is unlikely that the so-called “one percent” are going to have an easy ride from the tax authorities in the next few years, regardless of what the supply-side logic might be of tax hikes. 

Family Wealth Report recently caught up with Mela Garber, tax principal, tax leader of Anchin Private Client, about these areas. 

Q: We talked a lot about the estate planning/tax planning position of single people, whether they be unmarried men and women, those recently bereaved and divorced. Can you explain a bit more about how their situation is different and what sort of advice they need to take?
Garber: There are a few different scenarios where estate planning and tax planning can be different for those who are single, whether they are unmarried, recently bereaved, or divorced. 

The first is the issue of IRA accounts. For married people, spouses are usually listed as beneficiaries. This allows those who lose a spouse to roll those funds into their own IRA and continue to stretch out the distributions, with no restrictions on the time frame, since the distributions are based on life expectancy. For unmarried people, IRA accounts usually go as part of the deceased’s estate or to the children, depending on who is named as a beneficiary. The deferral also varies, with only 10 years of deferral if children are in fact the beneficiaries. For unmarried people without children or spouses to take care of, IRAs are great assets to name to a charity, since they are double taxed.

Power of attorney is another matter that can be complicated for single people. While married people can usually rely on their spouse having power of attorney should the need arise, unmarried people must be careful about who they choose - especially If they have multiple children. In the case that only one child is given power of attorney, other children may question disbursements and decisions that the child makes on behalf of the parents. Accuracies of gifts may come into question and cause both legal and emotional issues. Unmarried people with great wealth should plan for this and address this situation before it arises. 

If they don’t have children, they must be very careful about who they choose, as this person will be making weighty financial and other decisions on their behalf. They should consult with tax advisors and other unbiased sources to help decide about who should be named as having power of attorney.

One other consideration is that of pets! In the event of death, it is important for people to consider who will care for their pets and who will provide financial support for the animal (and these should usually be two different people). The pet’s trust manager should not be the one responsible for the pet to avoid situations where the funds are abused for the manager’s own personal gain.

Finally, there is the issue of access to the residence in the event of death. It is a difficult topic, but for unmarried people, it can be days before someone is notified of their death, especially if they have no children or a strained relationship with their children. If someone dies alone, their residence may be sealed and this may result in a complex proceeding, even if the will is in their residence.
 

Q: One issue that appears to have come up is a possible hike to capital gains tax. The Biden campaign appeared to support a potential doubling of the CGT rate, although it might be less severe than that. What sort of advice are you being asked for about this, in terms of structuring, holding off from selling assets, etc.?
We always advise clients against letting CGT tax be a consideration in their investment strategy. Bottom line is that if you believe your investments are strong do not make short-term decisions based on avoiding tax penalties.

It is human nature to consider selling securities now because people fear a future increase on capital gains, despite not knowing whether it will come to pass. One reason we strongly advise against this is that selling currently means that approximately only 70 per cent of the profits can go toward a new investment, since 30 per cent of the profits go to taxes anyway. Since profits are taxed as of today, selling because of the possibility of a hike doesn’t make sense.

Clients should only consider selling sooner rather than later in response to CGT rates when they are considering or already in the process of selling a privately held business for a substantial gain.

Q: What's your view at the moment of how much of a challenge people are having with probate, given the enormous disruptions caused by the pandemic and the lockdowns and how courts have been backed up?
Probate issues are being handled better today than they were at the beginning of the pandemic, but they are still delayed, operating with reduced staff and technological challenges. One interesting change is that the rules have changed on how wills and trusts can be signed - they can now be signed virtually, with witnesses present on video calls.

For single people with children, the issue of bias is an important one. Say a child comes in to help their mother, who cannot operate Zoom without assistance - other children may say that this child had an unfair advantage and influence over the mother, especially if it turns out that the distributions among the children are unequal. In the event of another “COVID-19” or unforeseen event that delays the court system, we recommend setting up revocable trusts or Transfer On Death (TOD) accounts.

Revocable trusts can be changed at any time while the person is alive, and the new trustee can have access to the funds right away, with no need for the court to step in and handle trust administration.

TOD accounts are useful for clients with less wealth - only a death certificate is required to go to the bank and withdraw money from the account. The more money and children you are dealing with, however, the more potential there is for problems to arise.

Q: When you talk to clients, how often do you need to remind them not to let the tax "tail" wag the investment "dog"?
All the time. Most people have an “allergic reaction” to paying taxes and want to minimize taxes in any way possible. Strategies they come up with to minimize tax often don’t make any investment sense and leave them with less.

We always redirect clients to their investment advisors - as said before, potential tax hikes or changes usually shouldn’t change existing and robust investment strategies. One alternative we recommend to those who are against paying taxes is donating to charitable organizations in order to minimize taxes paid at the end of the year.

Q: Are there particular trust structures, etc. that you see being used a lot for tax and estate planning purposes at the moment? Have you noticed particular trends? Are people using structures such as private placement life insurance, for example?
While estate planning changes with age, for very wealthy people (those with over $40 million in assets), the most common trust structure is the dynasty trust. This is a trust that can stay within a family for many future generations.

Most of these trusts are set up in a way that the person who funds the trust will pay the taxes on the income earned in the trust, whereby making tax-free gifts to future generations, since the asset essentially grows tax free.

One caveat is that in an event where the trust recognizes tremendous gains, the grantor may not want to pay that large tax bill. In this instance, sometimes dynasty trusts can reimburse grantors from the trust to pay tax. Though from the tax planning perspective it is not advisable unless life circumstances make it necessary.