It is pretty certain that the tax burden is going to rise, but while certain adjustments make sense, this should not dominate how people address estate planning, transfer and investments.

More US citizens will have to prepare for a sharper bite from the estate tax if certain lawmakers get their way, although the tax threshold is due to revert to its pre-2017 levels anyway in 2025, private client advisors say. But they warn that HNW individuals shouldn't let tax be the sole driver of how they deploy their assets.

The existing tax exclusion of $11.7 million on estate tax rolls off at the end of 2025 to about $5.5 million, unless lawmakers vote to maintain the threshold – unlikely given the Biden administration’s proposed hikes to taxes such as capital gains and income. 

“Some of the Democratic senators like Bernie Sanders have put forth a bill to change the estate tax exclusion to $3.7 million and potentially increase the estate tax from the current 18 per cent to 40 per cent. Effective wealth transfer strategies will now need to be considered by more Americans than ever,” Kevin Swanson, chief executive at Potentia Wealth, told Family Wealth Report.

The firm, which oversees about $500 million in client money, works with families with between $2 million and $30 million in liquid assets. It covers wealth management, tax planning, audit, accounting and affiliated services, trusts, real estate brokerage and insurance. Potentia Wealth is based in San Jose.

Regardless of what happens to tax rates under the Biden administration or future ones, tax should not overly mold how high net worth individuals invest, Swanson said. “A mistake is in allowing the tax tail to wag the dog,” he said. 

Swanson was asked if he was concerned about people shuffling assets too fast because they are worried about potential tax hikes, such as on capital gains. 

“My concern is that people are so worried about avoiding taxes they are not taking proper time to properly plan the move. These tax strategies should be done in cooperation with their tax professional and financial advisor at a minimum before taking action,” he said. 

Some advisors do think it makes sense to adjust investments/transfers to mitigate any tax hits. 

Clients should consider selling investments (including real estate) with large capital gains to take advantage of current historically low capital gains rates, defer gains on real estate transactions and/or accelerate depreciation deductions, Tim Tikalsky, tax principal, at California-based Sensiba San Filippo, said in a recent note. Another firm, LifeYield, recently told FWR that one problem is where HNW families hold wealth in different funds and other structures, often with varying tax rates, and as a result they end up paying more tax than they need to. This is relevant when decumulation is a trend. More than a week ago, the Boston Consulting Group’s annual overview of the world’s wealth industry singled out the topic. Wealth managers may miss out on major revenue opportunities to serve a new breed of ultra-high net worth clients and retirees who are decumulating their assets, it said.

Tax not always the main game
When asset transfers are decided, tax is not even the most important item on the board in many cases. Most clients will have a plan in place such as a revocable trust or will. It is not just a matter of tax-efficient wealth transfer….durable power of attorney and medical directives, which are typically included in the trust, are also important considerations, Potentia’s Swanson said. 

“It is important to have basic documents in place,” Swanson added. 

When people reshuffle assets for tax reasons, there is a risk of not thinking about the underlying logic of why the changes are being made, he said. 

It is also important for wealth holders to engage with children/grandchildren and understand what their values are, he continued. “We have programs to work with children of clients about how money works.”

“We have found it helpful to sit with clients and go through plans, in a workshop, to explore what impact in the world they want to have with their money. Then we can talk about which vehicle is the best one to manage that [specific goal],” he said.