The fiscal cliff typically refers to a combination of government spending cuts and the expiration of numerous tax cuts at the start of 2013. For taxpayers, the impact could be substantial. The nonpartisan Tax Policy Center says the average tax increase would be $3,446.
For the top 1% of Americans, the change would be the most drastic, with the tax rate climbing to 40.5%, up 7.2%. In addition, the portion of an estate that would transfer to beneficiaries free of tax, or the so called estate tax exemption, is slated to decrease from $5.12 million to $1 million.
At the same time, the top tax rate on assets in excess of the estate exemption will climb from 35% to 55%. Other rates, such as those on capital gains, are also slated to increase. While Congress and the White House may act to eliminate some tax increases, most Beltway observers predict that political gridlock will hinder meaningful intervention prior to next year, and even then policy changes could be disappointing.
For investment advisors, uncertainty over taxes is a multidimensional issue. If clients are forced to divert more of their earnings and investment gains to taxes, they will have less wealth to entrust with their investment advisors. From a longer-term perspective, advisors who fail to protect clients’ lifetime savings from estate taxes will eliminate the possibility of managing the assets on behalf of estate beneficiaries.
Yet, some advisors are using the fiscal cliff as a marketing and business building opportunity. Merrill Lynch Wealth Management, for example, has launched a video entitled “Taxes, Elections and the Fiscal Cliff.”
The firm’s website also has a variety of slide shows and articles dealing with the consequences of the upcoming tax changes. Well-known financial advisory firm Ric Edelman is also taking action by offering personal financial seminars that address if investors should change their portfolios prior to the upcoming tax changes.
The impact of tax changes hasn’t been overlooked by mutual fund firms, with many shops, including The Vanguard Group, providing educational materials on the topic. Vanguard, for its part, recently held a webinar entitled “The Urgent Need for Estate Planning” that focuses on the fiscal cliff.
Advisors are also using the fiscal cliff to strengthen client relationships by explaining how legacy planning, including the use of trusts, can help shelter assets from estate transfer taxes. Advisors typically refer clients to trusted estate planners to initiate programs or to assess if existing plans are appropriate. In the process, advisors can also strengthen their referral network.
Some investment advisors are gearing up for the fiscal cliff by evaluating tax efficient investment products and the use tax deferred retirement accounts. They maintain that evaluating such strategies and estate plans is appropriate even if the 2013 tax increases are thwarted, as clients’ wealth and income may grow over time and become more vulnerable to taxes. If anything, the fiscal cliff is simply providing many advisors with an opportunity to reach out to their clients and show that they have their clients’ best interests in mind.
