The results of the recent tax season suggest that many clients, particularly the high-net-worth variety who bring such joy to financial advisors, have not fully digested the changes wrought by the tax reform.
Fortunately, says our featured author, myriad effective tax-cutting strategies are available to return a smile to HNW faces.
First, examine qualified small business stock. Capital gains exemptions reaching 100% are sometimes available – before the reform, the limit was 50%. The exemption limit is set pretty high, in some cases at ten times the basis of any shares sold. A little aggressive tweaking could lead to an even greater exclusion of gains from taxable income.
Consider investing in an Opportunity Zone. This is a new category created under the tax reform. The strategy involves investing in poor communities across the US; capital gains are tax deferred until 2026. Gains held for at least seven years earn a 15% step-up in basis, too. Leslie Geller, wealth strategist at Capital Group, notes that if you hold an Opportunity Zone investment for 10 years, “when you sell that investment, you do not have to recognize any further gain. That’s a really, really big deal.”
Balancing the potential benefits is the fact that Opportunity Zone investments are unproven, so advisors and their clients should take care. “It’s definitely an alternative investment,” Geller said.
Some wealthy clients may take an interest in SLATs – a spousal lifetime access trust. The SLAT is an effective estate planning tool, particularly if the establishing party wants to maintain some control over the fund. Assets placed in a SLAT are no longer seen as part of the grantor’s estate, but some access is preserved via their spouse’s interest in the trust. If California’s estate tax proposal becomes law, SLATs could serve as a way to offset its provisions.
For more information, please read:
Best HNW client strategies for tax law changes | Financial Planning OWS