I called one of my first colleagues in finance, a London-born specialist now in estate planning, who works out of Baltimore.
What can our clients do now to get ready for tax law changes under a Biden presidency, I asked?
“Muggered if I know,” quoth the maven, employing a word which I censor, as this blog is widely read by family offices.
That’s some help. I rang up Jim, still circling that parking lot in Houston, who said he’s telling all clients to “be prepared to pivot.” What – one’s face towards the springtime sun? To let jogging pedestrians pass by? Towards the hoop? I really can’t stand industry jargon, unless I’ve coined it myself.
Let’s break it down: be prepared to pivot. To be: that means you’re alive and active. We await concrete developments, but that doesn’t imply passivity, lounging in the metaphorical hammock. Not all is unknown: the tax regime today, as it relates to estate planning, will change; our wealthier clients are in the fine crosshairs; whatever happens, it won’t be advantageous for many estates. So get active, now.
Prepared: I know many people who survived 9/11. Eric, an IT specialist at a bank, tells of running through the exit hall of the World Financial Center, where pedestrian traffic bottlenecks down to two escalators and parallel stairs. How that got past health and safety…
When the first tower fell, with a roar from the pit, they were instantly blacked out, disoriented by smoke and screaming. One of Eric’s office mates had a keychain flashlight; they used to rib him about it. Flashman found the stairs, sent up his friends, then stood there, a guiding light. He was prepared, no idea for what, to pivot on unfathomable twists. We have it in our minds, now.
Pivot – which way? We aren’t entirely clueless. Taxes have risen before and institutional knowledge is our beacon today. We knew the Tax Cuts and Jobs Act would sunset on December 31, 2025, anyway, barring extension, now most improbable. Specialists have been getting ready for ages, imagining ways out of chaos. Today, it’s time to assemble a team.
Good news: there are slick managers out there, ready to run sick plays on the fly, with a bench full of role players eager to compete. Center, small forward, shooting guard – assembling a winner is easy, if we crib from the experts.
Start with a financial advisor: that’s clear, more later. Make the acquaintance of a certified public accountant. CPAs are masters in the arcane art of drudgery, relieving our burdens. Estate-planning attorneys are worthies: people like me can spotlight legal issues, but tax-code reality calls for high priests of legal wisdom. Taxes aren’t a realm for winging it.
Insurance is our bread and butter over here, and while the basics are easy, the reality is staggeringly complex. That’s a good thing. Permanent life insurance can be structured to suit the most Gordian family structures or crazy-quilt assets. Families that make General Sternwood’s daughters seem denizens of Walton’s Mountain are met with straight faces and a sharp range of options – pivot points, we might call them. Insurance specialists are the steely-eyed missileers of estate planning in my book, and yes, I’m unabashedly biased.
If trusts suit your case, engaging a professional manager is wise. There may be trust-worthy candidates among family or friends, but experience teaches the virtues of dispassion, specialization and long knowledge. A trust properly constructed and wisely operated can cement a centuries-long legacy (ask Mr. Rockefeller’s ghost); done wrong, it can become a wrecking ball.
The financial advisor-point guard calls the plays. Rookies, here’s how it’s done: sit down together (six feet apart) and work up a personal balance sheet; list your assets and liabilities. Don’t let anything slip; nothing is too small, irrelevant or embarrassing. Last year, I received an overdue notice from my university library: 30 years past due. I’m embarrassed to share this, but it’s now jotted in my debit column, while my lawyer friend Ginger pro-bono checks for the late library book statute of limitations.
Next up, define your idea of an easeful retirement. This is tricky at age 30 – I’m not so sure myself at 61 – but it’s vital and informs your every investment decision. If you own major assets – and this defies age – a professional appraiser is a good hire. Business owners should pay strict attention here, as few things excite the dread tax master’s hand more than an inaccurately appraised business. All assets, I underline, must be cataloged and their role in procuring a comfortable retirement assessed. Let no wealth drivers – or sappers – get by unnoticed.
A legacy should be a cause of joy, not time spent in court, and that’s literal here – we’ve left our basketball metaphor behind. Whether it’s the end of first quarter or at half-time, it’s time to bring in the pros.
How much cash do you need in retirement? This one’s a puzzler. Taxes are crucial: retirement income via post-tax money is one thing, but pre-tax accounts can carry a hidden sting. My mother went through it. On a visit one winter, Mom needed a coat. She’d spotted one, a nice color, $75. I was wearing Armani at the time, $1,000, marked down. Shame on son.
Mother lived comfortably, yet found extras – a winter coat! – hard to buy. Take a bit more from your accounts, I said. No way: she was on the tax-bracket-madness line. The tiniest supplement upped her bracket and she’d lose more than gained. It was nuts. I think people over 70 should be declared tax-free, but that’s just crazy me, for now.
I suggested a slush fund: a couple of thousand, tucked in one of her hiding places. “But that would be illegal,” she pulled out of nowhere. “Mothers trump the Man,” I said, but I don’t think she dug me. The 1920s generation didn’t think about tax troubles like this; it’s hard to plan for things that don’t yet exist, if there’s no one around to prompt you.
Nowadays, you can readily build a crew – advisor, insurance specialist, tax attorney et al – to help plan for all eventualities. Get on it today: the big pivot is coming, sure as New England chill. Tucking a few bucks in a cigar box, as I finally did for mother – no use turning me in, the statute of limitations has passed – won’t cut the mustard.