Caught in the Bullseye: Managing Estate Planning Uncertainty for Affluent and Wealthy Clients

Caught in the Bullseye: Managing Estate Planning Uncertainty for Affluent and Wealthy Clients

Last time I was in New York, I had a terrible time.

The greasy spoons are thinning out. Imperial Coffee House served the best hot dog in town: kosher, steamed and then fried, with hot mustard on a buttery roll. It’s gone with the smoky wind. A glass tower stands there now. So where do I eat?

Keens is still up for a steak and the scotch & soda is served in its traditional bathtub. I ordered takeout from Café Evergreen, that’s ‘evahgween’, and before you accuse, that’s how mama-san speaks, and encourages punters to emulate. It’s a New York thing – take it and like it. Note: it’s all about the egg rolls at Evergreen.

I did see some friends, like Anny and Prep, married for years. He got his nickname playing hockey at the Catholic prep school he and I attended, years apart. We had the same Russian teacher, too, and shared similar fates. We met in Moscow in 1997. The nickname’s a laugh, because he’s tough as a Bruin and wise as old Solomon.

Anny, back in the day, was my roommate. I recall how she took the CFA exam ‘for fun’. Our friend Rebecca was taking it seriously, nervous as heck, so Anny tagged along to give moral support. She won the first round, remained standing for two more. Twenty years later, she’s a big honcho at a top ratings agency.

Anny did good. She still tells me everything, so I know she earns north of $300k. Sounds nice, but for Anny, it’s the start of a problem.

Her man Prep is one of those guys who toddled over to Russia with high school Russian, a college degree in high-sticking and cross-checking, and made it big. Prep traded copper, could handle tough clients. The sun shone in those days, and out of bright metal, he made hay.

Sales is dangerous work, lifestyle-wise, and we’re Catholic boys: we don’t like vices that don’t come from a cask. Prep kept his nose clean, literally, in a racket that claims weaker souls. Back in New York City, he sits pretty, head of sales in some glass-walled sky castle. On payday, he splits the difference between $400k and half a million. Their daughters have ponies, so all is swell.

Except, like I said: Anny’s unhappy, feeling competitive with her own husband. Curious, because when they met at our legendary party mansion on Krasnokholmskaya Street, I found them behind the floral sofa, heartily cooperating on a most private equity project. They seemed a complementary team. Sitting on another sofa, twenty years on, Anny was steamed, ruing the plotting of patriarchs.

I saw it differently. Anny works 9-6, sees the kids, lives a life. Prep leaves at dawn and often returns when the sun is a distant memory. She regulates; he earns, I offered. Anny glared my way, as she has for decades, when I’m being famously, infuriatingly reasonable. How I’ve escaped strangling escapes me.

There is one salve to Anny’s smarting sensibilities: by contemporary definition, she’s affluent, while Prep is wealthy. That’s a big difference when the tax man is drawing a bead on your income and estate. I really must ring her up with the cheery news.

Let’s gather my thoughts. The Biden administration sits on a pile of campaign planks, which, if nailed together, could swell into a historically proportioned tax increase. It’s all there: shrink the estate tax and gift exclusions, end the step-up in basis, hike corporate tax rates. Capital gains may be taxed more aggressively, perhaps even ruthlessly. Time will tell, but the trend is apparent.

Biden’s infrastructure bill, just released, suggests raising the top marginal income tax rate to 39.6%. Anny and Preps of the world, take notice. Affluent citizens must be particularly wary of income tax increases, and should consider slimming their taxable income by topping-up qualified investment plans and 529s for their children’s education. There are plenty of other strategies, too.

My friends might consider moving from New York, where they already pay skyscraper-high state and city taxes. Many states are strapped and they can’t just print money to cover the tab, like the feds can. Some states have estate and inheritance taxes all their own, and if the momentum builds, others may follow their lead.

Prep and Anny can’t be qualified as wealthy just yet, but crossing the line happens fast, with implications for taxes today and, more worryingly, for their inheriting children. My friends are big earners; they’ve been investing for decades; they own a Manhattan apartment; they’re in line to inherit portfolios and property from their affluent parents. Personal circumstances can change with the wind, just like in politics. Compounding the two is a recipe for a rumble.

The estate tax exemption today is $11.7 million, twice that for marrieds. A&P are OK for now, yet the Biden team wants to cut that exclusion to $5 million. Democrats in Congress have called for returning to the Obama-era level of $3.5 million. See how fast someone else’s woes can become your own?

My pals in New York and all folks wealthy and affluent should speak to their planning teams soon. Ask your estate planners if it’s time to consider a trust, perhaps even a GRAT, which the administration aims to kill, but hasn’t done yet – use the window. This is a good time, with exclusions still high, to give to individuals or charities, so if you’re philanthropically inclined, ask the experts how to proceed.

Well-served clients can consider investing in rental real estate, which offers depreciation deductions that can slim taxes. Direct investment in oil and gas wells gives the same benefits. Solar projects offer deductions, too, and as Biden’s green energy vision takes form, they will probably offer more benefits.

I was just about to type up my boilerplate – get cracking, still time to take steps to limit those taxes, when it hit me: I’d forgotten the donut, an odd thing to do in New York. Biden wants Social Security taxes paid on wages above $400k. Today, workers earning up to $142,800 pay this tax, and those above are excluded – I never understood why. If Joe’s proposal becomes law, there’ll be a Social Security tax-less ‘donut hole’ in between the two brackets. Anny will sit pretty; Prep will pay up.

Cheer up, honey – you just might win.

(For the love of love, pray don’t break Anny’s spell by revealing the obvious: their entwined, marital estate. They’ll always have tax advantages.)

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