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Lack of Clarity No Reason to Delay Tax Planning

By Murray Coleman January 4, 2017

A new year promises new opportunities for clients to take advantage of sweeping tax reform proposals from an incoming Donald Trump administration. But advisors face plenty of uncertainty in early 2017 trying to sort through the possible ramifications of changes being advanced by Trump and leading politicians in a Republican-controlled Congress.

Everything from how families approach philanthropy to financing new home purchases and real estate deals needs to be reviewed, say advisors who are already starting to prep clients for tweaks in their tax-planning strategies.

A proposal by the Treasury Department to cut tax-saving opportunities for entrepreneurs is at the top of advisor Dawn Jinsky's list of talking points with clients. The upcoming change to section 2704 of the IRS code would eliminate discounts now allowed in valuing transfers of closely held business interests between family members.

Such a regulatory change could hike estate and gifting tax bills by 15% to 35% for some business owners, estimates Jinsky, an advisor and CPA who leads the estate planning group of Southfield, Mich.-based accounting firm Plante Moran, whose financial advice group manages about $11.5 billion.

Regulators held hearings on potential amendments in November. But final wording could be released by the end of March.

“Most of our clients are holding off on making significant transfers — they’re waiting not only to see what happens with this Treasury proposal but also with bigger issues,” Jinsky says.

Also in the mix are rumblings that Trump officials are going to push repeal of the estate tax. The estate tax exemption is scheduled to go up to $5.49 million in 2017. But if it’s eliminated, some clients might expect to avoid being taxed at 40% on every dollar exceeding that level.

Even so, Jinsky is cautioning families about the possibility that only a partial repeal will take place or other taxes will be tacked on later.

“The estate tax has been around for 100 years and it’s only been repealed for one year in 2010,” Jinsky says. “So there’s also a real question about whether an elimination of the estate tax will truly be permanent.”

Dawn Jinsky

In the meantime, she’s pointing out that gift taxes aren’t likely to face repeal.

“It’s a back-stop to the income tax system where tax levels are similar to those applied to estates,” Jinsky says.

The difference, she adds, is that gift taxes generally involve transfers of wealth during someone’s lifetime. In contrast, Jinsky notes, estate taxes are “applicable to a person’s death.” Advisors need to discuss with their clients the possible ramifications “on both sides of the equation,” she adds.

Gregory De Jong, an advisor at Savant Capital Management in Naperville, Ill., also is telling clients not to count on a complete repeal of the estate tax. He’s been talking to in-house CPAs and estate planning experts at his firm, which manages $4.9 billion, to get ready for client meetings over the next month.

On the plus side, De Jong is suggesting to clients that if income taxes and capital gains are lowered — even over the shorter-term — this might be a “golden opportunity” to consider converting traditional IRAs into Roths. “They’ll still be taxed on the total amount being withdrawn, but the tax ramifications will be much less severe,” he says.

De Jong also believes the 3.8% Medicare surtax slapped on net investment income for high earners is likely to be repealed in the coming years. “For clients who are thinking about selling an investment property,” he says, “we’re talking to them about whether it might make sense to stretch out these types of deals through an installment sale to help spread their tax savings.”

For 2017, Tom Cahill is striking up conversations with investors about a possible push in Washington, D.C., to lower limits on mortgage interest deductions. Such policy moves figure to impact loan payments on a primary residence as well as a second home.

“We’re letting our clients who are carrying mortgage debt know that this type of a change could significantly cut back their ability to use deductions,” says the managing partner of Beaumont Financial Partners in Needham, Mass., which manages about $3.7 billion.

From a planning standpoint, Cahill is also talking to families who are preparing to buy a new home in 2017. “They might need to reconsider how much they’re going to pay with cash and other liquid sources,” he says. “We’re advising them to take a broader look at all of their financing options with real estate in the coming year.”