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Got Those Midterm-Election, Tax-Uncertainty Blues?

By Murray Coleman November 3, 2014

Corporate tax reform is a bigger issue in this week’s midterm elections than personal taxes. But neither is likely to undergo wholesale reform over the next year, experts say. Meanwhile, advisors predict small moves in Washington will be generally favorable for wealthy clients, including extension of certain tax breaks and clarification of how the 3.8% investment “surtax” to help fund Obamacare will be applied.

“Even if the political environment doesn’t become less divisive, we’re cautiously optimistic that Congress will act by early next year on changes that will prove beneficial to our high-net-worth clients,” says Jeff Yu, a partner at Column Capital Wealth Management in Indianapolis, which manages $550 million.

Yu is hopeful that retirees aged 70½ and up will still be eligible to make charitable donations of up to $100,000 a year from their minimum IRA distributions. Such gifts are not directly deductible, but the distribution won’t count as taxable income to the donor. It’s a popular tax-saving strategy, says Yu, although lawmakers have yet to OK its extension. “We’re recommending that our clients do give to charities, since this provision has a history of being extended,” he says.

Congress is also expected to extend provisions allowing small-business owners to write off the full cost of certain assets — like equipment and furniture — bought in the previous year, according to Bill Owen, an Indianapolis-based CPA at BGBC Partners.

He reminds clients that the maximum that can be expensed has fallen to around $25,000, from $500,000 in 2013. But it can still come in handy for small businesses. “Regardless of midterm-election results,” Owen says, “we’re hopeful that this type of expired corporate-tax provision will be reinstated and grandfathered to include this year.”

The IRS still hasn’t issued guidelines on how the 3.8% net investment income (NIT) tax will apply to business owners who have assets in trust but are not active in the business. “The pressure is on for Congress and the IRS to give taxpayers a concrete view on how trusts should be handled in these cases,” says Thomas Abendroth, an estate attorney and partner with Chicago-based law firm Schiff Hardin.

Rate Jitters

Wealthy clients occasionally get nervous as the tax year draws to a close even when there’s no election, says Dawn Jinsky, an advisor and CPA who leads the estate-planning group of Southfield, Mich.-based accounting firm Plante Moran, whose advisory group manages $10.5 billion.

Dawn Jinsky

For example, one of her clients, a business owner with a $50 million estate, recently asked what would happened if the current 40% estate tax on assets above $5.34 million rose to 45% — a proposal the client had read about in the news. Jinsky took him through the math and showed that such an increase would hike his overall tax bill by $2.2 million.

“We’re talking to a lot of our clients, especially those with net worth of $15 million or more, about how the dollar value of the exemption can be less important than the actual estate-tax rate,” Jinsky says.

Political efforts to strip the benefits of using so-called intentionally defective grantor trusts also worry some HNW clients, says Commie Stevens, a managing director and advisor at Beacon Pointe Advisors in Newport Beach, Calif., with $6 billion in AUM.

The trusts are a popular way for parents to transfer wealth to children in a tax-efficient way, according to Stevens. Grantors “sell” assets to a trust, receiving in return a promissory note that pays a fixed rate of interest each year. The main benefit, she says, is that clients pay income taxes on trust assets as if they still owned them personally. “The assets in the trust can grow at a faster rate, since the trust isn’t being depleted to pay income tax,” Stevens says.

Some in Congress want assets in such trusts to be included in the grantor’s taxable estate after death. But such reforms are a “long shot,” according to Stevens. “We’re not trying to make a political call here,” he says. “It’s something we feel is important to keep on our radar as the situation in Washington, D.C., evolves.”