Financial advisors can get worn by discerning clients, especially those who have unreasonable expectations of market returns or spend too much in retirement. But mental frustration goes both ways, and when it comes to taxes, things can get dangerous.
Wealthy investors are growing increasingly exhausted thinking about the Biden administration’s latest tax hike proposal. The situation is prompting some clients who are tired of gambling on the potential impact on their retirement portfolios to roll their eyes at their advisers and risk running into the IRS.
“Planning fatigue is a major issue,” said Martin Shenkman, an estate planning attorney and CPA based in Fort Lee, New Jersey. “Clients are fed up with all of this because we’ve planned so much in 2020 and 2021, and now we have another proposal.” He added that “it’s your job to tell customers, ‘Hey, you got all that bad stuff there. And they’re fed up.
President Joe Biden’s 2023 budget, unveiled on March 28, proposes $2.5 trillion in tax increases for the wealthy and corporations over a decade. The plan would impose a new wealth and capital gains tax that only exists on paper and raise the top ordinary tax rate to 39.6% from 37%. It also calls for an end to a long-running loophole known as the base increasein which people who inherit assets do not owe tax on gains accrued since the original owner acquired them.
The 20% ‘billionaire minimum income tax’ on people worth at least $100 million – even if the profits are only on paper – was immediately in danger when Senator Joe Manchin, a Democrat from West Virginia, signaled that he would oppose such a move. But other increases are still in play.
After talking with advisers for more than two years about legislative proposals to raise taxes, all in the wake of the 2017 tax code overhaul that cut rates sharply, some clients don’t want to hear much, or nothing, on the last round. Advisors say it’s a risky mental state, given that making the right moves now with trusts or donating to heirs or charities can potentially save a lot.
Ric Edelman, who a year ago stepped aside of his $291 billion The namesake company, Edelman Financial Engines, said “it’s annoying to see proposals that have been floated in the past being floated again.” Budget increases “make it difficult to provide clients with effective advice when there is continuing uncertainty about what changes there may be”.
That’s why Edelman likes to give all tax legislation its own cheeky subtitle: “The Financial Advisor Security Act.”
What is called planning fatigue is the state of gambling fatigue over how to plan one’s wealth. Her cousin, decision fatigue, does one feel overwhelmed and paralyzed by choices and decisions (a spousal lifetime access trust or a settlor-retained annuity trust? sprouted whole wheat versus sprouted organic oatmeal that torpedoes consumers at Whole Foods). Both states draw on cognitive and emotional biasesor behavioral psychology, which can cause investors to make imprudent financial decisions.
Burnout is more common among affluent clients.
“Honestly, people here in the Midwest don’t talk about tax policy,” said Nadine Burns, president and CEO of A New Path Financial in Ann Arbor, Michigan. “I’m the only one raising them.” She added that conversations with her “middle-income” clients focus on student loan repayments, saving for retirement and buying a home.
Humans (with the ants) dislike uncertainty, already exacerbated by the COVID-19 pandemic, inflation, and Russia’s invasion of Ukraine. So even though many advisers say most of Biden’s proposal increases are unlikely to happen, they need to keep clients in the loop, even if they’re exhausted from the tax talks.
Beth Shapiro Kaufman, tax attorney at the Caplin & Drysdale law firm in Washington, DC, which assists high net worth individuals with estate planning, said she prepares her clients for uncertainty, regardless of tax policy. Its standard mission letters still note that the gift and inheritance tax exemption is expected to return to lower levels in 2026 – or could drop sooner, or not at all. “Advisors need to let clients know what’s at risk,” Kaufman said.
Ashley Folkes, senior financial adviser and director of growth strategies at Bridgeworth Wealth Management in Birmingham, Alabama, says the uncertainty the new budget is resurrecting comes at a difficult time.
“There are a lot of distractions with inflation and war that occupy people’s minds,” he said. “Things that used to be priorities can become less important during difficult times.” The upshot, Folkes said, is that financial planners “sometimes have to be proactive and persistent because it’s in our clients’ best interests,” even if it annoys them.
Some estate planners and advisors has moved up a gear last year amid now dead proposals to slam the door backdoor Roth conversions, a preferred strategy for generating retirement wealth for clients. While that hatchet isn’t included in Biden’s budget, other changes, including a higher ordinary rate and the end of the base raise, are. Advisers have to deal with it, even if they think things will go nowhere as the White House battles inflation ahead of midterm elections this fall that could flip the makeup of Congress, where Democrats have a very slim majority.
“I really believe that clients are a little weary” and “frustrated with shifting political winds that are more like a swinging pendulum with each cycle,” said Scott Bishop, a chartered accountant and financial planner who is the executive director. wealth management solutions. at Avidian Wealth Solutions, an independent financial advisory firm in Houston.
Shenkman said the tired looks from advisers are dangerous because they “go against” recent IRS advice that focuses on taxpayers “dotting the i’s and crossing the t’s.” Failure to listen to an advisor’s tax suggestions or ideas for structuring trusts to pass on wealth could result in reduced income for heirs or a fight with the tax authorities.
“There’s something technical going on that customers don’t understand,” Shenkman said. “The biggest problem right now,” he added, is that “clients don’t realize that the IRS wants to focus on good administration.”