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New Tax Landscape Causing Mid-Year Planning Crush

Help clients by keeping holistic focus in mind.

An estimated 45 million U.S. households will transfer $68 trillion over the next 25 years, according to Cerulli Associates. Much of that massive wealth transfer could occur before Dec. 31, 2021, as owners of closely held businesses, homes, stocks, collectibles and even crypto try to cash out before the new capital gains tax rates go into effect in 2022. They say talk is cheap. But, even a whisper from Washington has created an apparent selling frenzy, led by baby boomers.

The new tax landscape could be especially tough on higher income households if capital gains are taxed as ordinary income and the estate tax exemption is lowered. With both changes more likely to happen than not, a mind-boggling number of transactions are in the works. Boomers are saying, “Hey, if I’m going to get taxed anyway, I may as well sell now and probably net more.” Everyone’s afraid of the new tax increases, and they’re not hesitating to pull the trigger.

Especially Tough on Business Owners

Whether or not they get the price they’re hoping for, many business owners are going to feel disoriented post-sale. They’ve been building and running their business for the past 40 to 50 years, and many have never really developed a life after business plan. Even if they cash out at a great price, many hard-charging entrepreneurs won’t know what to do with all their free time. And in many respects, they’ll have lost their identity and sense of purpose after they exit their business. A bad tax outcome will hurt even more.

Several former business owners I know have recently stepped away from their life’s work. Mostly exited because they had reached an age when they’re  expected to move on. One is currently driving his wife crazy hanging around the house. Another has traveled across the country to see children and grandchildren and has now run out of things to do. Selling and retiring without a plan simply makes no sense, no matter what the financial reward.

Buyer’s Remorse

It’s not easy on buyers either. With today’s overheated housing markets, many buyers who “won” frenzied bidding wars for a property now regret overpaying. Same with companies. Bidding wars generally favor the seller. Now, though, there are a lot for buyers to choose from. It’s complicated out there in the world of transactions, and your clients have never needed you more.

Charitable Giving

Even giving assets away isn’t as simple as it used to be. I’m working on 15 significant gifts for high-net-worth individuals that need to be completed before Dec. 31. Transferring large amounts of complex assets isn’t something you can do a few days before year end. Many of these transactions are pre-sale allocations of business interests. Unfortunately, several sellers (that is, donors) already completed their sales transaction before I was contacted.

Ideally, I’m brought in before the owner sells. But if the transaction is already closed, there are still avenues for relief. With low federal interest rates (AFRs), charitable lead trusts and pooled income funds can both provide generous tax deductions that can reduce the seller’s tax burden. Others look to opportunity zone investments and other tax-reducing and tax-deferral investments. I prefer to stay with structures that are clearly delineated in the tax law.

And it’s not over. I’ve been told by several new advisors that they have clients either in the process of selling, (or have recently sold) business interests in the hundreds of millions of dollars. Even though it’s only August, it feels like the usual November/ December planning crush is already here.

Real World Example

One client had a very large sale transaction that closed in June. Unfortunately, for a number of very complex reasons, I was unable to help prior to the sale. The seller vowed that he would get his affairs in order immediately following the sale and deal with his large gain. Yet, here we are in August without all of the documents necessary to begin his planning. Many of the strategies I initiate can take several months to design and implement, so, we’re facing an intense race to the finish line before Dec. 31.

It will be difficult to promise completed gifts if we wait much longer to begin the process. Just to give you an idea of how much gifting is taking place in 2021, it took the first 35 years of my career to help clients facilitate $1 billion in charitable giving. This year alone I’ll probably do another $1 billion.

Help Clients (and Keep Their Sanity)

Get the ball rolling ASAP, don’t wait until the fourth quarter. Before recommending any strategies, it’s important to understand your client well. Make sure you’re very clear about what they own, how they own it, what they’re selling, how they’re selling it, who they’re selling it to and what their values are, among other considerations.

Experience tells me that business owners hate paying taxes. When they sell, they need to consider ALL their tax implications, so they and their families retain the majority of their hard-earned wealth. We can help them when we have the right answers to the right questions. But it takes time to assemble all the pieces to the planning puzzle.

The linchpin to all this planning is clearly seeing the client’s big picture. It’s common for advisory teams to laser in on fixing a glaring issue before completely understanding the client’s entire situation, goals and aspirations. As much as we feel the need to stop the bleeding ASAP, we also need to step back, take a breath and look at the client’s situation from the 30,000-foot level.  I know it’s not easy when you’re racing the clock and the calendar, but whichever methodology you use to help clients, you must use keep that holistic focus in mind for every single engagement. It’s the only way that will serve the client family for the long term and achieve a successful outcome

Defer Less Urgent Planning

If you take nothing else away from this article, remember, not everything needs to be absolutely completed by year end. Focus on those things that are imperative and defer some of the less urgent planning items into next year. Doing so will serve your clients best and allow you to keep your sanity and objectivity intact.

Randy A. Fox,CFP, AEP is the founder ofTwo Hawks Consulting LLC.He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker. 

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