We find ourselves in the middle of one of the greatest wealth transfer periods of all time. Those with wealth must decide whether they want to make transfers, and if they do, they must decide how much, to whom, when and in what structure?
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Dennis Channer, a partner at Cornerstone Investment Advisors LLC in Boulder, culled through his client list to make sure anyone facing the potential 5 percent increase in capital-gains tax at the beginning of 2013 was aware of the potential change in tax rates. Locally, high earners with company stock options and other high-net-worth individuals appeared to be the ones most affected by the potential capital-gains tax rise to 20 percent from 15 percent.
The client in Aspen and a handful of Channer’s other clients decided to sell stock before the end of the year. The capital-gains tax increase potentially affects singles with annual income of more than $400,000 and couples with annual income of more than $450,000. Congress made the decision about the increase on Jan. 2 as part of its larger 2013 federal budget discussion and approval.
“There was so much uncertainty … and people were trying to second-guess what was going to occur,” Channer said. “We sold a lot of portfolio assets to trigger capital gains, and now we look pretty smart.”
Channer said that in December he contacted any investor client with income of $200,000 or more, and with stocks, bonds, mutual funds or any other investment that could realize substantial capital gains when sold. As it turned out, the new federal rules also increased the income rate for affected individuals to the $400,000 threshold and for couples to the $450,000 threshold, he said.
“There were a lot of clients who we advised who were thinking about liquidating unrealized positions. They had pent-up or unrealized capital gains,” Channer said.
Cornerstone Investment Advisors has more than $123 million in assets under management, with more than 100 families and individuals as clients.
Capital gains tax is the tax paid on the difference between the sale price of an investment asset, such as a stock, and its original cost. Across the nation, the uncertainty about what would happen to the capital-gains tax caused many companies to issue special dividend payments to shareholders before the new year. Potential changes and the strategies created to respond to them kept financial planners and wealth managers busy, both nationally and locally.
“It was really good to get through the end of last year. It was like a bad movie,” Drew Simon, a partner at BSW Wealth Partners Inc. in Boulder, said of the capital-gains tax discussion and other tax increases approved as part of the federal budget discussion.
At UBS Financial Services Inc. in Boulder (NYSE: UBS), financial adviser Peter Braun called clients and held seminars to make sure people were aware of potential tax changes, not only on capital gains but on other tax changes, including discussions about the federal estate tax. As part of Congress’ decision, Braun said, the federal payroll tax went up 2 percent for virtually every American taxpayer.
Braun said he did not recommend that long-term investors liquidate assets because of tax changes. However, if investors already had been planning to liquidate some assets, Braun said he advised them to do it before the end of December rather than waiting for new rules to go into effect — and several did.
UBS locally is an arm of UBS AG, a Swiss financial services company based in Basel and Zurich with a worth of more than 2.2 trillion Swiss francs under management.
When all was said and done in federal budget wrangling, the estate- and gift-tax exemption remained at $5 million per individual, but the current 35 percent top tax rate on amounts above the exemption increased to 40 percent in 2013, according to federal rules.
On Simon’s advice, a client saved about $1.4 million in taxes created by the changes in the estate- and gift-tax exemption by creating a trust for a new baby born in December, Simon said. Simon and his colleagues at BSW Wealth Partners evaluated the estate-tax changes for every family it represents that have such resources, he said. Ultimately, very few families actually changed their plans because of the new federal rules, he said.
That’s because even wealthy individuals often want to keep such funds as safety nets for their own long-term financial security, rather than put the money in trusts for their children or other financial arrangements, Simon said.
“Many strategies popped up, of, ‘How can I give it away, but not ultimately lose control of it if I need it’,” Simon said. “Should I take advantage of something to gift as much as $5 million to my heirs? It’s a good problem to have for anyone who is concerned about it.”
Such financial tax issues wax and wane with different elected officials in Congress, Simon said, adding that future lawmakers may change the tax laws in other ways.
BSW Wealth Partners manages about $750 million for about 220 client families, mostly in Boulder but also along the Front Range as well as in the San Francisco Bay area, Simon said.