Wealth Management
(Washington)
Most advisor attention as it regards Biden’s tax plan has been about increased capital gains taxes and the unwinding of the “step-up basis” in the inheritance of assets. However, there is another major risk and complication on the horizon. That has to do with state level inheritance laws and how they interact with Biden’s plan. The federal government has no formal inheritance tax, but rather an estate tax. States, by contrast, often have inheritance taxes. The big difference between the two is that the estate tax is levied on the estate itself, whereas inheritance taxes are levied on the beneficiaries. That means that each individual is subject to a different level of taxes based on their income.
FINSUM: To be clear, the implications of this are quite large for HNW individuals, as they could face much higher federal estate taxes in addition to high state level inheritance taxes.
(Washington)
China has been a no-brainer for any diverse portfolio and quite frankly continues to be one…see the full story on our partner Magnifi’s site.
(New York)
They do not get a great deal of attention, but annuities are having a real moment this year. Total annuities sales jumped 4% in Q1 versus the prior year. That is a pretty nice job for a product many would not think of as “fresh”. Variable annuities drove the gains, with a 7.5% quarterly jump.
FINSUM: Annuities have several tailwinds right now. The giant mass of baby Boomers entering retirement is one, Generation X liking annuities more than older generations is another, as are increasingly accommodative regulatory policies for annuities, such as their inclusion in retirement plans.
More...
(New York)
Any advisor will have noticed the big industry push towards model portfolios, and in particular, model ETF portfolios. To many, this might be a “what gives?” moment. The reason why is actually a simple one for both advisors and asset managers. For asset managers, models can be a very nice singular location to gather up assets. For advisors, it is all about saving time and getting the best of a wide array of ETFs. Model portfolio can allow advisors to get access to a range of best-of-breed products without the need to proactively take the time to diversify client Dollars into those funds.
FINSUM: Model portfolios are going to keep growing. They are generally a win-win for both advisors and managers.
(Washington)
All advisors are already nervous about Biden’s planned tax hikes on wealthy clients. As a quick refresher, the Biden administration wants to raise long-term capital gains taxes to 39.6% (in addition to applicable local and state taxes), as well as eliminate the “step-up in basis” at death in inheritance. This has major implications on its own, but advisors and CPAs have brought up another significant issue with the tax hikes completely aside from the increased level of taxation: it is extremely hard to document the original basis for many assets. This is particularly true for illiquid assets like real estate and small businesses—which often constitute the largest portion of an estate. According to Ed Zollars, a CPA, “How do you estimate the basis, especially when the person who had the best chance to answer that is deceased?”. KPMG summarized the difficulty of the situation further, saying “For a flow-through entity that’s been around for 45 years, in theory, I’d have to go through 45 years of tax returns … Many times, records aren’t handily available, and obtaining transcripts from the IRS is hard, too”.
FINSUM: On top of everything mentioned, remember that basis changes all the time in both LLCs and real estate, either by capital put in the company or through 1031 exchanges. This will be a reporting nightmare!
(New York)
Something very interesting is happening in the annuities market: a new generation is taking the lead. While for many advisors, getting Baby Boomers into annuities as they near retirement has been the focus, a new generation—Gen X—has been turning to the product because of a lack of pensions. According to a new industry study “investors under 55 are considerably more interested in annuities than Baby Boomers; 58% embrace the product as an alternative to pensions”. According to Jean Statler, CEO of the Alliance for Lifetime Income, “The high level of interest in annuities and protection among younger investors is extraordinary … Unfortunately, there’s still a large gap between what investors say is important to them and what financial professionals think is important”.
FINSUM: This makes a lot of sense. The generations younger than Boomers have experienced more income insecurity and retirement uncertainty and are more focused on their ability to control their own retirement income.