Why 2023 is the Year of Wealth Planning

Bank of America wealth experts encourage advisors to blot out the noise and focus on what really matters.

By Linda Hildebrand 

The sunset of the 2017 tax reform in 2025 should be a factor now when reviewing clients’ investment strategies, retirement planning experts say.

“In 2026, we see revival of old tax laws,” said Mitchell Drossman, head of National Wealth Strategies at Merrill and Bank of America Private Bank, when Bank of America Merrill Lynch experts sat down during a recent webinar to discuss wealth planning for the year ahead.

Some provisions’ extensions will be served up on the Congressional table — anticipated to be a “noisy” table, with Democrats controlling the Senate and Republicans the House, which alone initiates revenue bills, he said.

“I think it’s going to be awfully difficult for Congress to pass adverse legislation” affecting retirement planning in the year ahead because of their divisions, Drossman said.

Meanwhile, volatility in the market will have raised the value of some assets, which may offer growth opportunities for clients’ plans, he said. “That’s the window of opportunity.”

Advisors need not to focus on the noise but on what really can get done, said Drossman.

During the webinar, Katie Carlson, head of Wealth Strategy for Bank of America Private Bank, added that “drafting an estate plan isn’t a one-and-done thing,” Instead, “it’s something you need to visit, and revisit, and revisit, not just when there are tax changes.”

Even if there aren’t legislative changes this year, there could be opportunities in the market to seize, she said.

 ‘A lot of noise’

“Last year was a year of near misses, close calls, starts and stops, and ups and downs,” Drossman said about the high volume of proposed tax legislation in consideration.

President Biden’s initial Build Back Better proposal had a lot of controversial tax and investment provisions, especially on the gift tax and estate side, “some turning the estate planning community inside out and upside down” with anxiety, he said.

But the “skinny” version of some of those provisions that morphed into the Inflation Reduction Act that was enacted ended up being “benign,” Drossman said. It aided retirement planning for anyone not in very high-income brackets and was nothing to worry about for those “on the straight and narrow,” he said.

The Secure 2.0 Act retirement legislation that was signed into law by President Biden in December also was pretty much all good, making it easier to fund and to access retirement plans, among other provisions, he said.

“It was a year that started out pretty scary and ended up pretty good for taxpayers,” Drossman said. “Even in a unified Congress, we saw how difficult it was to pass [major] tax legislation,” he added. “Now, with a divided Congress, it’s going to be more difficult.

“There’ll be a lot of noise, a lot of it ‘white noise,’ background noise,” he said.

Expect more tax proposals soon, starting with the current budget process, most of it targeting higher-income earners, he said.

Additional Reading: Secure Act Holds Lots of Benefits for Clients 

What’s likely to happen is the House is going to ignore the president’s budget plan. The House will have its own idea about taxes and spending. Then the Senate will ignore them and have its own ideas, Drossman said, “round and round” until what gets done is unlikely to be a drastic change in the next year or so, left alone as “a fairly good landscape for retirees.”

“That’s the noise,” Drossman said. “We’re going to see a lot of proposals, but we have to focus on what actually can get done.”

In the next few months, he expects President Biden will go back to his menu of tax proposals that target corporations and the highest-income taxpayers to help pay for items for families and seniors, such as child-care credits and Medicare cost reductions.

Drossman expects Congressional debates on increases in the marginal tax rate, as well as the capital gains and dividend tax rates. He also expects discussion on a minimum tax on billionaires and maybe on a limitation on duration of trusts.

Most of the Tax Cut and Jobs Act of 2017 that passed under Republican control of both the House and Senate expires at the end of 2025, particularly provisions for individuals and families. The 2017 law doubled the estate tax exemption and reduced some tax rates, particularly for corporations and very high-income earners, and capped property and income-tax deductions, among other things.

Proposals have been made already to extend the 2017 tax reform, but “some will be noise,” he said, and not a lot may get done.

Advisors need to watch what they’re seeing every day: inflation, interest rates and volatility, he said. “This will dictate where you find opportunities for tax planning and decision-making.” he added.

Rising interest rates

Higher interest rates affect everything from mortgages to prices to credit cards — and how gifts are valued when employing estate planning strategies, Carlson said.

To give context, last year the IRS Section 7520 rate was about 2%; in April it will be 5%,  she said.

“Rates have risen significantly, but the 7520 rate for valuing gifts is still at or below average, so the same strategies we’ve been recommending the past decade can still make a lot sense,” Carlson said.

Two strategies that “haven’t been given their due” in the past decade of low, flat interest rates are ripe now, she said.

One is gifting the value of a home in a trust — a strategy commonly used for vacation homes that a client wants to keep in the family. “When rates are high, the value of the property is lower, so what that means is you can give more,” Carlson said.

The other is investments for clients who are charitably inclined and contemplating charitable trusts right now, Carlson said. During a rising interest-rate environment, values rise too, so you can give more, she said. For example, indexed for inflation now, the amount that can be passed free of estate tax is higher, she said.

If the estate tax exemption in the 2017 tax act sunsets, that threshold will be cut in about half. That’s why it’s important to find those clients who are fortunate enough to be able to put those assets in trust now, in case the divided Congress can’t pass an extension on the popular tax break, she said.

Volatility and family plans

“Investors can be nervous when we’re in the midst of a downturn,” said the webinar’s host, Jennifer Galvagna, head of BoA’s Trust, Estate and Tax Solutions. “Sometimes, there is a silver lining in that.”

Drossman agreed. “Investors and taxpayers are not looking for volatility, but if they look at volatility from the right angle, I think you find opportunity,” he said.

For example, if a client has $100,000 in their gift-giving basket, now may be a good time — while stocks are declining — to gift stock at low value. This offers the prospect of better long-term appreciation than moving cash or other types of assets, he said.

Or, swap an IRA earning low interest rates for a Roth, or form a whole new trust while values are low to grab opportunity for the long horizon, he said.

Carlson said it’s worth looking at ancillary items, too: power of attorney, wills, etc. If they’re 10 years old or more, check with clients to see if they need to revise them. It’s a good time to evaluate the beneficiaries of a trust to see if it’s serving its intent. If trusts are already fully funded, reassess whether they still make sense, and if their asset allocations make sense.

“A regular review of an estate plan is critical,” Galvagna said. “I don’t know how many time clients have come to us with a beautiful plan that they haven’t looked at it since they made it out.”

“There are family dynamics that factor into that, as well,” said Galvagna. “The client’s family evolves over time, and there could be complicated situations that take place over the years: blended families, second marriages, kids with differing needs, multigenerational beneficiaries.”

Families dictate not only how we talk about wealth, but also the catalysts that direct it, Carlson said.

Carlson even has a mnemonic device, the five Ds, that she uses when talking to clients: Death, divorce, disability, diagnosis and domicile.

She pointed to a recent study that found about half of retirees with more than $3 million in assets haven’t done any planning besides their wills.

“I think that’s very interesting,” Carlson said. “It means that there’s a lot of opportunity out there.”

Linda Hildebrand is a longtime newspaper editor and consumer reporter.


Latest news

Prominent Silicon Valley Investors Turn Against Biden

Support for Trump was taboo in the liberal bastion, but frustration with Biden has driven some influential venture capitalists to the right.

Self-directed Brokerage Accounts Continue Growth Spurt

Balances in advisor-led Schwab Personal Choice Retirement accounts maintain a strong lead over non-advised accounts.

Tuesday More Investment Transactions May Fail

U.S. trading moves to a shorter settlement on Tuesday, but it is expected to temporarily increase transaction failure for investors.

State Street Global Advisors Adds SPDR Portfolio Treasury ETF to lineup

Priced at 3 basis points, the new offering provides broad treasury exposure to customize bond portfolios.

Commonwealth Increases Alternative Market Access With iCapital Platform

The new system is targeted to high-net-worth investors but will be expanded to serve individuals of other wealth classes.

2024 ETF Insights for Financial Advisors

The use of active ETFs and model portfolios is rising, according to a Brown Brothers Harriman report.