President Biden’s capital gains tax hike plans make it a good time to sell appreciated stocks, some financial advisors said.
As President Biden prepares to push for a major hike in capital gains taxes, financial advisors say they’re adjusting their strategies to minimize the impact on their clients.
To pay for a permanent child tax credit and other social programs, the White House is considering a capital gains tax hike to 39.6% on people earning $1 million and over. Wealthy individuals could see their federal rates reach as high as 43.4% when the investment tax is included, Bloomberg noted.
Advisors—some of whom have been bracing for a capital gains tax increase since Biden included it in his campaign platform last fall—are already planning and implementing capital gains harvesting and reduction strategies for clients to blunt the impact of such an increase.
Like many advisors, tax attorney and CPA Leon LaBrecque, chief growth officer at Sequoia Financial Group in Troy, Mich., believes the tax increase will have far-reaching implications for the stock market and the economy. “We think that it will create a major shift in volatility because a lot of people will be doing gain harvesting or tempering. If you’re holding onto legacy holdings for the sake of holding them, it is probably a good time to harvest them,” he said.
While a tax can’t be collected retroactively, capital gains tax rates can become effective on the date legislation is passed, he warned. “I try to be cautious. For example, I have clients who sold a business as an installment sale. I told them, ‘If you accelerate full payment now, you’ll pay 23.8% as opposed to possibly 38%.’”
LaBrecque advises his wealthy clients to donate highly appreciated stock to charity and then buy shares right back. Clients get the tax deduction, are able to eliminate the capital gains bill and still get to hold the stock, he said.
He advised a client to donate a few million dollars in highly appreciated stock to a charitable remainder unitrust (CRUT), which eliminated the tax bill while giving the client an income stream of 5% a year. CRUTs stipulate that grantors receive a certain percentage of income each year. The remaining balance, when grantors die, will go to their charity of choice—in this particular case, the charity was the client’s alma mater, the advisor said.
Estate planning attorney and certified financial planner Michael Whitty, a partner with Freeborn & Peters LLP in Chicago, said he is advising clients to consider the Biden capital gains tax, along with Democrats’ proposal to impose capital gains tax at death, “as an opportunity to realize capital gains now before the rates go up. Doing so will accelerate the tax hit, but would reduce the taxable estate for tax purposes and the capital gains at death would be reduced,” he said.
Kelly Pedersen, founder of Caissa Wealth Strategies in Bloomington, Minn., said that while many clients may think a capital gains tax applies only to the ultra-rich, she reminds them to think again. “If the wealthy with very large holdings in some of the most growthy stocks decide to sell to get ahead of these capital gains taxes ... this will hurt most investors,” she said. “We have been advising clients to sell enough for liquidity, as well as [to] rebalance to take the profits off the table so they don’t get backed into a corner.”