Year-end planning for hard-to-value assets



All the talk about raising tax rates and lowering estate exemptions next year reminded me of my early career. It was then that a drastic shift in taxes and popular sentiment seemed to go against the rich and prosperous. Some of you are too young to remember Reagan’s 1986 Tax Reform Act, but it eliminated or reduced the value of many tax deductions, removed millions from tax rolls, and reduced the number of tax brackets. . Many advisors have been slow to respond to changes, and terrible last minute planning decisions have been made to miss year end deadlines.

Seems familiar?

In many ways, the Biden tax plan is not unique. There will always be fiscal torpedoes launched at wealthy taxpayers when the government has to raise money to finance its grassroots initiatives. I have lost count of how many tax changes there have been in my career. But as the old saying goes: “history tends to repeat itself”.

I realize that the hustle and bustle of year-end planning isn’t just sparked by a changing tax landscape. Demographics are also at stake. More than 3 million baby boomers retire each year – about 10,000 a day – and tens of thousands of them leave their businesses. Many of these retired baby boomers would rather run their businesses for another four or five years. But if their taxes five years from now will be much worse than they are today, many are asking, “Why not cash in now and call it a career?” “

Additionally, the lingering pandemic has forced people of all ages to consider their own demise. Even people who are years away from retiring or selling their businesses are seriously considering their legacy. Wealth planning, combined with the need to mitigate taxes on all kinds of highly valued assets, has accelerated the need for charitable planning.

Let the tax code be your guide

We have a large and complicated tax code, but it is not necessarily designed to work against you and your clients. If you slow down and use incentives that are clearly written into law, there are plenty of ways to reduce or eliminate taxes for your clients and their heirs. More on this topic in a minute.

Volumes have been written on how to mitigate the fiscal shock resulting from the appreciation of stocks, bonds and real estate. But what about those assets that are more difficult to define and value? This is where we see many planning mistakes made.


One of the biggest planning gaps is collectibles. According to UBS data, 25 percent of HNW investors see themselves as collectors. Whether it is works of art, classic cars, airplanes, antiques, rare coins, vintage wines or other luxuries, these treasures are often purchased for the aesthetics and pleasure. But they are still assets. The destination of these assets on the death of the owner is part of the estate planning puzzle.

Typically, most people buy collectibles in their own name and own them in their own name. They hang it on the walls of their house or park it in a garage for 14 cars. And when they die, those assets are included in their estate. These assets are also not liquid (unless, of course, they collect wine).

If a client has a taxable estate and the Internal Revenue Service requires them to pay estate taxes within nine months of the date of death, the things that are sold are those that no one knows what to do with, that is. that is to say, art. or the estate car collection. The collection comes from the estate because proper planning was not done in advance, so the family sells it to raise funds to pay off the debt.

Like any other asset, collectibles have tangible value. They need to be valued and planned properly, especially if the goal is to provide liquidity within the estate, or to sell it in a systematic way that does not depress the market. Or if your customers want their heirs to have some of these assets, they can’t just pull them off the wall or kick them out of the garage. They need to have a clear title, which means they can’t just make them go away. Unfortunately, this fact is often overlooked by clients and their advisors.

I had a client with a huge collection of Civil War memorabilia worth almost seven figures. Another client had $ 1 million worth of old paperweights. When he dies, one of his heirs will receive a $ 1 million clipboard. Believe me, clipboards aren’t something most advisers pay attention to. If we hadn’t done the right planning from the start, the heir would have faced a hefty tax bill.

Confusion of crypto assets

Crypto is another area that advisers misunderstand. Until recently, many financial advisers scoffed at crypto and non-fungible (NFT) tokens as not being part of any real wealth creation or planning. But, with so many clients asking them for advice on protecting and transferring their crypto assets, advisers are frantically catching up. We work with several clients who have between $ 20 million and $ 30 million in cryptocurrency. Since the assets are currently in their estate, if they die tomorrow, the IRS will expect to be paid. I’m pretty sure the IRS doesn’t accept cryptocurrency as a form of payment. So we need to help clients find real money, which usually means finding a way to cash out their crypto.

Now that the IRS has identified the crypto as a property, it is considered a long-term asset. The good news is that there are many things your clients can do with them from a charitable planning perspective. They can for example transfer crypto as property. In many ways, DFTs will be just another art form. We will therefore have to find ways to plan it and transfer it in a tax-efficient manner.

The big problem with crypto is that no one wants to give up their key. But how to make an irrevocable gift if the owner does not give up his key? There is a lot of uncharted territory that we will have to start navigating as trusted advisors. We can no longer see ourselves as defenders of a map, but rather as trusted guides through a changing landscape of complex decisions. And by the way, we don’t always have to find the next bright, shiny object that comes down from the pike. Sometimes we find new uses for long-standing tools. Take the good old mutual income funds (PIFs).


PIFs are a cure for the capital gains hangover. Even if only some of President Biden’s proposed capital gains tax changes become law (e.g. higher tax rates, deferral base), PIFs will become an even more attractive strategy than they are. already are. PIFs are essentially charitable trusts that “pool” the irrevocable gifts of one or more individuals, often a family. Very popular when first introduced in 1969, FRPs have fallen out of favor in recent years because their economy was not beneficial to donors. The combination of reduced tax deductions and more flexible planning tools has reduced their broad appeal. However, the tide seems to have turned, with savvy charities working with advisors to set up new PIFs to take advantage of the current low applicable federal rates, a published federal rate that reflects a benchmark used for many situations, including private loans. .

PIFs allow your clients to donate almost any asset – quite possibly low base stocks or low base real estate – and qualify for a charitable donation tax deduction. Your customers can then sell that asset in the PIF and avoid any capital gains tax on the sale. Donors then receive income for life. In many cases, FRPs allow your clients to generate income for several more generations, before the money actually reaches charity. Tools like PIFs sidestep the argument that if your clients donate large sums to charity, their children and grandchildren will not receive them.

I’ve been preaching the PIF gospel for half a dozen years, but it’s only now that advisers are hearing the message as the new tax landscape looms. Advisors call me with clients with sales of $ 10 million, $ 20 million, even $ 50 million and ask if they can use a PIF to mitigate their tax impact.

See my recent article to learn more about BIPs: Income Funds Explained

Coping with change

The changes ahead won’t be easy, but it’s one of the things I love about being a planner. It’s always interesting and constantly evolving. What are the best tools to use today as opposed to what we used five or 10 years ago? We will have to continue to challenge ourselves to learn new things, to be at the top of our game, so that we can cope with whatever presents itself.

There is going to be an extraordinary amount of business out there over the next five to ten years. I know you are up to the challenge!

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

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