4 Wealth Planning Themes for Uncertain Times

The 2024 presidential election has indeed been quite unpredictable, especially with the economic and tax policy proposals from the candidates. Given this uncertainty, it’s crucial for advisors to focus on the present and provide actionable guidance to their clients.

Here are four wealth planning and investment themes that are particularly relevant today:

1. Tax Efficiency: With potential changes in tax policy, it’s important to optimize current tax strategies. This includes maximizing contributions to tax-advantaged accounts and considering tax-loss harvesting.
2. Diversification: Ensuring a well-diversified portfolio can help mitigate risks associated with market volatility and political uncertainty.
3. Estate Planning: Reviewing and updating estate plans to reflect current laws and potential changes can help protect clients’ wealth.
4. Income Strategies: Developing strategies for generating reliable income, especially in a potentially changing tax environment, is key for long-term financial stability.

1. 2025 Tax Cut and Jobs Act Sunset: A Prime Opportunity for Guidance

As we approach the election, candidates Trump and Harris are presenting a variety of tax proposals. Harris suggests higher corporate taxes, increased rates for high-income earners, taxes on some unrealized capital gains, and no taxes on tips. Trump proposes no taxes on tips, Social Security income, and overtime pay, along with increasing the $10,000 exemption for state and local taxes, and implementing aggressive tariffs.

The most significant tax policy uncertainty is the scheduled sunset of the 2017 Tax Cut and Jobs Act at the end of 2025. This will likely compel Congress to enact some level of tax policy changes. With rising concerns about the fiscal deficit, investors may prepare for a higher tax environment.

With the sunset just months away, now is an excellent time to start planning. Being proactive now can help you feel more secure as we gain more clarity on future tax policies.

2. Gift Tax Exemptions: A Golden Opportunity for Advisors

A major concern for many high net worth clients is the potential reduction of current estate and gift tax exemptions, which could be cut by about half. Currently, the exemptions stand at $27.2 million for couples and $13.6 million for individuals. It’s uncertain whether these exemptions, along with reductions in overall income tax rates, will be extended or revert to pre-2017 levels.

However, the current environment offers historically generous gift opportunities. If you’re in a position to take advantage of this, it’s crucial to initiate a plan. As the Red Hot Chili Peppers famously said, “give it away, give it away, give it away now.”

If you have less capacity to make large gifts, it may be unwise to rush into irreversible decisions based solely on potential tax changes that might not occur. Decisions should be based on your individual capacity and needs—what you can afford and what makes sense.

We learned a valuable lesson in 2012 when there was a similar urgency to make large gifts before a potential estate tax sunset during the Obama administration. Congress took last-minute action, and the feared changes never materialized, leaving some regretting their decisions.

3. Increase Tax Efficiency with ETFs and SMAs

Given the recent strong performance of equities and concerns about potential tax changes that could negatively impact high net worth investors, it’s crucial to consider increasing the tax efficiency of your portfolio. The expanding fiscal deficit is likely to put upward pressure on taxes.

Two investment vehicles that can enhance tax efficiency are exchange-traded funds (ETFs) and separately managed accounts (SMAs).

ETFs: Both active and passive ETFs can be very tax efficient because they typically don’t have annual capital gains distributions. The structure of ETFs provides this tax efficiency, meaning an active ETF can be just as tax efficient as a passive one.

Given recent market performance, mutual funds often contain significant embedded gains. While wholesale reallocations from mutual funds to ETFs could trigger substantial capital gains, you can use capital gains distributions, dividends, and cash to reallocate into ETFs. This approach allows for a gradual transition of a portfolio through reinvestment. It’s important to note that mutual funds remain a preferred vehicle for tax-deferred and non-taxable accounts.

SMAs: Separately managed accounts can be tailored to individual investor needs and can effectively transition portfolios in a way that minimizes capital gains. SMAs can reduce the cost of portfolio transitions. For example, if you have a large position in a single stock, and it’s held within the new SMA strategy, that position doesn’t have to be sold, unlike if it were moved into an ETF.

4. It’s Time to Put Cash to Work

During election years, some investors prefer to hold cash on the sidelines, reducing market exposure until the results are clear and future policies are more defined.

However, market-timing is often more challenging than it seems. As an advisor, I emphasize that time in the market is more important than timing the market. Successfully timing the market requires two correct decisions: knowing when to exit and when to re-enter. For instance, investors who reduced their equity exposure at the beginning of 2024 due to election uncertainty missed out on the 21% rally in the S&P 500 Index this year (as of September 25).

Even after Election Day, tax policy may remain uncertain. Avoid trying to predict the future and don’t let policy uncertainty paralyze you. Instead, focus on what’s in front of you and what’s best for you in the current situation.

All expressions of opinion reflect the judgment of Jordan Niefeld, CPA, CFP® and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Asset allocation and diversification do not guarantee a profit nor protect against loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency. Investing in REITs can be subject to declines in the value of real estate. Economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. The companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

All information provided is for informational and educational purposes only and is not intended to provide investment, tax, accounting or legal advice. As with all matters of an investment, tax, or legal nature, you and your clients should consult with a qualified tax or legal professional regarding your or your client’s specific legal or tax situation, as applicable.

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