In Obama's State of the Union, advisers see a 'provocative' call to tax wealthy

Changes being called for would affect capital gains, trusts

Jan 20, 2015 @ 12:11 pm

By Trevor Hunnicutt

When President Barack Obama delivers his State of the Union address Tuesday night, he will make proposals that could change the basic assumptions advisers rely on with wealthy clients, according to financial advisers.

“Raising the top capital gains tax rate is going to be very unpopular with the investor class, and they just digested one [increase] very, very recently,” said Bruce Cacho-Negrete, a financial planner with Raymond James & Associates Inc.

Among the proposals, Mr. Obama will advocate assessing new taxes on capital gains on assets held at death. Currently, due to what's known as a “step up in basis” that allows heirs to pay taxes only on gains accrued after an asset is passed on at death, inheritors can sell property that appreciated significantly with muted tax liabilities.

The change in policy would apply to bequests and gifts, except those to charitable organizations.

The top long-term capital gains and dividend rate would climb to 28%, the highest level since the 1990s.

The Obama administration said the changes would be limited to those in the very top income ranges, remove unfairness in the tax code and stimulate reinvestment of assets into more productive ventures.

The proposals, detailed by the White House for the first time Saturday, were met with criticism by senior Republicans.

That opposition appears to make the proposals unlikely to pass. The GOP won control of both houses of Congress in a midterm election victory that is expected to dampen the president's entire policy agenda, which focuses on the middle class, as his presidency enters its seventh year.

But should the proposals become policy, the assumptions relied upon by wealth advisers would have to change, according to Susan R. Colpitts, a tax, trust and estate specialist and founder of Signature, an advisory firm.

“It is a provocative proposal,” said Ms. Colpitts. “It causes the estate planners to have to rethink the conventional wisdom.”

Among the issues at hand, wealthy inheritors would need to plan for the liquidity they would need to pay an estate tax bill. That could increase the amount of assets they would need to sell when the owner of an asset dies, or increase the level of insurance they would need to acquire to supply liquidity at the time of death. Many of those clients are passing on businesses or property that are fairly illiquid.

But she said wealthy clients could sleep well knowing that the proposals are unlikely to pass. If called by clients, “I would say that you should be glad that we have a Republican Congress right now,” Ms. Colpitts said. “We don't really worry about tax legislation until it's at the joint committee,” she said, referring to a congressional committee that has power to shape the legislation at a late stage.

Another proposal, to levy a new fee on the debt taken on by financial institutions, drew scorn from the brokerage industry. Mr. Obama is proposing financial firms with assets over $50 billion pay a new fee of 0.07% on liabilities.

Over the weekend, the Securities Industry and Financial Markets Association released a statement from its president and chief executive officer, Kenneth E. Bentsen Jr., who called the proposal a tax that “will curtail economic growth and job creation.”

The White House did not respond to a request for comment.

The Obama administration's broader economic agenda also includes expanding some tax credits for lower-income earners whom it defines as the middle class, including expanding some child-care tax benefits and enhancing incentives for college education.

Mr. Cacho-Negrete said those proposals were likely to earn more bipartisan support.

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