Professionals who advise high net worth clients are scrambling to protect them from the threatened impact of higher taxes and drastic cuts in federal spending — the infamous year-end fiscal cliff. Investment advisers, attorneys and accountants are urging clients to consider everything from selling appreciated stocks and businesses to giving away assets to take advantage of the federal tax cuts set to expire Dec. 31.

Indeed, unless investment opportunities become more plentiful, holding down tax liability may be one of the surest ways to preserve wealth in 2013.

To learn more about current challenges in wealth management, the Daily Business Review convened a panel of experts in finance, accounting, investment management and tax planning:

• Eli Butnaru, CEO of Mora Wealth Management.

• Adam E. Carlin, a director of wealth management, Morgan Stanley Smith Barney.

• Benjamin E. Hein, president and chief investment officer, PRS Investment Advisory.

• Seth Kaplan, partner and tax planning specialist, Berger Singerman.

• Joseph P. Nader, managing director and senior financial adviser,  Wescott Financial Advisory Group.

• Cathy Pareto, registered investment adviser and certified financial planner.

• Orlando Roche, regional president for Miami-Dade County, Sabadell Bank & Trust.

• Sheri F. Schultz, partner and director of business valuation services, Fiske & Co.


Sheri F. Schultz has braced her accounting firm’s employees for a heavy workload through the end of the year.

“I told my staff: No vacation this December,” she said. Why? A likely late-year rush by clients to capture the benefits of expiring federal tax cuts.

A pending expansion of estate tax liability, for example, has led more wealthy clients to ask Schultz how to minimize it. “Every day, I’m getting a call,” said Schultz.

It may be the start of a long surge in tax talks with clients. “There’s going to be major tax reform,” she predicted. “Major.”

Other professionals in accounting, banking, investment management and legal services also expect to work long hours for the rest of the year as wealthy clients act to blunt the impact of the scheduled Jan. 1 expiration of temporary tax cuts enacted under former president George W. Bush.

The maximum federal tax rate on long-term capital gains will rise Jan. 1 to 20 percent from the current 15 percent. The expiration of the Bush tax cuts at year-end also means that the federal tax on ordinary income will rise to a maximum of 39.6 percent from 35 percent.

Wealthy individuals this year can make a tax-free transfer as much as $5.12 million of assets to reduce the size of their estates and, thus, their families’ exposure to estate tax. But this option will expire, along with the rest of the Bush tax cuts, at year-end, when the maximum amount of a tax-free transfer will drop to $1 million.

The outcome of the presidential election and any Congressional action to address the federal debt could alter the direction of tax policy, Joseph P. Nader said.

So the Wescott Financial Advisory Group executive has advised clients to “be prepared to be proactive between now and the end of the year as these events unfold.”

Economic growth may expire along with the Bush tax cuts because history shows that after comparable tax hikes, “recession generally ensues,” Eli Butnaru said.

Benjamin E. Hein said the expiration of the so-called Bush tax cuts probably will signal a new era of higher federal taxes to address fiscal problems, regardless of who wins the presidential election on Tuesday.

“My general impression is that taxes are going to go up, one way or another,” Hein said. So he and his PRS Investment colleagues are advising clients to sell stocks, real estate, private businesses and other assets before the year’s end so they can include the capital gains in their 2012 income. “You might as well sell everything and repurchase it,” he said.

Banker Orlando Roche said he expects a busy November and December, too. He said to the extent the presidential election has encouraged procrastination among clients awaiting the political outcome, they will flock to him and other professionals for tax guidance between now and the end of the year.

“What I see from clients is a holding pattern. Everybody’s waiting,” Sabadell Bank’s Roche said. He said accelerated sales of stocks and other assets ahead of the Jan. 1 increase in the capital gains tax is the most common response among clients to the pending expiration of the Bush tax cuts. “The only place we are seeing some real urgency is capital gains.”

Selling stock now instead of 2013 is relatively easy compared to other late-year tactics to minimize taxes, such as transferring assets from personal ownership to a trust.

“I’m concerned that because people are in this holding pattern, there’s not going to be time to do a lot,” said Adam E. Carlin of Morgan Stanley.

For example, a husband with $10 million might want to shield all of it from estate tax by putting $5 million in a trust for his wife by the end of December. But “it’s probably already too late” try to complete this maneuver by year’s end, said Berger Singerman attorney Seth Kaplan.


Investors looking for better returns on their money may find them abroad more easily than in the United States. For example, select stocks in emerging markets have “nice valuations,” said Cathy Pareto.

 “If we’re looking at real estate, why not look at global real estate instead of U.S.? One-third of real estate holdings are in the United States. But what about the other two-thirds?” said Joseph P. Nader.

 Taxes on dividend income will rise as part of the Dec. 31 expiration of the Bush tax cuts. But Nader said many investors will go into dividend-paying stocks, anyway, because alternative investments that pay comparable cash yields are scarce: “Are people going to take their money out of something that’s paying 4 percent and put it in something that’s paying nothing and give up that yield?”

“From the investment point of view, we have been pretty conservative for the last year,” Eli Butnaru said. The U.S. economy is still sputtering, China’s growth rate has contracted,  and “Europe is in a very difficult situation … So, there aren’t many bright spots now.”

 Butnaru said his clients “are cautious, not just because of the taxes but also the general situation of the market. … The market has signaled at several points that things are not going properly.”

 Fixed-income investments are popular among many investors, but some appear riskier than stocks, real estate and other classes of assets. Adam E. Carlin cited corporate bonds with sub-investment grade credit ratings that yield a little over 6 percent as an example of high-risk, fixed-income investments. “We see an enormous amount of money that’s being put in certain areas of the market that I believe are dangerous,” said Carlin.

 “I’m less concerned about all the cash out there and more concerned about what people are doing with the cash,” he said, citing low interest rates around the world and their potential for inflating “bubbles” in asset values.

A general rise in interest rates would depress the price of bonds and other fixed-income securities. Yet they remain attractive to investors, said Benjamin E. Hein.  “Really consistently, money has been pulled out of equity funds,” he  said, “and we keep getting people adding money to bond funds. … I think they are going to be very unhappy a few years from now.”

 Investment scams are another source of unhappiness for the wealthy but unwary. In their zeal for higher yields, some investors inevitably consider offers to back suspicious enterprises.  “First of all, I would say, ‘Get an audited financial statement.’ If there’s no audit, that’s the first red flag,” Hein said.

  “You’ve got to educate the public and the customers that, when something like that comes up, you’ve got to ask questions,” Orlando Roche said.

Asset Sales

Entrepreneurs who enrich themselves by selling a profitable business or property also may ensnare themselves in unforeseen financial challenges and emotional tumult.

Some business owners are hurrying to sell their enterprises before the federal capital gains tax rises to 20 percent from 15 percent on Jan. 1.

“If you’ve been planning to sell a business, you really need to do it now before the end of the year, especially if you’re a high net worth individual,” accountant Sheri F. Schultz said.

But rushing into the disposal of a family business or rental property can be costly for sellers who are unprepared for post-closing pitfalls. For example, entrepreneurs can trigger profound disagreement within their families by selling a business that employed spouses, children and other relatives.

“I know a lot of situations where the family was torn apart,” Cathy Pareto said. “You have to weigh all that. Money is not the end-all, be-all. You have to consider the impact of those decisions on your family as a unit.”

Some former business owners face personal struggles with the transition “from something they understand. They’re selling tires. They’re selling purses. And then, all of a sudden, they wake up one morning and they’re not,” bank executive Orlando Roche said. “It’s hard for them to give it up. … There’s a personal attachment.”

Idled entrepreneurs also struggle to find conservative replacement investments that generate cash flows comparable to those of the businesses they sold. Many businesses and income-producing properties generate cash returns on equity capital that are too high to replicate easily with low-risk replacement assets, which tend to be low-yield as well, Joseph P. Nader said.

“If you own an interesting property that gives you a good amount of income and you sell it, then what are you going to do? Buy a Walgreens with a cap rate of 5 percent?” Nader said.

Securities that replicate an entrepreneur’s cash return on a business investment may be riskier than the business. “We can create a portfolio that can get him the return he’s been getting,” Benjamin E. Hein said. But the PRS Investment executive also said he routinely warns clients that certain types of securities portfolios are subject to volatile valuations.

For example, despite the mass appeal of fixed-income investments, “I would not invest my whole portfolio in high-yield bonds,” he said. “These are difficult discussions.”

“We aren’t advocating that clients take action based on taxes. … That should be a secondary consideration,” Eli Butnaru said.

Estate planning

Estate tax liability will spread to more families, starting next year, when a shelter from the tax will shrink by 80 percent, adding a greater sense of urgency to conversations about estate planning.

The maximum tax-free transfer of assets to reduce the size of an estate will fall to $1 million from $5.12 million at year-end, part of the pending Dec. 31 expiration of the Bush tax cuts. But the size of this shelter could change again in the months ahead.

“I don’t see it staying that way next year. Obama has talked about $3.5 million,” Fiske & Co.’s Sheri F. Schultz said.

“I still have no idea what they’re going to do with the estate tax,” tax attorney Seth Kaplan said.

Taking cover under the expiring $5.12 million shelter from estate tax is still possible this year. A wealthy individual could give that much cash to his children, tax free, by writing a check before the end of December. The transfer could take weeks, however, if it required the creation of a trust for the children and involved an appraisal of non-cash assets, such as real estate or a private business.

Wealthy couples can cut their heirs’ exposure to estate tax without transferring assets to them. “You don’t have to give it away in the traditional sense. You can have it out of your estate, but still have some access,” Kaplan said. “If you’re a married couple, there is a technique called non-reciprocal trusts, where each spouse creates a trust for the other one. That’s a way that assets can be retained by the senior generation.”

Couples also manage their families’ estate tax burden by putting such assets as securities and real estate under the ownership of a partnership or corporation, “then gifting a minority interest,” Schultz said. “You’re really not giving up control, and the person getting the interest can’t go ahead and take money out of it.”

Recipients can reduce the value of such gifts for tax purposes by applying a discount for lack of marketability, or a discount for lack of control over the assets, or both.

“Those discounts are substantial,” Schultz said, but one of them may go away. “One of the things Congress has been discussing over the years is getting rid of the discount for lack of control.”

She said that is one more reason wealthy individuals should consider making substantial gifts immediately, if possible, to reduce their families’ exposure to estate tax: “It’s a win-win situation for most investors who have the funds and the ability.”