Investors flock to financial planners ahead of fiscal cliff


The United States appears to be heading toward a so-called “fiscal cliff” at year-end, a conglomeration of new taxes and tax break expirations that would result in one of the largest tax increases in American history.

If Congress does not act to extend the marginal, investment and estate tax cuts implemented in 2001 and 2003, tax extenders and alternative minimum tax patches that make up the bulk of the “cliff,” taxpayers will be hit with a significant increase in taxes, said Eido Walny, attorney and owner of Walny Legal Group LLC in Fox Point.

Congress is in a deadlock on how to deal with the fiscal cliff. While inaction would help curtail federal debt, the tax increases could be devastating to the fragile economy, according to the Congressional Budget Office.

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“We’re at a point now where I think the general thought is that the chances of compromise are diminishing with every day that goes by,” Walny said. “No one wants to give the other side even a small victory.”

Capital gains taxes, estate and gift tax provisions and a number of other breaks will expire at the same time that scheduled tax increases go into effect, if Congress does not reach an agreement. The expired cuts and new taxes are expected to add up to $5.75 trillion by 2022, Walny said.

“There are dozens of different tax consequences that literally lead to trillions of dollars of additional taxes on Americans,” he said.

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Walny and other financial advisors have seen a bump in business as worried clients, particularly high net worth individuals, try to take advantage of existing tax breaks before they expire.

“They wanted to see if Congress would change the legislation, they wanted to see what their own financial situations would look like,” he said. “People are seeing the window of opportunity quickly closing.”

He expects the rush to pick up even more in the fourth quarter, since there is a significant opportunity to do some long-term management using existing gift and estate taxes.

At the moment, a married couple can gift up to $10.24 million exempt of taxes, with a 35 percent tax thereafter. In 2013, that exemption will be about $2 million, with a 55 percent tax thereafter.

Walny is in the process of hiring two additional attorneys, partially because of the increased workload.

The unknown variables in 2013 mean businesses are re-evaluating their financial plans, said David Dorley, individual and multi-life disability specialist at Guardian Great Lakes Agency in Pewaukee.

“There is quite a bit of uncertainty right now with the tax and regulatory environment. This has forced many of my clients, mostly business and practice owners, to really focus on the planning they have done with their CPAs and attorneys to make appropriate adjustments,” he said. “Being proactive is the key here.”

Dorley started seeing substantially more business related to the fiscal cliff in the second quarter, as clients and potential clients look to protect their assets.

“Typically, I focus on ensuring that proper protection is in place from an insurance standpoint,” Dorley said. “But overall risk management encompasses estate planning and tax planning, where I am involving my client’s attorney or CPA or referring them to one, to ensure proper planning is completed.”

Mike Bark, CPA and principal at Edge Advisors LLC in Wauwatosa, advises businesses on valuations, tax allocations and business transactions. He has also seen an influx of client questions regarding the fiscal cliff and implications on tax rates, especially for capital gains and estate taxes. Business is up about 35 percent over last year.

“Right now, what I’m telling every client is if you’re on the borderline of doing something, whether it’s selling a business or taking some income this year versus next year, do it now. We know what we have right now,” Bark said. “If somebody’s on the fence on doing something tax-wise, it’s giving them that extra motivation to get it done this year.”

There’s always an increase in business toward the end of the year, but this year is especially busy, he said.

Clients are wondering what they can expect based on the outcome of the presidential race. A 5 percent increase in the capital gains tax, to 20 percent, has motivated some to complete transactions. Bark encourages those completing estate planning to set up joint revocable trusts rather than going through a probate.

“People are more interested in tax planning than they were in years past,” Bark said. “There are a lot of planning things that people are worried about, and it’s probably motivated people who are selling their businesses to speed things up a little bit.”

Edge usually sees a 10 to 15 percent increase in business when people are worried about tax changes.

“Anytime there’s change in the law, whether it’s good or bad…we generally get a little bit of a bump from it,” Bark said. “Anytime you get a change or a contemplated change it helps our business.”

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