Enhancing Wealth in an Uncertain Tax Climate

Key Takeaways:

  • Careful, proactive tax planning can significantly enhance your wealth, paving the way to achieving your financial goals.
  • Many techniques that are technically feasible and legally sound are available to minimize your tax burden.
  • A taxation road map can help you step through the complex and ever-shifting tax code and legislative environment.
  • Most investors and even the best wealth managers are usually not specialists in taxation. For that reason, consider
    working—either directly or through a wealth manager—with a professional team that includes a tax specialist and a tax attorney.

As Benjamin Franklin so famously noted, the only things that are certain in this life are death and taxes. There’s not much any of us can do about overcoming death, of course. But taxes are a different story. There are plenty of ways to minimize your current, ongoing and future tax burdens in ways that are both technically feasible and legally sound.

Let’s take a quick step back and set the stage for effectively thinking about and planning how to minimize taxes. First, you must recognize that the correct handling of taxes can have a big impact on your long-term wealth. Investors often consider tax issues only after they have fully thought through other investment and wealth issues. That’s a big mistake. By legitimately minimizing your taxes through careful, proactive planning, you directly enhance your wealth and thereby further the achievement of all your other plans, goals, dreams and desires. The very nature of comprehensive wealth management demands that tax issues are given a prominent place through the entire wealth planning process.

As in the game of chess, one wrong tax move early on can lead to unwelcome or even disastrous results later on. Conversely, good tax planning can lead to huge tax savings both in the short term and in the long run. It therefore literally pays to take the time and make the effort to be sure that taxation issues are competently, effectively and proactively addressed.

Having a taxation road map can be enormously valuable. We will follow the one set out in the illustration below. It starts with “Today’s world,” which is dominated by an uncertain economic climate. Unfortunately, not only do we have an uncertain economic climate, but we have uncertain tax laws and the likelihood of substantial tax increases.

Taxation Road Map

Taxation Road Map

Tax laws are quite uncertain right now by reason of mounting pressure to increase taxes in the hope of relieving the problems of the national debt and continuing high budget deficits. It is important to note that everyone’s tax situation is different. Our intention here is to raise awareness of potential issues, and you should consult with your tax advisor for information specific to your unique situation. It is clear, however, that wealth owners with substantial assets and income could be the targets of ever-changing tax legislation.

Proactive planning requires ongoing attention to the legislative environment and a general understanding of the principles of taxation. Although the U.S. tax code is complicated and detailed and generally defies understanding by those not trained in its intricacies, it can generally be said that taxation follows either (1) the ownership of property (capital) or (2) the value of personal services rendered.

Importantly, however, even the smartest investors and the best wealth managers are usually not specialists in taxation. For that reason, you or any wealth manager you work with will want to bring together a professional team that includes a tax specialist and a tax attorney to help develop a comprehensive tax plan that is part of your overall wealth management plan.

This comprehensive plan may employ a variety of techniques—strategic and tactical proactive planning. It may also use a number of different entities, such as irrevocable trusts, corporations, family limited partnerships and family limited liability companies. Using the right techniques and deploying the right entities can make all the difference in terms of successfully enhancing your wealth for the long run.

It’s important, however, that neither you nor a wealth manager simply assume that a finished tax plan will not need regular monitoring and updating. Instead, your team should regularly review the tax plan to ensure that it is being correctly implemented and that better options are not available.