But investors appear to be keeping
their cool.
by Michael Finley
Exclusive to Financial Planning News
Copyright © 1993 by Michael Finley. All rights reserved.
People who could have accelerated income into 1992 either did it or didn't do it, Gurtz said. One remaining shelter Gurtz still uses is historical, rehab and low income housing tax credits. "You can have up to $7,000-$8,000 in tax credits there, depending on your bracket. It's not a new idea, but it still works for some people."
Along similar lines, there has been a flurry of news about low-income housing partnerships, Gurtz said. "The law has expired but it might be extended. You could save money on taxes if you're willing to lock money up for the next 15 to 20 years. They yield about 8%, and all you get is the credits. They're not for everyone, and they are risky, and there is lots of paperwork, but 8% after taxes is an attractive yield."
David Lampe, president of Houston Asset Management, is stressing the positives of variable annuities and life products. "Variable life products provide tax-free cash flow in the future, with no penalties for withdrawing the basis. Loans you make are not considered distributions, and are tax-free. Life products are a bit more flexible than annuities because of the FILO rule on annuity withdrawals."
Lampe wishes there were more options. "We'd like to see changes in capital gains taxes, and an expansion of investment tax credits. Here in Texas a change in real estate depreciation allowances would go a long way toward spurring new development."
Martin Jaffe, of the New York investment advisory firm Wood, Struthers & Winthrop, and vice president of the board of IAFP, firmly hopes no new tax products emerge soon.
"Wall Street isn't gearing up to sell any new conversion deals, like the real estate packages of the 1980s. The tax strategy we are recommending is good old, tried-and-true, buy-and-hold. As long as you don't sell, you incur no capital gains tax. If you buy the right stock, you may never have to sell.
"If you quote me on one thing," Jaffe said, "say that our recommendation here is to continue to invest where the economics are best, on an after-tax basis."
The tax picture coming out of Washington is as unclear as ever, but planners say clients are not panicking. Rather, they are "concerned," "resigned," "alert," or "waiting for the other shoe to drop." The prospect of higher taxes has been for many months, so high-income individuals have had time to let the idea sink in, and frame their responses.
No planner has a black box solution that makes client tax worries disappear. It's a tough climate, and attractive avenues are scarce. At the same time, no one is hoping for a rash of new tax products to hit the street and drag the industry back to the go-go environment of a decade ago.
"Basically, there's not a lot you can do," said Dennis Gurtz, planner and president of Dennis M. Gurtz & Associates, of Washington, DC. "Our clients aren't demanding shelter solutions. They know they will be paying more tax, but they don't know how much exactly. With the 'millionaire surtax' of income over $250,000, some people will be at about the 40% bracket for federal tax. They are resigned to it, but they see the increases as more annoying than devastating. "
At the Washington firm of Armstrong, Welch & MacIntyre, planners downplay the tax considerations. "The primary goal is to grow your wealth, not avoid taxes," says Margaret Welch. "Taxes are way down on the list.
"Most people in the highest tax brackets earn their incomes. We suggest that clients negotiate their compensation packages to take advantage of every possible pre-tax way to shelter their money. People can negotiate other kinds of nonqualified deferred compensation."
The cost factors of evaluating life insurance products and annuities should be re-evaluated now, Welch said. "In the past we compared the advantage of tax-deferred compounding against the 31% or 34% tax bracket. With a combined tax bracket of almost 40%, the relative costs of using a sheltered product go down a bit.
"But you must look at the actual numbers -- don't assume that tax deferral is the best way to go. Also, deferring taxes until tomorrow won't pay off if tax rates rise even further."
John Bowen, president of Reinhardt, Werba & Bowen, in San Jose, agrees that clients must keep their focus on economics, not just taxes. "We're encouraging clients to think more along long-term lines."
Municipal bonds are the big investment story right now, for instance, but the tax advantages will pale when bond prices fall, which is inevitable, Bowen said. "With bond maturities averaging 22 years, the risk there is equal to the equity markets."
Bowen's firm is suggesting clients pursue a strategy of passive investment in equities. "Index funds are an excellent way to enjoy market gains with only a fraction of the turnover of other stock funds," he said. "Index funds turn over about 16% annually, compared to an average of 90% for other funds. So an index fund defers 84% of capital gains taxes."
The consensus seems to be that customers have it about right -- wait and see what Congress decides, don't panic, and don't run screaming to the inevitable and suspicious tax shelter products that will doubtless appear.
"People won't fall for that again," says Martin Jaffe. "Too many of us remember what that was like." E