‘Planning fatigue’ from Biden tax plan sets advisors and clients on risky edge

Financial advisors can get worn down by demanding clients, especially those who harbor unreasonable expectations about market returns or spend too much in retirement. But the mental frustration runs both ways, and when it involves taxes, things can get dangerous.

Wealthy investors are increasingly exhausted from thinking about the Biden administration’s latest proposal for tax increases. The situation is prompting some clients who are tired of gaming out the potential impact on their retirement portfolios to roll their eyes at their advisors and potentially risk running afoul of the IRS.

“Planning fatigue is a major issue,” said Martin Shenkman, an estate planning lawyer and certified public accountant who’s based in Fort Lee, New Jersey. “Clients are sick of all this because we did so much planning in 2020 and 2021, and now we have another proposal.” He added that “it’s your duty to tell clients, ‘hey, you got all this bad stuff out there.’ And they’re tired of it.”

President Joe Biden’s 2023 budget, unveiled on March 28, proposes $2.5 trillion in tax increases on the wealthy and corporations over a decade. The plan would place a new tax on wealth and capital gains that exist only on paper and raise the top ordinary tax rate to 39.6% from 37%. It also calls for ending a long-standing loophole known as step-up in basis, in which people who inherit assets don’t owe tax on the gains that build up since the original owner acquired them.

The 20% “Billionaire Minimum Income Tax” on people worth at least $100 million — even if the profits are only on paper — was immediately in jeopardy when Sen. Joe Manchin, a West Virginia Democrat, signaled he would oppose such a measure. But other increases are still in play.

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After talking with advisors for more than two years about legislative tax hike proposals, all following the 2017 tax code overhaul that cut rates sharply, some clients don’t want to hear much, if anything, about the latest round. Advisors say that’s a risky mental state to be in, given that making proper moves now with trusts or gifting to heirs or charities can potentially save a bundle.

Ric Edelman, who a year ago stepped away from his $291 billion namesake firm, Edelman Financial Engines, said that “It’s annoying to see proposals that were floated in the past being floated again.” The budget’s increases “make it difficult to provide clients with effective advice when there is ongoing uncertainty as to what changes there may be.”

That is why Edelman likes to give all tax legislation his own cheeky subtitle: ‘The Financial Advisor Security Act.’

Exhausted
So-called planning fatigue is the state of growing tired of gaming out how to plan one’s wealth. Its cousin, decision fatigue, is the state of feeling overwhelmed and paralyzed by choices and decisions (a spousal lifetime access trust or a grantor-retained annuity trust? It can seem like the sprouted whole wheat flour vs. sprouted organic oat flour puzzle that torpefies consumers at Whole Foods). Both states tap into the cognitive and emotional biases, or behavioral psychology, that can lead investors to make unwise financial decisions.

The exhaustion is more common with wealthy clients.

“Honestly, folks here in the Midwest are not talking about tax policies,” said Nadine Burns, the president and CEO of A New Path Financial in Ann Arbor, Michigan. “I am the only one bringing them up.” She added that conversations with her “mid-affluent” clients focus on student loan payments, saving for retirement and home buying.

Humans (along with ants) dislike uncertainty, already heightened by the COVID-19 pandemic, inflation and Russia’s invasion of Ukraine. So even though many advisors say most increases in Biden’s proposal are unlikely to happen, they have to keep clients in the loop, even if they’re burned out on tax talk.

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Beth Shapiro Kaufman, a tax lawyer at law firm Caplin & Drysdale in Washington, D.C., who assists wealthy individuals with their estate planning, said that she preps her clients for uncertainty regardless of where tax policy stands. Her standard engagement letters always note that the gift and estate tax exemption is set to revert to lower levels in 2026 — or could go down sooner, or not at all. “Advisors have to let clients know what’s at risk,” Kaufman said.

Distracted
Ashley Folkes, a senior financial advisor and director of growth strategies at Bridgeworth Wealth Management in Birmingham, Alabama, sees the uncertainty that the new budget resurrects as coming at a fraught time.

“There are a lot of distractions with inflation and the war that have people’s minds occupied,” he said. “Things that were prioritized can lose their importance during difficult times.” The upshot, Folkes said, is that financial planners “need to be proactive and persistent at times because it is in our client’s best interest”— even if it annoys them.

Some estate planners and advisors went into overdrive last year amidst now-dead proposals to slam the door on backdoor Roth conversions, a favorite strategy for generating retirement wealth for clients. While that hatchet isn’t included in Biden’s budget, other changes, including a higher ordinary rate and an end to the basis step-up, are. Advisors have to deal with them, even if they think things will go nowhere as the White House battles inflation before midterm elections this fall that could flip the makeup of Congress, where Democrats have a razor-thin majority.

“I truly believe that clients have a bit of fatigue” and “frustrations with the changes in political winds that feel more like a swinging pendulum each cycle,” said Scott Bishop, a certified public accountant and financial planner who’s the executive director of wealth solutions at Avidian Wealth Solutions, an independent financial advisory firm in Houston.

Shenkman said fatigued eyerolls at advisors are dangerous because they “go against” recent IRS advice that focuses on taxpayers “dotting the i’s and crossing the t’s.” Not listening to an advisor’s tax suggestions or ideas for structuring trusts to pass on wealth could lead to less income for heirs or a fight with the tax agency.

“There’s something technical going on that clients don’t get,” Shenkman said. “The biggest issue right now,” he added, is that “clients don’t realize the IRS wants to focus on proper administration.”