Saturday, October 16, 2021

Should the Tax Tail Wag the Dog?



Ask The CFP® Practitioner

Darcie Guerin

“Every difficulty slurred over will be a ghost to disturb your repose later on.” ~ Frederic Chopin, Composer

Question: How much will the possibility of tax reform influence financial markets, and should I wait until this is completed before reviewing my estate planning documents?

Answer: There’s an old adage on Wall Street; “Don’t’ let the tax tail wag the investment dog.” With tax reform and infrastructure spending discussions underway, it may be tempting to let the “tail wag the dog” regarding investment decisions. An example of how short-lived market reactions can be in response to political events was the November 2016 election. Into the wee hours of the morning the market forecast was for dramatic sell-offs. Reality was that we closed up over one-percent the day following the election. More recently, the inability of the administration to pass healthcare reform on the first attempt, downward market sentiment was only a short-lived and a blip in the market’s progress since last November. Translation: Don’t let these issues hold you back from your planning. We all crave certainty, but waiting for it isn’t always the best course of action.

Financial markets managed to shake off the healthcare setback and shifted their attention to tax reform. If all goes well, the impact on equities will likely be minimal. But there’s another battle brewing because Republicans are so far apart concerning the border adjustment tax (BAT) and reductions of current tax deductions. Reaching across the aisle may be necessary to move the legislation through. Yet at this point it’s uncertain if the Democrats are willing to work with the President on anything. Eventually something will likely be accomplished, but while the back and forth process plays out, investor emotions will be tested. Translation: Increased volatility ahead.

Additionally, a government shutdown in late April is a possibility if the Freedom Caucus digs in on certain issues such as Planned Parenthood. The shutdown would only be a short term economic hit to growth and shouldn’t derail current positive sentiment.

In the next few weeks as Q1 earnings are reported, reality will have a brush with politics and influence markets. According to FactSet, an exceptional quarter of 9.1% growth is expected. While this is down from the 12% expected on 12/31/16, the revisions are smaller than in recent years (FactSet). Lower revisions are an issue if they continue. Translation: Corporate earnings matter because they lead to growth and income. The political process will remain a challenge increasing the likelihood of a consolidation period in markets.

Waiting to create or revise your estate plan for any reason isn’t usually advised. No one knows for sure when or if President Trump’s promised “massive tax cuts for the middle class” will occur. Sitting in limbo can be a dangerous place to be. Economic and political issues should have relatively little bearing on how and when you plan for the future.

Here are nine important reasons to take action:

  1. Estate equalization – A thoughtful, up-to-date estate plan can help preserve family harmony – in the case of remarriage, for example. And that harmony should supersede the tax considerations.
  2. Business succession – The smooth, efficient transfer of a business among existing business partners or heirs knows no political season.
  3. Retirement distribution planning
    Retirement is coming, and you’ll need to consider how, when and from where to take funds you’ll need.
  4.  Creditor protection – Assets need protection from creditors, which include future divorced spouses, business ventures and standard personal creditors. Plan before trouble is even on the horizon.
  5.  Change in insurability – Simply because you’re insurable and in great health today doesn’t mean you’ll stay that way. Lock in good offers while they’re still available.
  6. Beneficiary control – The thoughtful use of trusts can protect an inheritance for heirs who might not otherwise manage it wisely.
  7. Special needs – Individuals with special needs require special planning, which can include creating trusts that make the trust’s assets available when the special needs individual needs them without jeopardizing that individual’s ability to receive support from other sources.
  8. Legacy planning – Create a legacy trust that will continue for generations.
  9. Charitable planning – With no formal plan from the White House regarding the elimination of the estate tax deduction for contributions made to private foundations at death, we have no guidance as to whether or not this change will become law. So it makes sense to fund that charitable gift now just in case.

My dog Rickie is easily preoccupied by individual trees and can lose sight of the forest. With potential tax changes on the horizon, it is important to discuss estate planning strategies with your team of trusted financial professionals using your CERTIFIED FINANCIAL PLANNER™ as your quarterback. Your team can help you understand the current landscape and develop comprehensive financial and estate plans to reflect your overall goals and objectives. Stay focused and plan accordingly. Don’t lose sight of the big picture.

This information is general in nature and is not a recommendation of any particular strategy. The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Always consult with financial, legal, estate and tax planning professionals before taking any action regarding this planning. 

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”  

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Drive, Suite 401, Marco Island, Florida 34145. She may be reached at 239-389-1041, email Website: 

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