Tax Management and Estate Planning

Tony Svach: Welcome, everyone, to the Allspring webinar on the Big Beautiful Bill and Bonds, where we're going to talk today about the One Big Beautiful Bill Act. Today I'm joined by Holly Swan, Head of Wealth Solutions. She's been talking about tax aware investing for 14 years with clients at Eaton Vance and Bank of America, now with Allspring. And she has a lot of experience in just the practical implementation in addressing the needs of clients when it comes to tax-aware investing. We're also joined by George Bory, who's our Chief Investment Strategist. George has 30 years in fixed income markets. And he shapes our investment strategy working with portfolio managers across the firm to align the portfolios with market opportunities we've seen.

So, a lot of exciting things going on. While we were all sitting there buying hamburgers and hot dogs for our barbecues, and getting everyone together in the family, Congress was hard at work, and they passed the One Big Beautiful Bill Act. And so today, Holly, I'll go to you and just say, what does this mean for us as investors? There's a lot of conversation around what it does for taxes, but also what does it do for the country's debt. And so a lot of different ways to look at this. So, I'll start off with you to talk a little bit about that.

Holly Swan: Sure. So, first and foremost, the primary goal of OBBB was to extend some of the most important provisions of the TCJA, that's the Tax Cuts and Jobs Act of 2017, which we also refer to as the Trump Tax Cuts. So, it did that, but with some changes. So first, the TCJA doubled the standard deduction that we had in place prior to it. And so post TCJA, we saw a lot more people, taxpayers, using the standard deduction. Under OBBB, that standard deduction actually went up even more. So, it increased by another $750 for individuals, and $1,500 for married taxpayers filing jointly.

One of the things that was unfortunate for people using the standard deduction under TCJA was many of them were unable to deduct their charitable deductions. Under the new law, you can, in addition to the standard deduction for single filers, deduct up to a thousand dollars of charitable giving, or for married filers filing jointly deduct up to $2,000. So that's a nice perk there.

Some other changes that we should be aware of in the high net worth, ultra-high net worth space, itemized deductions were capped at 35 cents on the dollar. This is important for taxpayers who are in the 37% bracket. So think married filing jointly with income in excess of $750,000. So, their itemized deductions aren't going to fully offset in that 37% bracket. They're only going to offset to 35%. So it's not huge, but 2 cents on the dollar they're going to lose there.

The AMT exemption phase out, which which went up dramatically under the TCJA, which caused far fewer people to be subject to the AMT, that has been rolled back to 2018 levels. So not nearly as low as the levels we saw before TCJA, but still, some people who haven't been subject to AMT for years could be subject to AMT again. I think it's down to a million dollars for married filing jointly.

The SALT cap, which got so much press leading up to the signing of the new bill. So, the SALT cap, prior to TCJA, no SALT cap, TCJA capped salt at $10,000. That's the state and local tax deduction. Under the new law, the SALT cap goes up to $40,000, but it starts to phase out at $500,000. Now, the phase out language is pretty generous, so it's going to phase out slowly, but still, I think a lot of people would argue, because this is an issue that impacts people in a lot of high cost of living blue states, it's not quite the level of help that they were hoping for, especially given that on the campaign trail what Trump was talking about was repealing the SALT limitation.

One other thing that I think is huge for high net worth taxpayers, and actually, really beneficial probably for the economy, is the expansion of the qualified small business stock capital gain exclusion under 1202, which is my favorite code section, which I could talk about for an hour, and I promise not to. But historically, 1202 has allowed us to exclude $10 million, $10 million, the greater of 10 million, or 10 X basis on the sale of qualified small business stock.

The new version of 1202 given to us by the Senate allows us to exclude up to $15 million of capital gain on the sale of qualified small business stock. So I think this is a real incentive for high net worth, ultra-high net worth individuals to invest in qualified small businesses. So I think that's a great one that we should all be talking about more.

And then there are all of the changes that are based on a lot of Trump campaign promises that are meant to benefit the middle class, which probably will impact advisors' clients a little less, but could be really relevant to children of clients. And so that's the exclusion of overtime pay up to $12,500, the exclusion of tipped income up to 25,000. Both of those start to phase out at $150,000. There is the deduction of $6,000 for seniors. That is an above the line deduction. So you get it regardless of whether or not you itemize, there's the $10,000 deduction for domestically produced auto. So these things are all subject to income limitations, which means that a high net worth, ultra-high net worth family is less likely to benefit, but things that they should still be aware of in case their children qualify for them.

Tony Svach: Right. Well, thanks, Holly. So George, we will catch up with Holly on the 1202 later on and get a little bit deeper into that, because I know that she wants to talk more about it. But that being said, you have continuation of some policies, you have some new policies coming out. How does this affect then the investors and then ultimately the markets when it comes to these changes?

George Bory: Yeah, well, as Holly mentioned, I think the easiest way to describe the bill from a market's perspective is it's fairly growth positive. As Holly mentioned, the objective is to put more money back into the pockets of many people with a big emphasis on the middle class. It's intended to promote capital formation and manufacturing capacity here in the U.S., and it's really intended to incentivize work. And those sorts of factors are generally growth positive.

And so when we look across the market and we think about it from an economic perspective, we think that this is a fairly constructive bill. And Street are estimating that growth next year could be higher than otherwise by anywhere from one half to 1%, which is why you're starting to see the flow through in markets. When you look at the stock market, we're pretty close to all time highs right now, with a fair degree of momentum to the upside. The bond market's been pretty well-behaved for the most part. The 10-year yield is just below 4.5%, but it's been fairly well anchored in and around the 4.5% level.

And even the dollar, which really came off the boil really since the beginning of the year with the announcement of some of the tariffs, has shown some stabilization as well. So, from a market's perspective, it seems the market's actually fairly optimistic about the construct of the bill. When we look a little bit deeper, within the bill, there are some winners and then there are some losers. Some of the bigger incentives with respect to businesses has to do with depreciation, it has to do with interest expense write-off. And importantly, manufacturing tax credit. So, we're seeing a meaningful sector rotation within the corporate credit market in the bond market. You're seeing it in the equity markets as well, as you start to see a rebalancing. So, manufacturing does pretty well. Tech generally does pretty well. Energy, broadly speaking, particularly as it relates to hydrocarbons, does very well. And then parts of healthcare do well. And you're starting to see both stocks and credits react to that.

So, when we look at it from an investment perspective, we're fairly constructive on what's been proposed, what's been approved, and we think that investors should take it and run. You should assume that growth does better. The offset is it unfolds as we get into next year. So, maybe you're not going to get a big pop from an economic perspective this year, but the markets are always forward-looking, and that's really what's priced into markets today, and we've been adjusting our portfolios accordingly.

Tony Svach: So, I would say George, in the time we've worked together, on a George-positive stand, that's like a nine out 10 as far as a positive outlook, so with that being said, there are some other folks who have concerns they've expressed around this. What are some potential pitfalls that you might see stemming from this legislation?

George Bory: Well, Tony, I'm a bond investor, so I worry about inflation. And that certainly is a consideration. A big part of the bill is that debt-financed, that the federal government will be borrowing a considerable amount of money in the coming years, and that deficit spending in the order of 6, 7, 7.5% for the next several years, and perhaps not technically into perpetuity, but for a long period of time, it's a very real issue. The market's looking through that right now, the market doesn't seem to be too panicked about it, but what we've seen, if we look at either the term premium or so the difference between short-term bond yields, and long-term bond yields, the curve is steepening the long end of the yield curve, where some of those longer term inflation and then supply concerns kind of manifest themselves, are not really participating in this rally that we're seeing in other parts of the market.

So, from a bond investor's perspective, I worry about, is this inflationary or not? We think it will contribute to this period of above-target inflation from the Fed's perspective. So well above 2%, closer to 3% than two, and we likely stay there for the next several years. So that's something we need to consider as we think about Fed policy and positioning along the curve as we try and ride the curve as we like to say.

And then from a technical perspective, if the government needs to borrow an extra three to $5 trillion on top of an already $35 trillion debt load, that does come at a cost. Interest expense is the largest portion, is the third-largest portion of our spending. And that does pull a lot of resources to it as we move through time. So, while the resource distribution is business friendly, the big assumption is that growth will help and will buffer and offset the cost of the debt. But any downside or sort of slippage in terms of economic activity, as we all know, the debt remains and that cost is going to go up, not down, in the coming years.
So there's a lot of technical pressures that we worry about, as you point out. I don't get too excited about a lot of things, certainly from a positive perspective, but the growth story that we think actually looks pretty good. What we're worried about is inflation and the supply side as it relates to treasuries and the funding of that growth story.

Tony Svach: Got it. Thank you. Holly, turning back to you, so whenever my family broadly brings up economic topics to me at dinner or at the barbecue just saying, "Hey, I saw this passed," and they start rattling off five or six facts about the bill, there's a lot of different information sources out there, a lot of different ways people are talking about this. My kids are getting hit on Instagram and things with people's opinions on it. What are, from your perspective, some of the main misconceptions about this bill that folks should be aware of?

Holly Swan: The main misconception is that this is the largest tax cut in history. This is a large tax cut in comparison to what would have happened if TCJA had been allowed to sunset. But neither party was in favor of letting TCJA fully sunset. And from a taxpayer perspective, no one is going to be comparing their tax bill next year to what a tax bill would've looked like if the TCJA had sunset. They're going to be comparing their tax bill next year to this year's tax bill. And they're not necessarily going to see their taxes go down dramatically, particularly in the high net worth, ultra-high net worth space. So I think that a lot of the messaging they have received has given them false hope, particularly for those people who are in the 37% bracket who are going to lose the ability to fully offset in that bracket, for those people who are going to be subject to AMT who hadn't been because of the rollback of the phase out. For those people who were under the misperception that they were going to get back all of their SALT deduction.

So, I think advisors really need to re-level set with people, that this is really an extension with changes, or that that's what it's going to feel like to them, as opposed to the messaging that they've been getting, which is in comparison to a sunset.

Tony Svach: No, it makes sense. And good for advisors to have those conversations today with their clients versus a surprise next spring, and their taxes they put together. George, from your perspective, from an investor standpoint, you talk a little bit about the conversation we've been having with clients about riding the curve and diversifying your duration risk. Anything that you see from this bill that folks might be missing, or they need to think about from an investment standpoint going forward?/p>

George Bory: Yeah, I think that from an investment perspective, especially even for clients, if you own a company and you need to sort of commit capital, the business tax provisions within the bill are fairly favorable. And that's really where we get excited or enthusiastic about some of the changes. And it really has to do with the capital equipment purchases in R&D can be written off pretty quickly and in totality. So there's an incentive for companies to invest in equipment. There's a more generous corporate tax deduction that goes along with interest costs that encourages companies to finance things that they're going to purchase and they're going to buy. And then you can fully expense building factories, which is a big part of the Trump administration's agenda with respect to boosting the productive capacity of the U.S.

So we might be looking at a little mini factory boom over the next couple of years, and many advisors, their clients are the people that are driving those decisions. When we think about it from an investment perspective, we want to lend as bond investors to productive capital. So when we see businesses being built, when we see equipment being bought, when we see investments in technology, and research, and development that drives growth into the future, we want to be part of that. And so we're seeing that emerge, and it's one of the reasons why you see credit spreads in the corporate bond market as tight as they are, very close to all-time tights, and likely to remain fairly tight going forward.
So, what we tell clients is like, "Maximize your income, be willing to take some credit risk in your portfolio." We've been saying that for a while. We're going to reiterate that message over the course of this year and into next. And while credit spreads may feel tight, we're in an environment where the credit backdrop is actually fairly constructive, and this bill actually boosts that story rather than hinders.

And so if you can go down in quality, gain that extra yield at the front end of the yield curve, you should be willing to do that, because the economic construct that's around us is fairly attractive for those types of strategies. And we're seeing more and more clients do it. We're doing it in our multi-sector strategies, we're telling clients to do it in their portfolios, and we think this is a good durable strategy to boost income, to preserve your capital and yield your investments, and yield on your investments going forward, and then to sort of compound at a nice healthy rate, not just this year, but over the next couple of years as well.

Tony Svach: So Holly, in looking at this bill passing, some of these things have been made permanent, you've got some tax cuts for folks, tax benefits for others, markets seem to be doing pretty well here. Has tax-efficient investing in tax savings lost its luster? Are you going to have fewer people showing up to calls like these and others? What are your thoughts?

Holly Swan: I hope not. So, here's the thing. Yes, the provisions of TCJA that were extended were extended permanently. But there is nothing permanent about the tax code. The tax code is either temporarily permanent, or permanently temporary. It can be changed at any time at the whim of Congress. Now, it's obviously easier to do if the same party controls both houses and the executive branch, but if you look at this in the context of the overall national debt, and the CBO ballparks that this new bill is going to add 3.3 trillion onto our already very large national debt. And if you look at that dynamically with the cost of the interest attributed to that, I think it's closer to $3.8 trillion, is it very possible that a different Congress could choose to raise taxes to help to lower that debt?

I think that it is. And so I don't view anything. The word permanent is great. If it gives people comfort in their hearts, then I love that, but I never view anything about any tax code as permanent, and I think that clients and advisors should be viewing these favorable rates as a temporary opportunity to plan.

Tony Svach: So, if I'm listening to you correctly, then the feeling the taxpayer, or most taxpayers, let's say, in more of the high-net-worth space, their experience from a tax standpoint going forward from this legislation will be very similar to prior to. Is that a fair statement?

Holly Swan: Yes, I think without the eminent sense of doom about the sun setting of the unified credit.

Tony Svach: Yeah.

Holly Swan: But yeah, I think this should be viewed as a temporary reprieve

Tony Svach: Yeah. And just thinking from a long-term investor standpoint, the themes that were important to clients, systematic tax loss harvesting, maximizing their after-tax investments, so thinking about the wrappers investing, be that ETFs versus funds participating in municipal bond opportunities, those all still make sense for clients given the tax code we have from today going forward.

Holly Swan: All still makes sense. And especially if you view them within the greater context of whatever it is that's happening with tariffs, which are a form of tax, right? We've got our income tax, which we know is stable for the next four years. We don't know what's happening with other taxes. What are we going to be paying for goods, if because of doge cuts, or because of the end of Covid stimulus are state and local taxes going to be going up. I think those are all unknowns that actually make planning even more important, and could make planning with munis even more compelling. I think that's TBD.

Tony Svach: No, agreed. So George, I wanted to take advantage of the fact that over the last couple of days we did our prep calls, you actually did some of those calls from client offices around the northeast. In those conversations in the last week, post the passage of this, what is top of mind for advisors? What have you been talking about with them in those meetings?

George Bory: Just picking up from what Holly mentioned. I mean, I think the most important thing is you have to be nimble. And we're talking about the tax bill, but that's in isolation. When we sort of took about the other changes that are happening within the market, whether it's tariffs, whether it's immigration, whether it's regulatory changes, as well as geopolitical changes around the world, we live in a very uncertain kind of environment.

So, our central message has been, keep it simple, be nimble. Number one and two. Within your portfolio, especially with bonds, maximize your income. Income is your friend in this environment. The more income you have, the more financial flexibility you have in your portfolio. The easiest thing to do in today's market is people are harboring lots of money in cash still as a safety trade, waiting for that magic moment in time where you get an all clear. Well, the sad news is that's never coming. You never have the all clear. There's just different degrees of uncertainty.

And we'll look at the economic factors, what's driving the market today, if rates do come down a little bit, being in that cash position, you're giving up a lot of performance. Just look at year to date returns in bonds and stocks, they're beating cash. And even stocks which have had a rough start to the year, but then rally pretty nicely, are now meaningfully outperforming cash. So just optimizing that liquidity position has been one of the biggest discussion points with clients, because we are still all cashed up, generally speaking, going out into say an ultra short or a short duration portfolio where your yields are 50, 60, 70 basis points or even more, higher than a cash portfolio, locking that in for the next one to two years, and then being able to make a more purposeful decision as these policies start to clarify. That's kind of the first thing that we talk to about clients.

The second is just duration. Duration is important in a portfolio. And we've seen that this year. Bonds yields have come down a little bit from where we were when we started the year, and you can see that sort of capital appreciation you get from a higher price in your bond portfolio, that supplements the income that's kind of clicking along behind the scenes. And that can be very powerful in a year where maybe yields do drop 25 basis points or so.

And so having a little bit of duration, which goes a long way in your portfolio, is the other sort of ballast if you will. It's a little bit of downside protection, but it's also just a hedge against the uncertainty in the world. And within that duration, within that duration, the important thing is to diversify it. You don't want to be exclusively wed to the treasury, as Holly mentioned, sort of the municipal market taxes, tax strategies still matter. They matter tremendously. It's still very tax efficient to invest in the municipal bond market, but the muni market doesn't exist in isolation. It exists sort of in competition and in parallel with all the other markets we've already discussed.

And so having that as maybe a cornerstone within your portfolio, especially around the intermediate part of the market where you can harbor a fair bit of duration, and then supplement the income, from wherever you get the highest income levels within either the taxable tax-exempt, or even the international markets, is a great way to sort of set up your portfolio. And those are the strategies that we've been spending a lot of time discussing with clients, is sort of maximize your income, diversify your duration, and then let it run. If you can build portfolios with income yield levels that are upwards of 6% or so on a tax equivalent basis, you've really set up a nice portfolio that should beat inflation and weather a lot of volatility, and will compound very, very nicely as we move through time.

So, there's a lot to do in bonds right now, and I think these discussions have been very robust, and I think very productive when we talk about how to build wealth-creating strategies using bonds.

Tony Svach: No, agree. And George, I really like the messaging, keep it simple, be nimble, and maximize your income for clients. And staying with that, and just the conversations we've had for the last three years about getting cash off the sidelines, taking steps of lily pad trades. And so continuing those conversations, I think the investors never had more options for investments to meet their specific needs. And advisors now have all these tools at their fingertips to help the clients. And the one thing is that you can't ever guarantee returns, but you can guarantee tax savings. It's just math. It's like if you tax loss harvest, and here's a tax rate, you're going to get that. And that's another buffer for clients if they want to step out of cash, there's a buffer from a dynamic of tax loss savings that helps them with that decision to move out in the curve. So, really exciting opportunity for clients to maximize these resources available to them.
Holly, so we talked about a lot today. We can go back into 1202, but I think we're going to be cut off from our 30 minutes here, so we might hit that on the next call. But that being said, what's the one or two takeaways folks should have? If you're an advisor and you talk to clients maybe about one or two things, what would you say those primary points would be?

Holly Swan: So I would say, prepare for an M&A uptake. Reach out to your business owning clients, and talk to them about the benefits of pre-liquidity event planning, because I think we could see a big uptick there. Any clients who have been paying alternative minimum tax are on the cusp of that, reach out to them and talk to them about tax aware strategies, income timing, ISO exercising, strategies I think are going to be more important now than they have been since 2017. So I think those are some really easy ones.
I think we're still going to see a lot of Roth conversions, and charitable giving to offset those. So I think those are some really easy touch points right now. But I think the overall takeaway is, reach out to clients and let them know, "Hey, your tax bill probably isn't going way down. It could actually go up a little bit if you're in that top bracket."

Tony Svach: No, thanks, Holly. And for those of you who don't know, Holly has a number of pieces on our website that you can tap into that talk about a lot of these topics, and how to have that conversation with your client. And George is a regular contributor on RA first Friday. He also contributes to a lot of pieces we have on a monthly basis. You can subscribe to his content, and I hear from him on a more regular basis.

So, thanks to all of you for joining with us today. We hope the session provided valuable insights into how the One Big beautiful Bill Act may reshape tax state and income planning. And how you as trusted advisors can help your clients navigate the opportunities and challenges ahead. So big thank you to our speakers, Holly Swan and George Bory, thanks so much. And as a reminder, a replay of today's webinar will be available shortly. And we'll also be sending out a follow-up email with key takeaways and additional resources from Allspring.
If you have any other further questions, or would like to connect with a member of the Allspring team, please don't hesitate to reach out. Thanks again for your time, and we look forward to seeing you at a future event. Have a great day.

Tony Svach: Hi, I'm Tony Svach, head of Intermediary Sales at Allspring, and welcome to SpringTalk. Today, joining me is Holly Swan, our in-house expert in taxes and head of Wealth Solutions. And she's part of the Global Client Strategy team. Holly, thanks so much for joining me today.

Holly Swan: Thanks for having me, Tony.

Tony: So, it is April in Chicago. That means a little less snow, means a little more rain, some flowers on the horizon, the Masters, baseball, all kinds of happy stuff. And then, a call from my tax preparer and they walk me through my tax filing for the year. And not so much fun. Not the best part of April. So, as we look at 2025, 2024 is in the books, but we're sitting in the middle of the year, only April. What can advisors do on behalf of clients today to help them with their tax situation as they think about 2025?

Holly: Right. You know, the thing about taxes is that paying is inevitable, but overpaying is optional. So, as we look at our 2024 taxes—which I know a lot of us are filing extensions, but that's an extension of time to file, not an extension of time to pay, so we're all paying this week—first, I think an easy thing to do is to review our estimated tax payments for the upcoming year to make sure that we are not going to be paying penalties going forward. That's a really easy way to avoid paying in money that we don't need to pay. And of course, we don't want to overpay those estimates because that's making an interest-free loan to the government. But we don't want to underpay and get hit with the penalty. We want to look at the timing of our income. There are some forms of income that we can control the timing of, like the exercising of options. So, look at your income for the coming year, project out for the next year, and to the extent that you have options to exercise, think about whether you're better off exercising them this year or waiting. Look at some of your options for reducing your income, like optimizing your retirement funding or charitable giving strategies. And I really like to encourage people to look at their charitable giving strategies now. So many people wait until year end and they really think of December as giving season. And charities promote December as giving season. December is the worst time of year to give, in my opinion. First, we feel tapped out because of the holidays. But also, if you want to really make an impact from a tax perspective giving plan like giving with appreciated stock instead of cash, waiting until the last week of the year is not the time to do that. So, look at doing that now. Also, talk to your clients about implementing tax-efficient investment strategies in their portfolios. Lots of ways for advisors to help their clients to get that tax number down to really add tax alpha for them. It’s a great way to also take a look at their outside accounts and say, hey, here's where I could add tax alpha if you brought those assets over. And also, review those AMT (alternative minimum tax) preference items. I know a lot fewer people are getting hit with AMT right now, but particularly things like ISO (Incentive stock options) exercises, take a look at those and see if there are ways to get people who are paying AMT out of the AMT.

Tony: Yeah. So, a lot of it is just thinking ahead, helping the client refocus and say, as we have some time in the year, let's think about charitable donations. Let's think about the tax payments we're making ahead of time to not have that penalty. So, just really not wait until the end of the year to think about taxes or April 14.

Holly: Or wait until April. So many people wait until April. And like, that ship has sailed.

Tony: Right, right. It makes total sense. So, you touched a little bit on investments—some ideas to think about there. When you think about tax-efficient investments, what are some things that advisors should be putting their minds to around that opportunity?

Holly: Sure, there are some really easy ones and some more complex ones. So, let's start with the really easy ones. Improved asset location: so, taking a look at your clients’ assets and making sure they're holding them in the right account. So, I met with an advisor last week who was like, hey, what do I do about my clients who are getting all of these capital gain distributions in their taxable accounts for mutual funds? Mutual funds are not tax efficient. They should really be held in your clients' tax-deferred and tax-exempt accounts. We should really be looking at things like ETFs (exchange-traded funds) and SMAs (separately managed accounts) in clients’ taxable accounts. And so, for advisors who haven't already made that pivot, making that pivot. But also for advisors who have but have prospective clients who still have a component of their portfolio that's self-directed, saying, hey, let me take a look at that self-directed piece and make suggestions for how you can improve asset location within that, that's a great way for them to show the value of working with an advisor instead of being self-directed on that piece. Systematic tax loss harvesting: if there is one thing that the last couple of weeks have shown us, it's that waiting until December to harvest your losses, you can miss out on a lot of down-market opportunities, right? These past few weeks, there have been a lot of opportunities. And so, if you were just doing it in December, you missed out. And so, making sure that you're harvesting year-round, so that you can offset your gains and not just your gains from this year. First, if you have excess gains, you can use $3,000 of that to offset ordinary income, but you can also carry those losses forward to offset gains in future years. And so, if you have a client with a large, highly concentrated, highly appreciated position that they need to work their way out of, harvest big losses when these opportunities present themselves so that you can help them move away from those large, highly appreciated concentrations in a really tax-efficient way. Another one that I think a lot of advisors have been saying is how can I get my clients to start moving away from these money market funds that they really gravitated towards over the last couple of years and really understand that munis are giving them a better tax equivalent yield? Well, right now, when they're coming to you saying, hey, I'm really upset by the amount I just paid in taxes, sitting down and showing them the money market is yielding a lot, but here's what the tax equivalent yield would be if you had instead put this into munis, this is the perfect time to be having that conversation.

Tony: And just along those lines, too, I agree that one of the things that we talk about with clients all the time is the advisor has the gift today versus ten years ago even of choosing your wrapper and being thoughtful in that. And so, you've got your mutual fund, your ETF, your SMA. You can go with direct indexing or active but really being thoughtful and intention with those wrappers versus just having them come to you. And so, I think that's the next step in our evolution of serving clients—looking across their holdings and saying are these the wrappers of choice for these accounts or these clients that are optimal from a tax standpoint? And you're right. It's not something that's easy to talk about all year, but when it's hitting home right now, it's a visceral reaction to really talk about, there are returns and what the markets return, but what I care about is what you keep. And so, let's talk about taxes and location and actually like the net returns of a municipal investment of a tax-efficient wrapper because that's really what matters to the client.

Holly: Yeah. And so many clients just have it stuck in their mind, like, oh, mutual funds are the least expensive alternative. Or the money market is the inexpensive alternative. And they have this sort of legacy mindset of, I need to go for the least expensive alternative and this is what I was taught. And they haven't been keeping up with the times and understanding the tax ramifications of some of those wrappers that they were taught that they wanted and that the lowest cost alternative isn't necessarily what's going to give them the most value in the long run.

Tony: And I'm also surprise by when you talk to folks not in our industry, the lack of knowledge of an ETF. Like just because of the fact that we're in the industry with our advisors, we just make the assumption that, well, you've got mutual funds, ETFs, SMAs. We throw out acronyms all the time. But if you actually sit down at Thanksgiving and go around the table and ask people, do you know what the difference between an ETF and a fund is? It's not a pretty answer.

Holly: That's true. I mean, honestly, I've had some advisors say to me, can you explain the difference? So, I think that there is some demystification that needs to happen there. And so, when you throw separately managed accounts into that mix, that can really get confusing for people.

Tony: It really can. Really can. So, we have our current tax law that’s looking to sunset at the end of this year. So, if that were to happen, what does that look like for advisors and what should they be thinking about if that does occur?

Holly: Yeah. So first, I think the chances of that actually occurring are pretty slim. I think Trump has been pretty adamant about the fact that he doesn't want that to occur. But if it did—and I still think it's important that we level-set that with clients about what would happen—we would see an increase to income tax rates. The AMT exemption would decrease. We've seen way fewer clients get hit with the alternative minimum tax over the last few years since TCJA (Tax Cuts and Jobs Act) was enacted in 2017. The standard deduction would decrease. So, we used to see a lot of clients filing with itemized deductions. We've seen a big decrease in that because the standard deduction has gone way up. The standard deduction would go down and we’d go back to seeing more people as itemized filers. The SALT cap would go away. That's the $10,000 cap on state and local taxes. So, those are the big income tax things. From an estate tax perspective, the unified credit, which is currently $13.99 million, would essentially get cut in half, so around $7 million. So, from an estate planning perspective, that would be huge. So, we have seen a huge rush in the ultra-high net worth space of people running out to do planning just in case that were to happen.

Tony: Yeah. So, you have the benefit of just traveling the country, talking to folks about taxes, which I think sounds like fun. I don't know if everybody does, but it sounds like a good time. But in those conversations, what are some unique planning strategies that you think about and you consider once we know how tax reform moves? What are some things that you've run across or you think about that could benefit advisors?

Holly: Well, so first, when we see how tariffs play into tax reform—because tariffs are really an ever-changing, daily-changing moving target at this point—and when we see where we're going with that, what the stagflation situation could be, there's a lot of pressure on Powell from that perspective. But we could see real opportunities in rate fluctuations there. So, that, I think, is something for advisors to keep an eye on. If we see rates continue to stay low and the Republicans really are pushing for a long-term extension of TCJA—they're currently pushing for what they are calling a permanent extension of TCJA—but in the tax world, tax laws are either temporarily permanent or permanently temporary. But if we are to see that extension, it could go away at any moment if we see a change in administration. So, I think Roth conversions will be really appealing because if you look at low rates combined with where we are from a national debt perspective, no matter how permanent they make these rate cuts, rates are likely to go up at some point to help us pay the national debt down. And so, everyone keeping that in the back of their mind, Roth conversions, I think, are going to be really compelling. Also, when we see how these cuts pan out, let's look at the things that they're talking about. They're talking about a complete extension of TCJA. They're talking about some other Trump proposals like getting rid of the tax on tips, tax on overtime, potentially giving us a deduction on auto loans for domestically produced loans. There are some other things out there that we're not talking about as much. Project 2025, and I know that Trump has said that it's not a guideline for his administration, but I think if you look at the first few months of his administration, I think we can also say that it's not-not serving as a guideline. And Project 2025 does call for a reduction in the top capital gains rate to 15%. So, if we were to see something like that, I think there would be the potential for massive acceleration of capital gain recognition. And that would be interesting because that is a tax cut for the 1%. But it's also a way to massively accelerate tax revenue and potentially pay for a portion of tax reform. It's an opportunity.

Tony: Right. So, it seems like there are a lot of opportunities depending on where the pendulum swings to over the next couple of months and years. And so, then looking at some estate planning ideas, some of the different potential outcomes in tax law over the next couple of months, what are some trends that you see that maybe aren't front page that people should be thinking about, that they should really pay attention to that might be coming over the next 6 to 12 months that you see in your day-to-day time in the tax world, if you will?

Holly: Yeah. So, one thing that I think we're not talking about that worries me is unintended consequences of getting rid of the tax on tips. One thing that I worry about, first, I think we've got to be very careful about how something like that is written. Because I think there's the potential for a lot of people to start recategorizing their income as tips, but also, I worry about the long-term implications of people reporting lower income. For instance, all of these employees who currently get a lot of their income through tips—let's think about hospitality workers—what are the implications to their Social Security income over time? If Social Security is calculated based on their highest 35 years of earning and suddenly we're not counting tips in their earnings, right? So, things like that concern me. If we stop taxing overtime, I think that sounds great and let's incentivize people to work more and work harder, but then, are we suddenly needing fewer workers because the workers that we do have are working harder? Now maybe these things intersect with immigration policies also because we need more people to fill more jobs. But I think those are some things that we haven't started talking about yet that I do think we're going to need to start talking about. I also think that tax reform has been really overshadowed by tariffs in the news lately. And I do think, given where we are now, that we've officially entered the reconciliation process because the House has passed the budget resolution and we're going to find out more and more about how they are planning to pay for this. We're going to learn more about what their plans are with respect to Medicaid and Medicare. And so, I think what these plans are will become a lot more certain and will allow people to plan more. I do think there is a proposal out there right now to completely repeal the estate tax and to keep the step-up in basis. If you had asked me three weeks ago if that had legs, I would have told you that that was the craziest thing I had ever heard. And I have learned over the last few weeks to not discount any of these things, right? So, maybe I don't think it could be part of reconciliation because I don't know how we would pay for that. But what I would say is no matter how tax reform shakes out, estate planning will never go away because the human side of estate planning—how we want our wealth to shape our children and the issues that are unique to our families—those things will never go away. And from an income tax perspective, even if we do see lower rates for now, it’s never going to take away the sting of seeing that bottom line on our tax return. There's never going to come a time where we're like, oh, I'm super happy about that giant number I see there, right? That's never going to be the case. We're always still going to be like, oh, I wish I hadn't made eye contact with that number. We will always want that number to be lower and financial advisors will always be able to add value to their clients by showing how they are able to make that number lower. And that's by helping them avoid taxation, largely through asset location choices, helping them to defer that tax, and helping them to offset that tax through smart charitable giving strategies.

Tony: And I agree. I think there's so many layers to the estate planning and there's the emotional family dynamic of it and you see that more and more. As advisors gather their clients together, they spend almost as much time on the generational influence of wealth as they do the bottom line of what they're actually going to pass to the next generation.

Holly: I would say they spend more time. The emotional part really ends up taking more time because the tax mitigation strategies are what they are, right? But the dynamics of each family are so different and how they want their wealth to impact not just their kids, but, in some cases, three generations down. That is a lot for families to think through and that part is never going to change.

Tony: Agreed. I think the thread through everything that we've heard today is just the importance and the need for advice of clients—objective advice—that's helping them make the decision. Given all the different optionality folks have these days versus years past, it's more important than ever.

Holly: Yup, absolutely.

Tony: Well, Holly, thank you so much for your insights today. Really appreciate it. And I'd also like to thank our audience for joining us and we look forward to seeing you all next time on SpringTalk.