Continued Tax Uncertainty, Too

Ordinarily, at this time of the year, we take this opportunity to alert clients to a variety of year-end planning considerations and offer general recommendations for opportunities we believe are compelling. Earlier this year, we were reasonably confident that, whether one would like the specifics or not, we would have clarity about income tax and estate and gift taxes going into 2011 and beyond. Due to the current political landscape, however, we now do not expect any important resolution, if any, until after the election on November 2 and the reconvening of the current Congress following that...but Congress may fail to take action even then. In any event, we find it next to impossible to confidently predict those tax outcomes at this time.

Since whatever resolution may occur will be critical to decisions clients may need to make before the end of the year (on issues such as deferred compensation elections, timing of option exercises or asset sales, the nature and timing of family wealth transfers, to name just some of the big issues), we now plan to send a special report to clients as soon as the fog of uncertainty begins to clear. Expect something, in whatever detail we can fathom, (which could be not much) before the end of November. Meanwhile, for a preview of what we may conclude if income tax rates do increase for 2011, you can review our comments from the January 2008 edition of Insight.

Among the biggest open questions for many of our clients will involve the next steps on the Roth IRA conversions we helped them make earlier this year. For almost all such clients, we do not expect that “recharacterization” will be attractive and, for many of them, paying the entirety of the resulting income tax as a 2010 item may continue to be the overall best timing choice. This environment of Roth conversions has presented an opportunity to demonstrate our objectivity and alignment with the best long-term interests of our clients. Paying the full tax burden at once, and paying it early will probably foster the greatest value for the conversion for many clients. And even where paying in deferred installments (2011 and 2012) is the better choice for some others, those very substantial near term tax payments will reduce the assets we manage and thus, the base on which our fees are calculated. In the long-run, of course, we will benefit from the enhanced value these Roth conversions will produce for our clients. But, in the short-term, we, along with our clients, are making a significant investment in that better future.

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