Family Offices, Wealth Managers Face New and Looming Tax Changes

For wealthy Americans and the firms that manage their money, this tax season offers plenty of potential headaches.


As tax season arrives, wealth managers and family offices throughout the U.S. find themselves grappling with how best to respond to recent and potential rule changes. They’re better prepared in some cases than in others. One new challenge: Last year Swiss banks moved to sever relationships with U.S. taxpayers in the lead-up to this January’s implementation of the Foreign Account Tax Compliance Act. Financial wealth is easily transferable, but individuals with gold and other physical assets in Switzerland have had to confront the tax implications of liquidating them.

Fatca, which requires foreign banks to disclose more to U.S. tax authorities, creates a fresh layer of compliance for many firms. Most with lengthy offshore experience have been preparing for some time. “The onerous penalties that firms who are in noncompliance will be subject to have meant that most wealth managers and family offices subject to [Foreign Bank and Financial Accounts reporting] have rapidly adapted,” says Kevin Packman, a Miami-based partner with law firm Holland & Knight who chairs the offshore-compliance team as a member of the private wealth services department’s estate planning group. The impact on domestic wealth managers is much smaller than on foreign banks with U.S. clients, Packman adds.

This year families with $250,000 or more in earnings will also start paying the Patient Protection and Affordable Care Act’s 3.8 percent surtax on investment income. “There was a lot of preparation for this in 2012 in anticipation of the Obamacare provision and the expiration of the Bush tax cuts,” says Rhona Vogel, CEO of Vogel Consulting, a Brookfield, Wisconsin–based multifamily office with $2.7 billion in assets under management. “Still, as 2013 taxes are prepared, a lot of people are going to experience sticker shock.”

Robert Gordon, founder and president of tax-focused brokerage Twenty-First Securities Corp., sees several potential shifts in taxation that will affect advisers and their clients in 2014. The biggest move that New York–based Gordon predicts is a bipartisan push to cap the deduction benefit for charitable donations at a specific rate, probably 28 cents on the dollar, the lowest bracket.

The Obama administration, the Senate Assessment and Taxation Committee and the Congressional Budget Office have already provided opinions on that change; combined with politicians’ unwillingness to single out tax treatments, the need to boost revenue makes it likely, Gordon says. “There are giant lobbying firms fighting for each individual deduction, mortgages, charities,” he notes. “Capitol Hill will be loath to choose winners and losers from these groups.”

The current maximum deduction is 50 percent of adjusted gross income for a public charity and 30 percent if the money goes to a private foundation. Family office CEO Vogel says a number of her firm’s clients routinely exceed those limits. “Private family wealth is a critical support base for nonprofits in this country,” she warns. “A change like that could have a chilling effect on charities’ ability to raise needed funds.”

Twenty-First Securities also sees potential threats to tax treatment on some of the products that advisers prefer to use for portfolio tax efficiency, founder Gordon says. Exchange-traded notes avoid mark-to-market treatment like futures contracts do; at the end of the year, they’re subject to tax on unrealized gains or losses. Removing that advantage would make advisers rethink allocations to some asset classes. Mark-to-market exemptions for exchange-traded products have been a hot topic among financial industry lobbyists for several years, Gordon says: “The mutual fund industry has been on a crusade to kill these, and I think they are going to get their wish.”

Changes to carried-interest treatment and limitations on master limited partnerships are possible too, he adds. During the past few years, MLPs have migrated from the oil and gas operations they were created to foster to businesses with ever-more-tangential links to energy production, such as hydraulic fracturing wastewater storage, prompting charges of abuse.

Scrutiny of carried-interest payments could hit many single- and multiple-family offices directly, Gordon and Vogel contend. The most widespread impact may be on so-called friends-and-family deals, a common practice whereby family offices bring in people they know on one-off transactions, often real estate investments. “These deals are typically structured with an incentive for the general partner who found the opportunity,” Vogel says. “A move by Congress to strike down carried-interest treatment will create a headache for many family offices as they try to calculate a change in value each year.” • •