What a Wealth Tax and Lindsay Lohan Have in Common

Yesterday’s New York Times contains an op-ed article by Daniel Altman, “To Reduce Inequality, Tax Wealth, Not Income,” that suggests replacing the income and estate tax with a wealth tax. Much of the article talks about the growing wealth and income inequality in the United States over the past thirty years.

Read the full article at Forbes

Telemus Wealth Advisors Year-End Reminder

The clock is ticking, but like Alice we cannot see what lies at the end of the rabbit hole. With pending elections, expiring tax provisions, exploding debt and a weak economy, the only certainty is that no one knows what the final tax structure will look like in 2013. Despite this lack of clarity about future tax laws, employing a wait-and-see approach to tax planning will likely lead to payment of excess income taxes, a diminished financial legacy, and other lost opportunities that could have been prevented or mitigated with advance tax planning.

The Playing Field

Without Congressional action in 2012, existing tax laws will revert to the tax structure that existed in 2001, resulting in higher gift, estate and income taxes. These tax increases are compounded by two new taxes created under the Patient Protection and Affordable Care Act, which will take effect in 2013. These new taxes are (i) a tax of .09% on certain wages and self-employment income, and (ii) depending on an individual’s income level, a tax of 3.8% on investment income. A brief summary of the potential reversion to 2001 tax laws include:

• Individual tax rates will increase, with the highest individual tax bracket climbing from 35% to 39.6%. In conjunction with the new 3.8% tax on investment income, the maximum rate will climb to 43.4% for certain individuals. The lowest tax bracket will increase from 10% to 15%.

• Federal estate and gift taxes rates will rise from 35% to 55% and the exemption will drop from $5.12 million to $1 million.

• Preferential tax rates on long term capital gains, currently at 15%, will increase to 20%. Dividends will lose their preferential treatment and will instead be taxed as ordinary income.

• Itemized deductions will be limited and many new taxpayers will be subject to the Alternative Minimum Tax.

Whether the government allows the country to revert to this 2001 tax structure is likely dependent on the November elections. Each Presidential candidate has his own vision for the future and widely differing views on who should bear the tax burden. Barack Obama has stated that under his tax plan the “wealthy” would feel much of the impact from the changes in the tax structure. Mitt Romney has stated that he wants a 20% reduction in tax rates across-the-board, but given his goal of making the tax reduction revenue neutral, it will be a challenge to actually obtain such a reduction. The candidates’ views also differ on estate taxes, with Romney stating that he wants to eliminate the estate tax and Obama stating that he would like to keep the estate tax, but lower the exemption to $3.5 million and institute a higher tax rate. The Congressional elections could be even more determinative of future tax laws than the Presidential election. With such uncertainty, it is impossible to predict with any accuracy what the final tax structure will look like in 2013 and beyond.

The takeaway is that given the uncertain tax future, it is imperative to take advantage of beneficial provisions in the existing tax structure as soon possible, while they are still available.

Meet With Your Tax Professional

It is important to meet not only with your tax preparer, but also your financial team including your financial advisor, attorney and tax professionals. A coordinated, multifaceted strategy is needed especially if you have a net worth over $5 million or if you are the owner of a closely held business. Some strategies to consider include:

• Many of the income tax provisions have thresholds such that if you can manage to stay below them you can avoid some of the new taxes, including the 3.8% investment income tax created under the Patient Protection and Affordable Care Act, or potential increased tax rates under Barack Obama’s tax proposal for being deemed “wealthy”. Transferring asset ownership among family members may be a way to avoid these increased taxes, thanks to current friendly gift tax provisions. Family limited partnerships may also be a way to avoid future estate tax increases while simultaneously tempering the impact of income tax increases.

• It may be beneficial to sell assets with built-in long term gains prior to the end of 2012, especially if such assets were to be sold in the next 1-3 years, given the potential tax increase on capital gains expected in 2013 and beyond.

• Due to the complexities of the Alternative Minimum Tax it is important to calculate taxes under various scenarios especially when considering strategies such as accelerating bonuses or other income into 2012 versus 2013. For cash basis taxpayers, the timing of billings and related revenue recognition strategies should be considered together with overall income planning. For all of the aforementioned reasons and many others, it is crucial to begin your tax planning as soon as possible.

• Conversions of 401(k)s and regular IRAs into Roth accounts , under which qualified distributions are tax-exempt, deserve a serious consideration in 2012.

• Make sure you have maximized your annual gift tax exclusions, which for 2012 are $13,000 per recipient. With spousal gift splitting this means you can give $26,000 per recipient. Note that under the current tax laws, direct payments of medical and tuition are not treated as gifts for these limitations. Proper tax planning also includes a charitable giving strategy. Gifting of certain appreciated assets to qualified charities or organizations will make even more sense if tax rates increase, and as a method to avoid the new Medicare investment tax.


Opportunities exist but time is running out. Please consult with your advisor and plan for the future whatever it may be.

“I wanted a perfect ending. Now I’ve learned, the hard way, that some poems don’t rhyme, and some stories don’t have a clear beginning, middle, and end. Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what’s going to happen next. Delicious Ambiguity.” Gilda Radner

Andrew Bass, CPA, PFS, CWM Chief Wealth Officer/Managing Director


Telemus Investment Management, LLC, Telemus Wealth Advisors, LLC, and Beacon Investment Company, LLC, registered investment advisors, are wholly-owned affiliates of Telemus Capital Partners, LLC. Telemus Investment Brokers, LLC, member FINRA and SIPC, is a wholly-owned affiliate of Telemus Capital Partners, LLC

Telemus Market Commentary – November 13th, 2012

November 13, 2012

US Equity Markets Down More Than 2%

Contrary to some opinions, today’s market selloff has little to do with the outcome of yesterday’s elections and much to do with European Central Bank head Mario Draghi’s comment that he anticipated seeing weakness in the European economy for the foreseeable future. Prior to the opening of European markets this morning (at roughly 4:00 am EST) S&P futures were actually up. Draghi also made the comment that near-term inflation was not a concern. We believe the combination of those two comments is setting the table for Draghi to further ease monetary policy in Europe tomorrow. None of this is really new news—we’ve known about Europe’s problems for some time now; but, when markets rise quickly, as ours did these past five months (up 12%), they tend to respond more violently to negative news (even when it’s already known). The S&P 500 peaked in mid-September—since then, including today’s move, it is down less than 5%. Global equity markets were up nearly 14% these past five months, and since peaking in mid-September are down less than 4%. All in, since the lows in early June, the S&P 500 is up nearly 10% and global equity markets are up more than 12%, including today’s selloff.

Impact of Election Results on the Economy, Markets and Interest Rates

Going in to yesterday’s election, the one common thread across most Americans seemed to be a general disdain for politicians, specifically incumbent politicians. Ironically, the net effect of yesterday’s elections was to maintain status quo: President Obama is still the President, Republican Congressman John Boehner is still the Speaker of the House of Representatives, and Democratic Senator Harry Reid is still the Senate Majority Leader—nothing substantive has changed. While that reality may be frustrating for some of us, in general, markets are more concerned about uncertainty than anything else. What is equally clear to us, and hopefully to the aforementioned politicians, is that neither party can claim that the American voters gave them a resounding mandate to pursue their specific agenda and policies. They somehow need to find a way to compromise a solution to the Fiscal Cliff. If they do not it will almost certainly push the domestic economy back in to a recession. The combination of tax hikes and spending cuts will have a dire impact on an already slow growing economy and employment environment. We believe they will once again arrive at some mini-compromise over the next couple months and kick the rest of the can down the road. The ultimate solution is a full rewrite of the tax code and a rethinking of entitlement programs, defense spending and social security—we can say with certainty none of those things will be done over the next two months. The other thing that didn’t change yesterday are the ongoing stimulative policies of the Federal Reserve—those policies are what have been driving this market, with an occasional derailment by politicians both at home and abroad, for the past three years.

Impact of Current Environment on Telemus’ Various Investment Strategies

Global Equities—we believe most of the changes we made in the Global Equity sleeve over the past month will provide more downside protection than the overall global equity market. Specifically, we’ve reduced our overweight in domestic large cap stock exposure and have added exposure to frontier markets and small- and mid-cap developed international markets. Our rationale was simply that domestic large cap stocks had the most to fall in a global selloff, because they’ve risen the most in recent years, and have the least to gain should the equity market rally extend. Today’s market action serves as a good confirmation of that premise: domestic large cap stocks are down more than 2%, whereas developed international, emerging and frontier markets are down less than 1.5%.

Global Fixed Income—generally speaking, what’s good for stocks is usually bad for bonds and what’s bad for stocks is usually good for bonds. We’ve kept our bond maturities relatively short to protect against rising rates. While rates have remained low, we are cognizant they can’t go much lower but they can go a lot higher—in other words, we see more downside risk than upside potential in the bond market. On a day like today our Global Fixed Income sleeve will likely increase in value. Longer-term we will be perfectly content earning our yield on the portfolio.

Real Assets—once this latest round of “Europe in the news, again” passes, we believe the US Dollar will resume its long-term decline. In such an environment our Real Asset sleeve, which is comprised of natural resources, precious metals, real estate investment trusts and energy infrastructure (pipelines), will thrive. It is designed to generate attractive dividend yields while also providing protection against the inflationary effects of a declining dollar.

Absolute Return—in theory these strategies should hold up in any environment; in practice they tend to behave like a large global balanced portfolio. As with the design of most of our strategies, we believe this sleeve will provide clients with superior downside protection while participating in upside moves.

Opportunistic—this investment strategy seeks to generate high fixed income streams through non-traditional fixed income investments such as preferred stocks, convertible bonds, senior bank loans and mortgage REITs. We hedge away the equity-like risk to lock in on the cash flow yield. Currently the sleeve is generating cash flow yields in excess of 6% (investment grade corporate bonds are yielding less than 2%). We believe the diversification and the hedged nature of how we manage the sleeve will allow it to continue generating above market yields with some additional growth potential.

Cash—always the forgotten asset class until days like this occur. Investors won’t earn much in money market funds for some time; but, they also won’t lose anything.

Overall, we believe client portfolios will perform consistent with our overriding investment philosophy: we’re in the keep rich, not the get rich, business. Our goal is to build the least risky portfolio necessary to achieve our clients’ investment goals.

Jim Robinson CEO & CIO—Telemus Capital Partners

Disclaimer And Disclosure

This report is provided for informational purposes only, and does not constitute any offer or solicitation to buy or sell any security discussed herein. All opinions expressed and data provided herein are subject to change without notice. All investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Past performance does not guarantee future results.