Against a backdrop of higher interest rates, the rising popularity of wealth taxes and a world economy entering a period of slow growth, strategies to minimize taxes have never been more important to family offices.
“More than ever, family offices are using this time of uncertainty to take a pause and reflect,” said Jo Anna Fellon, national leader of private client services at Marcum LLP in New Jersey. Many of her family-office clients are facing higher tax burdens due to appreciation of their assets, she said.
“As a result, they’re looking for opportunities like utilizing more tax loss harvesting” as well as increasing their use of gifts and interfamily loans, Fellon said.
On one hand, Republicans successfully blocked the Biden administration’s efforts to increase the top marginal income-tax rate, tax capital gains at ordinary rates and expand the net investment income tax to include active pass-through income.
On the other hand, efforts to implement wealth taxes are gaining momentum. Two weeks ago, seven states that together represent about 60% percent of the country’s wealth — California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington — introduced legislation aimed specifically at an individuals’ net worth.
And two trusted strategies — qualified opportunity zones (QOZ) and donor-advised funds (DAFs) — could soon lose some of their shine, tax law experts say.
THE HIGHLIGHTS
- Family offices could face higher tax burdens this year due to appreciation of assets.
- Though proposals to increase federal taxes fell through last year, lawmakers in seven states are now pushing wealth taxes.
- In surveys, family offices have expressed concern about cross-border tax issues.
- 64% of survey respondents are not confident that their tax operations are high-performing.
- From a tax perspective, 2022 was a roller-coaster year for the wealthy and ultrawealthy.
Will Sinclair, the New York-based head of JPMorgan Private Bank’s Financial Institutions Group, said he’s not seeing as much demand for QOZ funds — investments in the development of economically distressed communities that may be eligible for tax benefits — “given that the benefits for current investments have been reduced.” But he is seeing “some select demand” for closely held, family-controlled QOZ funds.
Though donor-advised funds have been extremely popular because donors get an immediate tax deduction, Fellon said, there is talk of potential new rules.
Proposed regulations would create two types of DAFs: qualified and nonqualified. Qualified would require the fund to distribute the donations to charity within 15 years of receiving the donation, whereas nonqualified would extend that deadline to 50 years.
The hitch is that deductions for donations made to nonqualified DAFs would not be allowed until the funds are distributed to a qualified charity.
As family offices increasingly expand their investments and operations into other countries, cross-border tax issues become more relevant. In fact, nearly three-fourths (72%) of respondents to Credit Suisse’s survey of single-family offices cited international tax consequences as a concern in 2022. Yet they remain uncertain about their own tax strategies, with 64% of respondents to Ernst & Young’s survey of single-family offices saying they are not confident that their tax operations are high-performing.