Don’t freeze: 4 wealth planning themes for uncertain times

The 2024 presidential election campaign has been unpredictable and unprecedented in numerous ways, creating uncertainty around the future of economic and tax policy. Against that backdrop, it’s important for advisors to stay in the present — not the unknowable future — and provide ongoing guidance to their clients.

In a recent Capital Group “Live with Leslie” event, we discussed the uncertainties surrounding future tax policy. Our guidance to advisors, in short: stay in the moment.

Advisors best serve their clients in times like this by planning for what we know, as opposed to trying to predict the future. So with that in mind, here are four wealth planning and investment themes that are relevant and timely today.

1. 2025 Tax Cut and Jobs Act sunset: A golden opportunity for guidance

Heading into the election, we are seeing a growing list of tax proposals from candidates Trump and Harris. From Harris: higher corporate taxes, higher tax rates for high-income taxpayers, taxes on some unrealized capital gains and no taxes on tips. From Trump: no taxes on tips, Social Security income and overtime pay and increasing the $10,000 exemption for state and local taxes, all coupled with aggressive tariffs.

The biggest tax policy uncertainty surrounds the scheduled sunset at the end of 2025 of the 2017 Tax Cut and Jobs Act. This will act as a forcing mechanism for Congress, making some level of tax policy changes very likely. With growing concerns about the fiscal deficit, Capital Group analysts are encouraging investors to prepare for a higher tax environment.

With that sunset looming 15 months from now, this is a golden opportunity for you to initiate planning conversations with clients. The more proactive you are now, the better your clients may feel when we get more clarity on future tax policy.

2. Gift tax exemptions can be a gift for advisors

The top concern for many high net worth clients is the potential reduction — by about half — of current estate and gift tax exemptions. Today’s levels are $27.2 million for couples and $13.6 million for individuals. It’s unclear whether those exemptions ­— as well as reductions in overall income tax rates — will be extended or returned to pre-2017 levels.

But one thing we know for certain is that the current environment allows for historically generous gifts. If your client is in a position to take advantage of it, we would strongly encourage you to have that conversation with them. Our guidance, to quote the Red Hot Chili Peppers, is to “give it away, give it away, give it away now.”

On the other hand, for clients with less capacity to make large gifts, it can be unwise to rush into an irreversible decision based solely on potential tax changes that may not happen. Such decisions should be based on the individual client’s capacity and need — what they can afford, and what makes sense for them.

We learned this lesson back in 2012 when there was a similar sense of urgency to make large gifts before a potential estate tax sunset during the Obama administration. Congress took last-minute action, however, so the feared change never materialized and likely left some clients regretting their actions.

In either case — whether making gifts now or later — this is another opportunity to cement your status as a trusted advisor.

3. Increase tax efficiency with ETFs and SMAs

Given the recent strong performance of equities, coupled with concerns around tax changes that would negatively impact high net worth investors, we believe investors should give serious thought to increasing the tax efficiency of their portfolio. We do believe the expanding fiscal deficit is likely to put upward pressure on taxes.

Two investment vehicles that can be used to improve tax efficiency are exchange traded funds (ETFs) and separately managed accounts (SMAs).

ETFs — both active and passive — can be very tax efficient, because they don’t typically have annual capital gains distributions. And it’s the ETF structure that provides the tax efficiency, so an active ETF can be just as tax efficient as a passive one.

Given how the markets have performed in recent years, mutual funds often contain significant embedded gains. While you’d likely want to avoid wholesale reallocations from mutual funds to ETFs — which could trigger significant capital gains — you can use capital gains distributions, dividends and cash to reallocate into ETFs. That way, you can transition client portfolios through re-investment going forward. It’s worth noting that mutual funds are still a vehicle of choice for tax-deferred and non-taxable accounts.

We also encourage advisors to consider SMAs, which can be constructed with investor personalization in mind and can be effective in transitioning portfolios in a manner that minimizes capital gains. SMAs can reduce the cost of a portfolio transition. If a client has a large position in a single stock, and if it’s held within the new SMA strategy, that position doesn’t have to be sold, which it would be if you moved it into an ETF.

4. It’s time to put cash to work

Lastly, some investors want to hold cash on the sidelines during election years, reducing market exposure until the results are clear and future policy comes into focus.

We think this kind of market-timing is more difficult than investors often realize. A key mantra at Capital Group is that what’s important is time in the market, not timing the market. A market call has to be right twice — you have to know when to get out, and when to get back in. A proof point of sorts:  investors who reduced equity exposure at the beginning of 2024 because of election uncertainty would have missed out on the 21% rally in the S&P 500 Index this year (as of September 25).

Even after Election Day, the future of tax policy may not be clear. So we think useful counsel to advisors in this uncertain time is: Don’t try to predict the future, and don’t let policy uncertainty cause you to freeze in place. There are better ways to advise your clients. Focus now on the clients in front of you and what’s best for them in the current situation.