Obama tax plan causes headache for advisers

President Barack Obama's latest tax proposal has plenty of good news for the rich, but it also has financial advisers scrambling to adjust their year-end tax and estate plans.


On Monday, Obama proposed extending all Bush-era tax cuts for two years and maintaining the top dividend and capital gains tax rates at 15 percent. He also proposed implementing an estate tax of 35 percent with a $5 million exemption.


If the U.S. Congress does not act, the Bush tax cuts would expire and the estate tax would rise next year to 55 percent with a $1 million exemption.


The possibilities have advisers scratching their heads as to what to tell clients about their year-end tax plans.


William Fleming, a managing director in the personal finance division at PricewaterhouseCoopers, said he is scheduled to give a number of tax presentations over the next few weeks, and now it looks as though two-thirds of his slides will be irrelevant.


"We were going to talk about contingency planning and what we would do if tax rates went up. Now we might be able to throw all of that to the curb," said Fleming.


Advisers to the wealthy are pleased with this latest development, which would let clients retain more of their wealth. Still, the experience of riding the tax roller coaster over the past few years has left them hesitant to make any changes until Congress takes action.


This time last year, many advisers were convinced that Congress would act in time to prevent the elimination of the estate tax. That did not happen, and wealthy people who died this year paid no federal estate tax.


"I predicted to my clients that the estate tax would never be repealed this year, so you can see how good my crystal ball is," said Gerald Dunworth, an estate planning attorney at New York-based Gibney, Anthony & Flaherty.


This time, he is telling his clients to just wait and see.


The estate tax repeal has also caused plenty of headaches for advisers trying to draft estate plans despite uncertainty about whether a retroactive tax would be imposed and what the rate would be going forward.


It is not just 2010 that has been problematic for estate planning. The estate tax was phased out gradually from 2001 to 2010, with the rate decreasing and the exemption amount increasing each year.


This made planning a challenge for advisers unable to predict when a client would pass away and what the estate tax rate would be, said David Hamar, head of the tax group at Silvercrest Asset Management.