Wealth Management

Monthly Economic Summary

Last month was very good for the markets and below is the economic summary for April.  As always, if you have any questions or want to discuss more in-depth do not hesitate to give us a call!

Sources:

  1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
  2. Indices:
    • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
    • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
    • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
    • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Understanding Biden’s Proposed Tax Plan

President Biden recently announced his $1.8 trillion plan (American Families Plan) for new benefit spending and increased taxes. Please keep in mind that this is the first iteration. We expect to see new items added and changes made as the proposal advances through Congress. Below is a summary to understand the proposed changes.

Capital Gains Tax

Right now, depending on your taxable income, the federal long-term capital gains tax rates are either 0%, 15% or 20% for most assets held for more than a year. High earners with significant investment income over certain thresholds pay an additional 3.8% surtax (net investment income tax) on top of the top capital gains tax rate (20% capital gains + 3.8% surtax = 23.8%).  The Biden proposal would increase the top federal long-term capital gains tax rate to 39.6% and those high earners would still be subject to the 3.8% surtax creating an actual tax rate of 43.4%. This tax rate would apply to individuals and married couples (filing jointly) that make over $1 million a year (this includes dividends and capital gains) and is estimated to impact about 500,000 Americans (Source: Bloomberg).

 CurrentProposed
Top Federal Long-Term Capital Gains Tax Rate20.00%39.60%
Net Investment Income Tax3.80%3.80%
Total Highest Combined Rate23.80%43.40%

Note: The above reflects what has been proposed; the general expectation is that the capital gains tax rate will most likely be increased to around 28% (a rate that is roughly between the current rate and Biden’s proposal).

What is Included in the $1 Million Income?

For now, the proposal appears to focus on those making more than $1 million annually. That means, most individuals would not be impacted by these changes. It is important to note, however, that the $1 million represents total annual income, which may include capital gains and qualified dividends (this could become an issue for anyone with a large liquidity event like selling real estate or a business).

Factoring State Taxes

This increase would make the capital gains tax rate the highest it has been since 1954. When looking at this change combined with state taxes, individuals would become hugely impacted:

As you can see Californians in the top tax bracket would be hit with a combined tax rate of 56.7% since California taxes capital gains at ordinary income tax rates.

What Assets are Impacted?

The new proposal would impact stocks and bonds. Individuals that sell a home or business with large capital gains would need to do additional planning as they would be impacted by these changes as well. There would not be capital gains taxes for family-owned businesses or farms if the heirs continue to run the business. Primary residences would still maintain the current exemption of $250,000 ($500,000 for a married couple) as well.

Killing the Step Up In Basis

Another proposed change announced is the elimination of the current step-up in basis at death for gains of $1 million ($2 million for a married couple). Under current laws when someone passes the heirs receive a new cost basis on the inherited property, which is the value of the assets at the time of death (or, if elected, six months after the date of death). This new cost basis would eliminate capital gains that would have normally been taxed. The possibility of eliminating the step-up in basis is being discussed so that a strategy is not employed of just holding stocks until death to avoid paying capital gains taxes. Below is an example of what would happen if they remove the step-up in basis.

Example Under Current Law: Kim’s father passes away and she inherits a taxable stock account worth $1.5 million with the original cost of the investments being $300,000. Under current rules, Kim will inherit the account and her cost basis becomes $1.5 million instead of her dad’s $300,000. If she chose to sell the $1.5 million of stocks, she would not incur capital gains taxes.

Example Under Proposed Law:  Kim’s father passes away and she inherits a taxable stock account worth $1.5 million with the original cost of the investments being $300,000, meaning long-term capital gains of $1.2 million. Since the gain is over $1 million that means $200,000 ($1.2 million – $1 million exemption) is subject to capital gains tax that needs to be paid regardless if Kim keeps the stock or not. Assuming a proposed higher capital gains tax rate of 43.4% this would trigger a tax bill of $86,800 ($200,000 * 43.4%)

Note: The above reflects what has been proposed; the elimination of the step-up in basis is expected to be more difficult to pass without some revisions (possibly a phaseout).

Potential Planning Opportunities

Many different planning strategies would be impacted by these changes. In recent years we have seen a large disparity between the highest income tax rates and capital gain tax rates creating some unique planning strategies like Net Unrealized Appreciation (NUA).1 If the capital gains rate is similar to income tax rates, then it is no longer a viable planning strategy. 

Additional planning should be done if there is a large liquidity event like selling real estate or a business to defer or eliminate some capital gains taxes. Such as possibly using a Qualified Opportunity Zone Fund and other planning strategies.2 Charitable gifting strategies (stock donations and donor-advised funds) are not expected to be impacted and may continue to be an attractive way to reduce capital gains taxes. We expect to see an increase in the use of charitable trusts as well in response to these proposed changes.

The real winner here is going to be the insurance industry. Life insurance death benefits are still tax-free and will become the best way to pay for these taxes or to pass money to heirs in the most efficient manner.

Potential Portfolio Management Considerations

Typically, you want to hold less tax-efficient assets (i.e., bonds) in tax-deferred accounts (i.e., retirement accounts, health savings accounts) to shelter the ordinary income generated. Under the proposal, for those earning more than $1 million in taxable income, we may want to consider flipping the script by (i) holding stocks that generate capital gains and qualified dividends in tax-deferred accounts, and (ii) holding bonds in taxable accounts, especially tax-free municipal bonds.

BFSG already builds portfolios in a tax-efficient manner, but others may want to consider holding more exchange-traded funds (ETFs) in taxable accounts which are usually more tax-efficient investment vehicles relative to mutual funds.3 Furthermore, Real Estate Investment Trusts (REITs) would be favored to invest in and hold in taxable accounts due to a qualified business income deduction.4 Finally, depending on the outcome of the step-up in basis proposal, many investors may want to invest for the long-term (buy and hold forever).

Finally, we will continue to tax-loss harvest portfolios (selling securities at a loss to offset securities sold at a gain) to minimize capital gains exposure.

What Do We Expect to Happen?

Whatever we do predict today is most likely to be wrong because we do not expect the proposals to go through without several revisions and changes. We expect to see more potential additions from Republicans and Democrats (i.e., possibly a reinstatement of the deduction for state and local taxes).

The proposal most likely will not be enacted until July or September, which is when we expect the Senate to debate and pass the reconciliation bill. The higher tax rates could become effective when the bill is enacted into law, given a retroactive effective date (May at the earliest), or delayed until January 1, 2022. The last time Congress legislated an increase in the tax rate (President Reagan and a Democratic House settled on an increase from 20% to 28%), the policy became law in October 1986, but the increase did not take effect until January 1987.

While tax increases are on the horizon, they are likely to be watered down by the time the final bill passes and take longer to be passed. We will continue to monitor the situation and keep you updated.

  1. Net Unrealized Appreciation (NUA) transactions occur when you convert employer stock in your 401k or retirement plan with your employer into a taxable account. When securities are sold, any NUA is taxed at the long-term capital gains rate. Any additional gain is taxed based on the holding period of the shares after they are distributed.
  2. Investors can deploy realized capital gains from the sale of an appreciated asset into a Qualified Opportunity Zone Fund which may allow deferral, permanent reduction and elimination of capital gains taxes provided certain investment deadlines and holding timeframes are met.
  3. Exchange-Traded Funds (ETFs) tend to have lower turnover (many ETFs are passive strategies), trade on a secondary market, and have a structural tax benefit of in-kind redemptions, therefore limiting capital gains.
  4. The majority of Real Estate Investment Trust (REIT) dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes qualified REIT dividends through Dec. 31, 2025. Considering the 20% deduction, the highest effective tax rate on qualified REIT dividends is typically 29.6%.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

8 Reasons Why Physician Anesthesiologists Retire Wealthy

The Agnew Clinic, an 1889 painting by Thomas Eakins.*

Author: Andrew Donahue, CFP®

Some of our clients are the best physician anesthesiologists in medicine. They also make for some of our best wealth accumulators. Here are eight reasons why.

1. They understand the importance of takeoff and landing.

For many physician anesthesiologists, their money is made when they start and when they finish (during induction and emergence). That’s not to say time in between is a lull. Patient complications and emergencies are commonplace. Typically, however, the most consequential anesthetic planning and judgment is rendered at the beginning and at the end of each episode.

The same general sequence follows for their wealth management. We see our clients realizing that the most meaningful and impactful financial decisions they can make is usually (i) when we first establish their financial plan (and implement changes immediately thereafter), and (ii) as we start to “land the plane” for their retirement.

In hindsight, they often admit they had no clue how much wealth they could maximize during the entry and exit phases (“but I’m glad I listened”).

2. They read people well.

By necessity, physician anesthesiologists tend to specialize in first impressions. Sometimes, they only have a few minutes to greet a patient, assess a psychosocial profile, and/or establish a physiological baseline. Other times, they are managing distracted surgeons, exhausted clinical teams, and out of touch administrators. Human nature becomes a realm of professional expertise.

For our clients, this skillset is useful as they approach the financial services industry. As with anesthesiology teams, there are good wealth management teams and bad wealth management teams. The American Society of Anesthesiologists recommends using a “fee-only fiduciary” (legally bound to act in your best interest). It’s also recommended that any such fiduciary be a Certified Financial Planner™ (professionally bound to take a holistic approach to your financial life).

Beyond these two fundamental first steps, our clients seem to avoid trouble by simply asking questions and trusting their gut.

3. They “get” the importance of breadth of knowledge.

Physician anesthesiologists are true medical experts. Dr. Henry Jay Przybylo, physician anesthesiologist and author of Counting Backwards, describes it well:

“Anesthesiology allows little of what was learned in medical school to be forgotten. Perhaps no other specialty remains as expansive or inclusive, covering all the basic sciences (anatomy, pathology, physiology, pharmacology) and all fields of clinical medicine (internal medicine, surgery, pediatrics, obstetrics, and even psychiatry)… On any given day, any page of the physiology, pathology, or pharmacy texts may need to be scoured for a reference…

…[Until] I’m assured my patient has returned to a state of comfort and is prepared to reunite with loved ones, I am the primary care physician. During my anesthesia care, I become the internist, the ob-gyn, the pediatrician. The child scheduled to have a skin mole removed might have a failing heart; the woman whose brain aneurysm has burst might also suffer the pain and deformities of rheumatoid arthritis. When things take a turn for the worse during a procedure, when the blood loss climbs or the heart rhythm goes awry, it’s left to the anesthesiologist to make life right.”

When our clients select a wealth manager, we can’t help but notice they tend to look for someone with breadth of knowledge. They seem to “get” that wealth accumulation is about much more than investing and stock-picking (just as anesthesia is about so much more than putting people to sleep). It’s investing, yes. It’s also tax avoidance, retirement planning, Medicare and Social Security planning, benefits selection, education planning, health care expenses, budgeting, purchase decisions, cash management, credit cards, estate planning, insurance planning, liability protection, asset protection, gift strategies, debt repayment, wills, trusts, incapacity planning, financial aid, credit management, student loans, charitable giving, and legacy planning. Not one of which any wealth manager can address without considering the effects on the others.

They tend to look for a professional who treats the financial organism as a whole, not just one cell or one part.

4. They want to be hands-on.

Every day, physician anesthesiologists care for sick patients and save lives. Sometimes, they are the actual healers themselves. It’s an intentional level of involvement they chose early in their medical careers (procedural care versus academic treatment). In particular, applied clinical pharmacology is a passion – administering medication, observing changes, and responding in real-time.

Our clients tend to approach their relationship with wealth management the same way they approach their relationship with medicine. They don’t sign up and disappear. They want to be involved. They schedule regular meetings. They look to understand the methods and recommendations. They aren’t interested in the minutiae, but they want to see how the work moves the needle in real-time.

This kind of active client engagement always (always) improves the outcome. If you can think back to your last “dream” patient or surgical case, for us it feels something like that.

5. They make decisions under pressure.

When something goes wrong, a good physician anesthesiologist brings leadership and composure to the operating room. If a patient is crashing, they don’t hesitate to step in and stabilize the table – regardless of who’s in the room.

Our clients tend to bring the same bias for action to their financial life. They have confidence in their financial plan (which they had a hand in creating) and they trust the science and math behind it. If something unexpected happens, they calmly reflect on the facts and make appropriate changes. Because their reactions are always measured and controlled, they rarely suffer any self-inflicted financial wounds.

6. They deftly navigate the unknown.

Still today, there is so much science cannot explain about consciousness and memory (let alone, how gas impacts one but not the other). Despite decades of research, the mechanism of action remains one of neuroscience’s greatest mysteries. Yet, the absence of absolute knowledge and control of anesthesia does not preclude physician anesthesiologists from applying it to save lives.

This familiarity with the unknowable tends to help them avoid mistakes in their financial life. We all fear market volatility, for instance, but that doesn’t mean we bury money in the backyard. We choose to invest as a counteroffensive to inflation. Not one of us knows how much we will spend in our life – or how long it will go – but we make careful sacrifices and choices now to be ready for different scenarios.

Many realize quickly that the appropriate response to the financial unknowns of life is moderate conservatism – not extremism.

7. They cope with reality.

Literally and figuratively, physician anesthesiologists confront reality on a daily basis. They erase consciousness, eliminate pain, remove time, deny memories – all in the name of extending human life. What’s more? They accomplish all of this while their specialty, profession, and practice is assaulted with bureaucracy and distraction (MIPS, MACRA, PPACA, bundled payment programs, reimbursement cuts, industry consolidations, patient satisfaction ratings, quality scores, insurance denials, administrators, billing regulations, contractual arrangements, clinical guidelines, professional liability claims, electronic health records, increasing caseloads, unpredictable shifts, CRNAs, outdated drugs, etc.).

Not surprisingly, physician anesthesiologists face some of the highest burnout rates in medicine (often ranked just behind emergency medicine, critical care, and family medicine).

As exhausting and disheartening as it can be, we find our clients do well to prevent their emotions from draining their energy. Instead, they keep a sharp focus on what they can impact and control: (i) keeping their profession and practice solvent, and (ii) maximizing professional income while it’s available.  Mentally, they describe anything else to us as a “waste of time.”

This mindset and pragmatism is usually what brings them to us in the first place. Yes, they possess the intellectual horsepower to learn and master finance, taxation, and the markets (and more). What they tell us is simple, “All of those hours I’d be planning and day-trading, I can sell to medicine for a lot more.”  

8. They want to find balance.

Every day, physician anesthesiologists balance their patients’ needs. They control awareness and responses to pain, adrenaline and blood flow, and memory and muscle tone. They assess and re-assess what needs to be done to make sure every episode of care is a “non-event” for the patient who entrusts them with their life.

We often notice, as soon as our clients begin to see plan progress and feel more confident about their financial path, they start to apply the same calculus and thoughtfulness to their own life. They start to tell us they value balance more. They start to express more gratitude for what they have. More appreciation for those in their life. More positivity about their future and their place in the world.

Here is what’s fascinating.

Usually, right about when they move to an abundance mentality is about when they start to see their wealth take off. Not unlike anesthesia – one of the biggest mysteries of neuroscience – it’s a phenomenon of wealth accumulation we cannot fully explain.

Andrew Donahue, CFP® is a financial planner and wealth manager at Benefit Financial Services Group (BFSG) in Irvine, CA. Prior to a career in private wealth management, Andrew served as a congressional aide and a hospital executive. He can be reached at andrewd@bfsg.com.

Please see important disclosure information here.

*This is a faithful photographic reproduction of a two-dimensional, public domain work of art. This photographic reproduction is considered to be in the public domain in the United States. This file has been identified as being free of known restrictions under copyright law, including all related and neighboring rights.

Longevity is a Blessing and a Curse

It is amazing how long people are living and the wonderful quality of life they live. We had a client that was 93 and was a fantasy football fanatic. Another client was 94 and still playing tennis and golf. We have a client over 100 and she is still sharp as a tack. We are blessed to be able to live long and fulfilling lives these days. Longevity is a real blessing but does not come without some challenges. The longer you live the larger the nest egg you will need and additional planning around things like long-term care is important as well. For tips on how to increase longevity or to review and make sure you will have enough income in retirement do not hesitate to contact us at financialplanning@bfsg.com

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

The Basics of Annuities & Mutual Funds Webinar

BFSG’s Senior Financial Planner, Paul Horn, CFP®, CPWA®, was invited to be a guest speaker for the “It’s Your Money!” workshop series put on by not-for-profit Financial & Estate Literacy. These workshops educate seniors to take control of their financial, estate, and charitable giving decisions. For this session, Paul focused on two of the most heavily sold products by financial brokers/dealers: annuities and mutual funds. Learn the basics and what to look for by clicking HERE.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.