result in a lower threshold for the estate tax exemption and a higher top marginal tax rate , among other potential changes .
However , some items in the law might not be missed when they go away , including the cap on state and local tax deductions .
“ The state and local tax [ SALT ] deduction cap at $ 10,000 is a big source of frustration for taxpayers ,” Storey says , “ especially those living in high income-tax states .”
Another source of frustration for wealthy clients , specifically in high-income tax brackets , is the 20 % capital gain and dividend tax for individuals earning more than $ 492,300 ( or couples earning more than $ 553,850 ). “ If you expect your income to be low in the years before 2026 ,” she says , “ there may be opportunities to accelerate income at lower rates ,” which means clients might want to look at “ Roth conversions , exercising and selling stock options or restricted stock options ,” among other things .
“ A surprise that many wealthy taxpayers won ’ t be expecting is potentially being subject to the alternative minimum tax again ,” Pontius says . Under the Tax Cuts and Jobs
Act , high earners still had to pay the alternative minimum tax , but married couples got an exemption up to $ 1,036,800 in income . That threshold is set to decline again . Before the law passed , the exemption phased out at a much lower $ 160,900 in income .
“ I ’ m not sure I ’ d call it ‘ anger ,’ as these individuals have likely hit the wall in the past with not receiving a deduction or credit based on their income ,” Pontius adds , “ but I often hear , ‘ I make too much money , don ’ t I ?’ My answer is , ‘ It ’ s a good problem to have .’”
— Jeff Stimpson
Tread Cautiously With Exchange-Traded Notes
In the wake of the Silicon Valley Bank collapse , and with some banks still in peril , exchange-traded notes , debt instruments that are backed by the financial strength of their issuing banks , are facing a precarious future .
Take the X-Links notes , sponsored by Credit Suisse . The bank is involved in a corporate takeover by a larger rival ( UBS ) that could spell the end of its ETN lineup , which includes the Credit Suisse X-Links Crude Oil Shares Covered Call ETN ( USOI ), the Credit Suisse X-Links Gold Shares Covered Call ETN ( GLDI ) and the Credit Suisse X-Links Silver Shares Covered Call ETN ( SLVO ).
The firm announced its regular monthly coupon payments for these funds on April 3 , so on the surface things seem normal . But Credit Suisse ’ s ETNs have an underlying history of trouble . Back in 2020 , nine of the firm ’ s ETNs were delisted . Among this group were its “ VelocityShares ,” linked to the S & P 500 VIX index . One note that bet against volatility , the VelocityShares Daily Inverse VIX Short Term ETN , was overwhelmed by extreme market turbulence in 2018 . After that , the liquidation of this and other volatility ETNs wasn ’ t a surprise .
A 23-Year History
Currently , there are 82 ETNs with $ 8.2 billion in assets , according to the ETFAction . com database . Most of these assets are invested in niche areas tied to commodities , volatility and leveraged or inverse strategies .
The largest ETN by assets is the JPMorgan Chase Alerian MLP ETN ( AMJ ), which has $ 324 million . Over the past month , the note has experienced average daily volume of 396,644 .
The first ETN to surface in global markets was in 2000 . The original note was sponsored by Bank Leumi in Israel and was linked to the Tali 25 index , a benchmark of 25 leading companies in Israel .
Currently , there are 82 ETNs with $ 8.2 billion in assets , according to the ETFAction . com database .
Since then , ETNs have been lauded and promoted by the banking industry for their tax-efficiency . Because the bank issuer is paying for the full value of the index , there is zero tracking error . But that all depends on the strength of the banks . Is the added dimension of credit risk worth it ?
Even before the latest bank turbulence , ETNs had a sketchy history going back to the Great Financial Crisis .
In 2008 , the Lehman Brothers Opta ETNs went bust . At the time , competing ETN sponsors like Barclays Bank had the chance to step in to save Lehman ’ s ETN shareholders , but they didn ’ t . Instead of creating confidence in the ETN marketplace , this spurred doubt . And today , those doubts are still rightfully lingering . What should advisors do ?
Find An ETF Instead
ETNs “ provide a useful wrapper for hardto-track areas . But the credit risk of the counterparty remains a relevant risk ,” says Mike Akins , the CEO at ETFAction . com . For this reason , locating an ETF equivalent for the same target asset class is likely to be the safer strategy .
Using the ETF structure immediately eliminates the risk that the product will go bust because of bank failure . And while ETNs might be slightly more tax-efficient than traditional ETF , those benefits would be negligible if the investment were kept inside a tax-friendly retirement account anyway .
Also , using ETNs inside a portfolio complicates the investor ’ s asset allocation . For example , a portfolio model is likely to misclassify a commodity-linked note as exposure to commodities . In reality , the investor doesn ’ t have exposure to commodities but rather to the unsecured debt of the ETN issuer .
Advisors who insist on using ETNs with client portfolios should tread with caution . Akins adds , “ ETNs require a higher level of due diligence and ongoing monitoring .”
— Ron DeLegge
MAY 2023 | FINANCIAL ADVISOR MAGAZINE | 11