The past year has been one of complex challenges and unprecedented change. While many factors impact investors, research consistently shows that investors, particularly the high-net-worth are keenly aware of the negative effect taxes can have on their investments. According to the 2016 U.S. Trust Insights on Wealth and Worth survey, the majority (55%) of high-net-worth investors say it’s more important to minimize the impact of taxes when making investment decisions, while less than half (45%) say it’s more important to pursue the highest possible returns regardless of the tax consequences.

This should come as no surprise, since taxes can be one of the biggest investment expenses that affluent clients face. For high-net-worth and high earners, tax rates can be as much as 40% or even 50%, when Federal and state taxes are combined. In turn, these clients seek experienced advisors with proficiency in tax planning as part of a personalized and holistic approach to financial advice. For RIAs and fee-based advisors, developing expertise in tax planning—and putting it to work to protect clients' wealth—should be a top priority, not only during tax season, but all year long.

You should take measures to help your high-net-worth clients reduce the taxes owed on income and investment gains. A number of effective tax-planning strategies are outlined below.

Tax-Loss Harvesting

Taxpayers in higher brackets can harvest losses to offset investment gains and lower their tax liability. Focus on selling losing investments that no longer fit your high-net-worth client’s investing strategy, or use this as an opportunity to rebalance their portfolio. Typically you cannot sell shares to lock in a loss with the intention of buying them back right away. The IRS “wash sale” rule bars investors from claiming the loss if they buy the same or a “substantially identical” investment within 30 days of the sale. However, it’s a little-known fact that by moving these assets into certain tax-deferred vehicles, your clients can avoid wash sale rules and still remain invested in the same asset classes—allowing them to participate in future upside potential, while cutting their tax bill to maximize future growth. Even over a short time horizon, the benefit can be meaningful for many tax-inefficient assets and tactical strategies.

Annual Gift Tax Exemption

For the 2016 tax year, an individual client can give a gift of up to $14,000 per year—and couples can give a gift of up to $28,000 per year—to an unlimited number of recipients. These gifts can help reduce the amount of their taxable estate—and are exempt from the federal gift taxes. Gifts may include cash, stocks, bonds and portions of real estate. To contribute money toward a child’s education, clients typically can make a payment directly to an educational institution and pay no gift tax. To fund education expenses clients may also consider a tax-deferred 529 plan.

Charitable Contributions

When making a significant gift to charity, high-net-worth clients should consider giving appreciated stocks or mutual fund shares that they have owned for more than one year. The deduction for the charitable contribution is the fair-market value of the securities on the date of the gift—not the amount the client originally paid for the asset. Clients can boost their tax returns by deducting the appreciated amount—while never paying any taxes on the profit. Keep in mind that if clients expect their income to increase in the next year, they may benefit by waiting to defer charitable contributions and other deductible expenses accordingly.

Minimize Taxes With The Power Of Tax Deferral

An important step in the tax planning process is to help high-net-worth clients leverage the power of tax deferral. You can help your affluent clients diversify between different tax rates and different types of taxes, as well as diversify between taxable investments and tax-deferred vehicles, to help control not only how much they pay in taxes—but also when these taxes are paid.

The power of tax deferral helps achieve tax diversification, to effectively manage the timing of taxes, minimize their impact, and ultimately generate more wealth. With tax deferral, your affluent clients keep more of what they earn by deferring taxes during peak earning years, when they are taxed at a higher rate. Over time, they accumulate substantially more through tax-deferred compounded growth. And when they withdraw income in their retirement years, they are likely to be in a lower bracket and pay less in taxes. There are several tax deferral solutions that allow you to manage and minimize high-net-worth clients' tax obligations:

Max Out Qualified Plans: A fundamental step in any effective tax planning strategy is to max out tax-deferred vehicles such as qualified plans. For the 2016 tax year, contributions to a 401(k), 403(b) or similar workplace retirement plan must have been made by December 31, 2016. The contribution limit to employer-based 401(k) plans remains $18,000 ($24,000 for clients age 50 or older).

To make a tax-deductible contribution into an IRA, this tax season’s deadline is April 18, 2017. The current contribution limit remains $5,500 ($6,500 for clients age 50 or older). Many advisors prefer to wait until this April deadline to evaluate their clients’ tax returns and determine the best way to leverage an IRA. With a Traditional IRA, clients pay no taxes on contributions—and instead wait to pay taxes later when making future withdrawals during retirement. With a Roth IRA they pay taxes on contributions—but make future withdrawals tax-free and penalty-free as long as they are at least 59½.

Roth Conversions: A Roth IRA can be an important tax-free source of income for high-net-worth clients in later years. But when converting from a Traditional IRA to a Roth IRA, the entire value of the IRA is considered ordinary income. This “bracket creep” can create an immediate tax burden, a disadvantage for some clients considering a conversion. Many clients can save more on taxes by waiting until they are in retirement to do the conversion, when they will most likely be in a lower bracket. When converting to a Roth, clients have until October of the year they make the conversion to reverse it and turn the Roth back into a Traditional IRA.

In the past, in order to be able to convert from a Traditional to a Roth IRA, one’s income needed to be under $100,000. The IRS rules have changed and there is no longer an income cap in place. With the cap removed, your high-income clients can convert as long as they pay the appropriate tax on the conversion. There is no 10% early withdrawal penalty if the funds move from the Traditional IRA to the Roth IRA in a 60-day window. This is an underutilized strategy that should be implemented for your high-net-worth clients.

Asset Location For Tactical And Alternative Strategies: To generate more alpha, many advisors use tactical management or non-correlated assets such as liquid alternatives. And according to Advisor Authority, Jefferson National’s study of more than 1,300 RIAs, fee-based advisors and individual investors nationwide, nearly half (47%) of ultra-high-net-worth investors are likely to take a more tactical approach to investing. But these strategies can be tax-inefficient due to high turnover and short-term capital gains. Using a strategy called asset location—to “locate” these tax-inefficient strategies in a qualified plan or other low-cost tax-deferred vehicle—can preserve all of the upside without the drag of taxes. For investors heavily allocated to fixed-income, commodities and REITS—typically taxed at higher ordinary income rates—asset location can have a measurable impact as well. Research shows that asset location helps mitigate tax implications to increase returns by 100 bps or more—without increasing risk.

Legacy Planning And Wealth Transfer: According to U.S. Trust Insights on Wealth and Worth, more than 60 percent of affluent individuals consider it important to leave a financial inheritance to the next generation. The majority of the wealthy have a will or comprehensive estate plan, and roughly half have some type of trust. But trust income in excess of $11,950 currently is taxed at 39.6%—the highest income tax bracket—plus the 3.8% net investment income tax. By funding a trust with certain types of low-cost variable annuities, you can minimize, delay or even eliminate the current tax, to maintain more wealth for the next generation of family members—and the next generation of clients for your firm.

For this strategy to work, it is important to choose an annuity that has no commission, no surrender fees, and a broad selection of underlying funds. Low cost VAs work well with many types of trusts: Credit Shelter Trusts or Bypass Trusts, to save more for future generations; Net Income with Makeup Charitable Remainder Unitrusts (NIMCRUT), to reduce taxation of highly appreciated assets; Revocable Trusts to shelter income for clients in high brackets; and Special Needs Trusts. Or, for a simple wealth transfer solution, certain annuities offer a non-qualified stretch option to generate a lifetime income stream for heirs.

Capture More Of The Growing HNW Market

High-net-worth households in the United States are steadily growing, according to Cerulli. From 2015 to 2016, the number of households with investable assets of $3 million or more increased more than 10%, from 1,821,745 to 2,023,518, and the number of households with investable assets of $10 million or more increased nearly 30% from 249,159 to 318,978.

While the competition for high-net-worth clients continues to increase, and complex market dynamics make every basis point of performance count, you can differentiate your firm and attract more affluent   clients by demonstrating your expertise in tax planning. Taxes may be one of the biggest investment expenses that your high-net-worth clients face. By using simple effective solutions like the power of tax deferral, you can help clients mitigate the impact of taxes on income and capital gains, to optimize their portfolios now, and accumulate more for the long term. The sooner you focus on tax planning—and put it to work—the sooner your affluent clients and your firm can begin to reap the benefits.     

Laurence Greenberg is president of Jefferson National, now operating as Nationwide’s advisory solutions business. To learn more about the innovator of the industry’s first flat-fee investment-only variable annuity with the largest selection of underlying funds, please visit www.jeffnat.com.