Making Sense: August Q&A

Amy: Hi. I'm Amy Thomas, a strategist here at First Citizens Bank. On Tuesday, August 20, our Director of Market and Economic Research Phil Neuhart sat down with Senior Director of Wealth Planning Nerre Shuriah to talk about the fundamental importance of wealth planning. As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only.

Additionally, Nerre Shuriah is a licensed attorney but is not acting in that capacity for purposes of this video. None of the information you hear should be considered as tax or legal advice.

Phil: Nerre, thank you so much for joining us today. It's a pleasure to have you. Why don't you start by telling us a little bit about your team and how you work with clients.

Nerre: Good morning, Phil. It's nice to be here. So our planning team does have a number of key philosophies that are foundational to how we want our clients to experience the planning process.

The first is our planning teams are local. We don't have a national team that we deploy out to meet our clients. We try to base them in the major cities in which our clients are based, and that allows them to be knowledgeable about the state municipal taxes or rules as well as any cultural or geographic information that may be endemic to that region.

Second, we provide planning on a modular basis. Meaning while clients may have, you know, two dozen different goals or dreams, risks or concerns that they need help with, we don't tackle them all at once and take our client through a one- or two-year-long process to get it all done. What we try to do is prioritize maybe five or six that we're going to work on for the next 6 months, do an analysis, help the client make a decision about what's the best solution and then go straight to implementing that solution.

What happens with that process is that everybody feels the success of making incremental progress, and the client doesn't feel overwhelmed by planning. They don't feel drained by the process because it can be very emotional. And then we circle back and tackle the next section or phase when they're ready or we try to help them get ready.

The next is planners are objective. We don't compensate them with variable compensation. So they should have no conflicts of interest when they're recommending a product or service to a client. So if a planner says this life insurance policy is the best thing for you, the client can trust that the planner has no self-interest involved, that that policy is best based on their situation, their family dynamics and their assets.

And then lastly, our clients are mainly business owner clients. And business owners have a lot of complexity in their planning. We are trying to help them both with their own personal planning as well as that of the company, the employees and then any other stakeholders, which could be partners or co-owners. That's a lot of different people or entities that we're trying to plan for. So we put a lot of resources in front of our business owners to help them move forward and get to their goals.

Phil: We often hear the term financial plan, and you mentioned it. But what are the keys to building a successful, sophisticated financial plan as your planners do day in and day out?

Nerre: That's a good question. But I'd even like to go back to kind of the foundation of your question, which is a financial plan. And that's something that I really would like to get people to stop thinking of it as a plan. A plan sounds like a noun. Right? You're going to expect something. I'm going to give you a book, like a thing. And really a plan a financial plan is a process.

It's something that you engage in over time. It never quite ends because when you think about your life, you're constantly evolving. Right? People are always getting married, getting divorced, having kids, grandkids, someone's passing away. You have a new job. You leave a job. You retire. You may get an inheritance. You may have a windfall or some other thing may happen that's unfortunate like a health event.

So we want you to think of planning as a process that it keeps evolving. And so when you have that in mind, then you realize that there are things that I need to tackle. There are aspects of it like the retirement planning, you know, the investment planning, the estate planning, but that you don't do it all at once and never look at it again, that you keep touching on it year after year after year. And I think if they—if everyone keeps that in mind that they should revisit it, year after year, that that's probably a key start to their financial plan.

Phil: Right. So it's a living, breathing plan. So it's really in-depth. One thing that's always on our client's minds or often our client minds, are taxes. And you might have heard it's an election year. We can't ignore that, of course. And taxes always come up in election years. What are you hearing? What are you telling clients, relative to taxes and in this current election cycle?

Nerre: So I would say, traditionally, taxes always come up. But as you know, we've had the big switch this year. So we don't have as much information on tax policy as, say, we would have in a more typical election cycle.

Usually, what we try to do is before the election, we may put out some articles on our FirstCitizens.com page, alerting people to maybe what is a potential. And then certainly, once the winner is elected, we do write an article about what is potential tax legislation.

So keeping that in mind. So the Child Tax Credit was something that came up from the pandemic. The American Rescue Act doubled the Child Tax Credit, made it paid out monthly and made it refundable—meaning a family could get it even if they didn't pay taxes. And it ended or terminated in 2022. That was a very popular credit. It's actually bipartisan. There's a number of bills that want to reenact it or revive it. It's likely that that would come back around regardless of which party wins because as I said, it's fairly popular, and it did actually halve child poverty.

Some other things that you may be hearing through the campaigns are tips. Surprisingly, both parties are advocating for no taxes on tips, and that's a real populist type of promise.

It's interesting. And I think when you hear tips, you probably think a waiter, you know, waitress, that type of thing. But actually, think about your experience with tips nowadays. Right? You can go anywhere and be requested to pay tip. Right? You could go get your oil changed and asked to pay a tip. You could go to a personal trainer and be asked to pay a tip.

So tips are for any service industry or could be any product. And it would be very difficult to then legislate what type of income now constitutes a tip. So a lot of people could move most of their income to the tip category, and that would be very difficult to enforce.

Phil: The classic unintended consequence. Right?

Nerre: Exactly. So I think when we're all thinking of somebody that's probably more middle or working class getting tips, it could then expand to almost anybody reclassifying their income as tips.

Then the second part is it may treat people in uneven ways. So a waiter who works in a state with a high minimum wage pays less of his income in tips than a waiter in a state with a low minimum wage. The tax code really shouldn't treat two people with the same type of income in such disparate ways. It wouldn't hold up to a legal challenge in that way. So while it sounds really good, I think it may be difficult to enact or enforce. And even if they could, it may be difficult to survive a legal challenge. And even if it does do both of those things, it would be really expensive because budget estimates say it would reduce the federal income by $150 to $250 billion. And that's just on the definition of tips that we both know now.

I think the other thing that we're hearing is, from former President Trump, that he'd like to do away with the income tax code entirely and just have us all survive on tariffs. Sounds really nice. I mean, nobody loves filing income tax returns. However, that could get quite tricky. So if you don't know, tariffs is sort of like the extra cost that we pay on imported goods. Not we, but, you know, that is assessed on imported goods from foreign countries. The problem is that companies aren't going to just take that cost.

Phil: That's right.

Nerre: They're going to pass that on to the consumer, which would mean increased cost of goods that we pay for. Things in the store. We're already crowing about the increased cost of groceries.

Phil: Tariffs are inflationary.

Nerre: Right.

Phil: It's a classic economic principle. That gets passed along to the consumer.

Nerre: Exactly. And then the difference here is the income tax is progressive. So it starts at lower levels for lower income earners and then higher tax rates for higher tax income earners. But tariffs are not progressive. And if you have lower income, you're actually paying a higher percentage of your income on consumer goods, which would mean essentially you'd be paying more in those indirect taxes.

Phil: Right.

Nerre: Which are really just the tariffs.

Phil: Yeah. We mentioned unintended consequences with tips and with tariffs, huge unintended consequences. We solved that in the 1970s, tariffs and quotas.

Nerre: Right.

Phil: They really do drive distortions that I think, on the surface, we might not think of.

More specifically, on January 1, 2026, the current estate tax exemption will sunset if Congress does not act. This is something near and dear, of course, to private wealth clients. How are you thinking about this, and what are you saying to clients relative to the estate tax potentially sunsetting?

Nerre: So we've said quite a bit. We've actually put out two articles about this, and the law you're talking about is the Tax Cuts and Jobs Act, and that does sunset December 31, 2025.

And it has impact on two tax systems, both the income tax and the transfer tax, which covers the state gift generation skipping tax.

So that law for income tax in particular did benefit high income earners more so. So those people are going to be impacted. It condensed the tax brackets. It lowered the top rate. It forced people to move to the standard deduction and discourage itemized deductions. So, in that respect, if you benefited from that law, you're not going to benefit from its sunsetting.

But there were some things that it got rid of that could help you as, on an individual basis, case-by-case basis. So for instance, it capped the ability to deduct state and local taxes to $10,000. It also capped your ability to deduct mortgage interest at $750,000. Those couple of things may be more beneficial for an individual, but it's on an individual basis. It's hard to say. That's probably something that would impact you greatly if you lived in a high-income state or municipality.

Another thing to be aware of would be if you did tend to itemize, say you wanted to make charitable donations, you might want to wait until it sunsets and then bundle them all in 2026 when you are likely to itemize. If you do think that you benefited greatly from the Tax Cuts and Jobs Act, you might want to accelerate some income now while you are in lower tax brackets. So that's something where you should be working with your CPA to say, "How did this impact me in the past? What are some steps I should take now to take advantage of it before it's likely to sunset?"

And the thing is, the sunset is a passive act. Right? Congress doesn't have to do anything. It's just going to sunset on its own regardless of who wins the election.

Either one will have to take some steps to fix it, adjust it to their particular campaign promises. Because even if it does sunset, there are some things it does that's not particularly helpful to either party.

There's also a second part to that Tax Cuts and Jobs Act, which I mentioned, which is that the estate tax, which doubled, will also sunset. Meaning, if you want to take advantage of that extra gifting, you need to do that now.

And the reason why we suggest you take some action now is there are a number of strategies that may be beneficial to you and your family, but picking the right one requires some education. So that could take some time. And then implementing the strategy could take time. Some strategies require a block of time in between steps so that those steps don't get condensed down into one singular transaction in the eye of the courts. And so you may not be able to, say, implement it all over the course of 1 or 2 months. You may need a 6-month break in between. And so that coupled with maybe booking attorney's time, you know, as the sunset gets closer and closer, and most people need the time of an attorney to draft and execute documents to implement strategies, they're going to get busy.

So if you have an estate where that increased estate tax will impact you and you could benefit from it, it behooves you to take some action now. Or even if you choose not to take some action, at least make that an educated guess so that you know that you have nothing to regret later.

Phil: Nerre, thanks so much for joining us. This is extremely enlightening. Thank you again.

Nerre: It was a joy to be here, Phil. Thank you.

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