The impact of tax reform on asset and wealth managers

by AM admin on January 8, 2018

Brian Rebhun, US Asset and Wealth Management Tax Leader –

Congress on December 20 gave final approval to the House and Senate conference committee agreement on tax reform legislation, the Tax Cuts and Jobs Act (TCJA), clearing the bill for presidential action.  The President signed the legislation on December 22, 2017 with most of the provisions taking effect January 1, 2018.

The impact to the asset and wealth management (AWM) industry of the TCJA will be substantial. I believe there are four main business issues that will impact the industry.

  1. Higher effective tax rates will require principals of asset & wealth managers to reconsider where they personally reside and where the management company is doing business.
  2. AWM managers, specifically alternative asset managers, who have relied on carried interest and the preferential tax on long term capital gains (20% rate), may need to rethink their compensation models with their investors and employees.
  3. Given AWM managers will not be eligible for the pass-thru special rate, asset & wealth managers may evaluate their form of organization (corporation vs. limited partnership vs. S corporation), especially with the new 21% corporate rate.
  4. Given the change in rules for real estate, real estate investment trusts (REITs) and master limited partnership (MLPs)       should be more popular asset classes attracting both domestic and foreign capital.

Over the next few weeks, I will address these four business issues that will impact all AWM managers. In this first blog, I will address the issue of geographic location and the potential movement from high tax states in which asset and wealth managers do business. Below is a simple chart of the impact of the loss of the state and local tax (SALT) deduction in the geographies where many AWM managers are headquartered.

As a result of the SALT deduction being limited to $10,000, principals and senior deal professionals of asset managers, are considering where they may want to live personally. For asset managers in the Northeast states (like NY, NJ & CT), some may explore opportunities to change personal residency to states with lower or no personal income tax. If exploring a change of residency, there are many considerations to keep in mind including whether from a lifestyle perspective, the principals and their spouse/significant others/children will be accepting of the move. Without the family moving, it will be difficult to substantiate a domicile change, especially from New York, which has the most significant and aggressive residency audit program. Other factors that should be considered are the time spent in the new resident state; the size and use of the home; relocating the business in whole or in part; and moving of items near and dear to the new resident state.

In addition to personal residency, asset managers are considering how the move of a principal or senior deal professional could impact their business. Besides the opening of an office in a potential new jurisdiction, asset managers need to determine what front, middle and back office operations should relocate with the deal professionals. This would have a big impact on the amount and location of office space required for the management company to conduct its investment management activities.

Will the loss of the SALT deduction cause a mass exodus of asset managers out of high tax states? Only time will tell but for the asset managers looking to relocate, significant business and tax considerations will need to be addressed as this is a highly complex and audited area by states. It will be also interesting to see how high tax states may react to the potential loss of their high wage earners. These states may seek to retain and attract the industry through increased incentives.

I’d love to hear your thoughts.

Print Friendly, PDF & Email

Comments on this entry are closed.

Previous post:

Next post: