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Wells Fargo UHNW Unit Plans Big Play for Trump's New Tax-Shelter Vehicle

By Miriam Rozen December 21, 2018

Wells Fargo’s ultra-high-net-worth unit Abbot Downing intends to make a big play to provide Opportunity Zone investment options for its clients, who have on average $149 million in assets per household, according to the firm’s executives.

A new law established by President Donald Trump’s 2017 Tax Cuts and Jobs Act has established the Opportunity Zone options. Under the law, investors have the option to shelter capital gains from taxes if they invest for the long term in properties or businesses located in some 8,700 census tracts scattered nationwide and designated by the U.S. Treasury Department as economically distressed. If investors pour capital gains from selling other assets into long-term stakes in the designated zones, they can defer paying taxes on the re-invested capital gains for as many as seven years and then pay taxes on only 85% of the re-invested capital gains.

Most significantly, if investors keep their stakes in a zone for 10 years, they will incur no tax on the additional capital gains they realize when they sell those assets. To receive any of those tax benefits, investors must “substantially improve” zone properties, according to the Treasury’s regulations. But that requirement only calls for the investors to spend an additional amount equal to the purchase value of only the structures on the Opportunity Zone land they acquire.

One financial advisor has called the Opportunity Zones tax benefits a “Roth IRA for the rich.”

At Abbot Downing, management took a bit of a breather after Trump won his tax overhaul before it began exploring the Opportunity Zone options, according to Lisa Featherngill, Abbot Downing’s head of Legacy and Wealth Planning.

“We didn’t focus on it initially,” Featherngill says.

But starting in the late spring, after the Treasury issued maps showing where the designated tracts were located, Featherngill and others at the firm began to recognize that the tax policy offered its clients unprecedented investment options.

Earlier this month, Abbot Downing held a conference in New York that included a panel on Opportunity Zones. Among the panel members was Aron Betru, a managing director for the Center for Financial Markets at the Milken Institute, which worked with the Economic Innovation Group, a bipartisan group launched by Sean Parker, Napster founder and former Facebook president, all strongly advocating for the new tax policy.

Although Abbot Downing management expects its ultra high net worth clients will rank as precisely the type of investors who will leap at opportunities to unload unrealized capital gains in a low-tax and eventually tax-free environment, the firm has not yet winnowed down which of the more than 40 funds targeting Opportunity Zones it will offer, according to Carol Schleif, Abbot Downing’s deputy chief investment officer.

“We are deep in due diligence,” Schleif says.

Precisely because of the law’s novelty, no fund manager has previous experience complying with all the related regulations — nor does anyone even know what all of them will be, since the Treasury is still scheduled to issue more guidance. But Abbot Downing is already evaluating fund managers who have real estate experience who plan to pitch Opportunity Zone targeted funds, Schleif says.

Even after Abbot Downing determines which among those funds are the best options, they will not draw the interest of all the firm’s clients, Schleif says.

Why not?

“Some clients are acutely attentive to tax issues. Others aren’t,” she says.

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Tags:  Investment strategies , Tax planning , Family wealth/family office , Facebook , Milken Institute , Wells Fargo

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