With 2011 tax-rate decisions delayed by Washington brinkmanship, financial advisers spent most of 2010 unable to answer key questions from their wealthy clients.
"It's been extremely challenging," said Matt Brady, head of the advice unit at Barclays Wealth Americas.
"Uncertainty is always hard for clients — it makes it difficult to plan."
Fortunately for those advisers, a compromise tax bill eventually addressed rates, though only for two years. In 2012, advisers and their clients may face more uncertainty.
The guessing game that characterized 2010 centered around tax cuts from the Bush era, including the estate tax.
The income tax cuts enacted under the second President Bush were scheduled to expire at the end of 2010, and the estate tax, which had gone from 45% in 2009 to 0% in 2010, figured to rise as high as 55% at the beginning of 2011.
What's more, the uncertain fate of the generation-skipping transfer tax muddied the waters.
That tax applies to gifts and bequests made to recipients one or more generations removed from the giver.
Under the compromise, the 35% individual tax bracket was extended until 2013.
The legislation also extended the capital gains and dividend rates for those in the 25% income tax bracket and above: The current 15% rate is to remain in effect until 2013.
And the agreement extends the estate and generation-skipping tax provisions for two years at a 35% rate and with a $5 million individual exemption.
Despite the compromise, the need to deal with the federal deficit looms, and observers say this could mean higher taxes two years from now.
In addition to that prospect, another set of taxes is looming on the horizon for 2013, noted Pam Hollinger, an Invest Financial Corp. adviser at Marquette Bank near Chicago.
Under the new health care law, individuals earning at least $200,000 a year, or couples making at least $250,000 per year, will face a 0.9% Medicare surtax, Hollinger said.
And a 3.8% tax will apply to the investment income of high-income households.
The additional income tax poses a challenge for employers, Hollinger said.
"How will they know that me and my husband add up to more than $250,000?" she asked. "Employers are going to have to figure out how to account for that."
Hollinger said she has recently had the duty of breaking the bad news to high-net-worth clients about the 3.8% investment income tax.
"Many of my clients are not aware of that," she said. "It's been hidden in the health care reform bill."
The uncertainty over tax rates for 2011 has been worrisome for some high-net-worth clients, who wanted to make the most tax-savvy moves before yearend regarding everything from charitable donations to life insurance.
But some financial advisers, such as Andrew Lucking at PrimeVest, have counseled clients not to sweat the uncertainty.
A long-term outlook and long-term planning are more important than reading short-term tea leaves, he said.
In a mid-December interview, Lucking used capital gains rates as an example.
Without a legislative compromise by yearend, he noted, capital gains rates would have risen just a bit, to 20%, from 15%.
"There's not a reason to sell out a good, long-term investment just based on that alone," he said.
"You always want to be careful not to let the tax tail wag the dog."
If the uncertainty over taxes possessed any good news for bank-based advisers, it would have been that, for many, the wealthiest clients — the ones who stood to be most affected — made up just a small proportion of their total clientele.
For Hollinger, the discussions with such clients have been pretty straightforward.
"I've just been trying to calm my clients down by telling them, 'Once things pass, we can move forward with your plans,' " she said.
"I've been telling them that we just have to wait and see," she said, "and soon we'll have some certainty."
