A new president always heralds change. So far there has been a tremendous amount of new legislation proposed, along with executive orders designed to stimulate the economy. Many more changes are being discussed. Among the many changes expected with this president is an increase in capital gains taxes.

Currently, Biden is proposing to raise capital gains taxes from 23% to as much as 39.6% for high-earners. Not only will this impact many financial advisor’s clients, but it also has an impact on a financial advisor looking to sell their practice. In a typical practice sale, the majority of the sale price is allocated to goodwill, which is subject to capital gains taxes, while any held as part of a non-compete or other clause are treated as ordinary income. If the tax hikes are passed, this could mean that the entire sale of a practice would be taxed at the higher rate (almost 17% higher).

Many experts don’t believe the new tax rate would go into effect until 2022, even if it is passed this year. For advisors looking to sell in the next 1-5 years, this may mean it makes better financial sense to sell now, even if the advisor plans to continue to stay on and work over the next several years. These new “sell and stay” arrangements have gained popularity as they help ensure a smoother transition and give both parties more time to completely change over the practice. Other advisors may choose to go ahead and use this as a prompt to exit completely. As it is still a seller’s market, valuations are high and there is a large pool of willing and able buyers at the ready.

Advisors looking to sell before the tax rate goes up need to take steps now to start the process. It can take anywhere from six months to a year on average to sell a practice. With the end of the first quarter fast approaching, advisors need to move quickly to close the transaction before any new legislation goes into effect.