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Financial Planning for a Biden Presidency

Following the 2020 election, Biden is in the White House and Democrats hold the majority in Congress. While it’s a 50/50 split in the Senate, Vice President Kamala Harris can act as a tie-breaking vote, giving Democrats more leverage to pass legislation. With this current makeup, the likelihood of new tax legislation is high. With President Joe Biden in office and a Democratic majority in Congress, there is a greater potential for tax increases. Because it’s still so early in Biden’s presidency, it’s hard to predict what the future holds.

These uncertainties may be worrisome for you and your family, but with the right financial guidance, there are ways to keep the wealth you’ve worked long and hard to build out of the government’s hands. It all boils down to understanding the current policy implications and how to roll with the changes so you can keep your financial goals on track.

What we know right now

Because Democrats control Congress, they can use budget reconciliation to pass legislation with a simple majority, with the exemption of a filibuster. With their majority, Democrats are looking to push two big agendas. Those include rolling back portions of the Tax Cut and Jobs Act and expanding the Affordable Care Act, all of which could have a significant impact on your taxes.

On top of that, Biden has also promoted a tax agenda that places a larger burden on wealthy Americans. Some of the items on his agenda include:

  • Tax increases on people making $400,000 or more annually.
  • A payroll tax hike for people who make $400,000 or more annually.
  • Limits on itemized deductions for high-income taxpayers. Eliminating the step-up basis.
  • A decrease in the federal estate tax exemption.
  • Tax increases on capital gains and dividends.

None of these policies have gone into effect yet. However, it does give you an idea of what may lie ahead.

Finding the right financial vehicles in a high-tax environment

Knowledge and preparation can help when it comes to dealing with uncertainty. Because even with the current administration’s tax agenda, there is a lot you can do to keep your money where you want it. With the guidance of a fiduciary-level financial advisor, you can pursue a variety of avenues to keep more of what’s yours. Here are just a few examples of planning strategies that high income earners and wealthy families should consider moving forward:

Tax Diversification Strategies For Wealth Accumulation

401(k)s and IRAs have long been the most popular vehicles for retirement accumulation. Historically, contributions into these vehicles have allowed a deduction at the participant’s marginal tax rate. With the new proposed legislation, these deductions would be limited to 28%. Meaning if you are in the top marginal tax bracket, you could potentially be subject to double taxation on contributions. Taking a more diversified approach to current and future tax treatment has never been more important.

You can do so by converting pre-tax retirement funds to a Roth IRA. Roth IRAs allow you to contribute post-tax funds into a retirement account, which you can access tax-free after five years and attainment of the age of 59 ½. Or, you may consider looking at Cash Value Life Insurance as an additional tax-efficient cash accumulation tool. If the cost of insurance is less than the tax cost of an alternative investment, it may be worth considering. There are also no age restrictions for access or contribution limitations on cash value life insurance.

To research this option in more detail, take a closer look in another article here.

Charitable Giving Considerations

If Biden’s 28% deduction cap becomes a reality, charitable giving deductions may be more difficult to capture as well. However, with a comprehensive strategy, capturing those deductions is still possible. Here are a few examples:

  • Donor-advised funds: These funds qualify for full tax deductions subject to the AGI limitations without specifically naming a charity at the time of contribution. They allow you to make contributions of cash, securities, or other assets, continue to grow those assets tax-free, and name the ultimate beneficiaries at any later date.
  • Charitable giving with real estate: You may have some real estate beyond your family home. Whether it's unimproved land, rental property or even a vacation home, donating these to charity can help you reduce your tax bill, along with increasing your philanthropic footprint. With careful planning, you may be able to capture a tax deduction while still retaining some use of the property donated.
  • Charitable giving with cash: Unique to the 2020 tax year, the C.A.R.E.S. Act included benefits for those who made cash donations to qualifying charities. These donations allow you to deduct up to 100% of your adjusted gross income. However, it’s important to note that donating cash to private foundations and donor-advised funds do not qualify for the increased limit over the normal 50% deduction limitation.
  • Charitable giving with stocks: This is a viable option for those who have highly appreciated assets in the stock market. Once contributed, charities can sell those assets without recognizing a capital gain. Not only can this be an opportunity to support a charity you love, but a great way to reduce your tax liability. If planning is done correctly, the donor can even receive a residual income stream from the donated assets. However, setting this up can be complicated. If you’re looking to do charitable giving of this nature, it is very important to speak with a reputable financial advisor who can help you make the most out of your decision.

Tax-loss harvesting

Thanks to the pandemic, elections, natural disasters, global turmoil and more, your stock portfolio may have experienced some significant volatility recently. Capturing losses while remaining in a similar position, also known as tax-loss harvesting, can help offset realized gains you would have otherwise paid capital gains taxes on.

Transferring wealth from your taxable estate

For individuals with a net worth more than $3.5 million or $7 million for couples, Biden’s estate tax proposal could limit you from passing wealth down to future generations without significant transfer tax implications. Fortunately, removing taxable assets from your estate now can help reduce this burden. Here are a few ways you can do this:

  • Utilize Annual Exclusion: Under current law, you may give up to $15,000 to as many individuals as you wish without incurring a transfer (gift) tax. You can also make gifts to a tax-free education plan like a 529 or place gifts in a trust for the benefit of family members. A financial advisor can be a knowledgeable partner in this pursuit and help you make a decision that works best for your goals and objectives.
  • Utilize Lifetime Exemption: Over and above the annual exclusion mentioned above, the current lifetime exemption allowed to pass free of transfer tax is $11,700,000 per person or $23,400,000 per married couple. This is proposed to be reduced to $3.5 million per person or $7,000,000 per married couple. Making large gifts before the laws change will be a key focus for wealthy families in the coming months.
  • Loans and Installment Sales: Given the historically low interest rate environment, wealthy families are able to transfer assets through loan or sale out of the estate at a very low cost. This enables families to exceed the transfer limitations allowed by the annual exclusion and lifetime exemption. Using this strategy also allows the grantor to retain a “string” they can use to pull back the assets later if laws or circumstances change. And if you decide to forgive the loan, it can be considered a gift, which can be easily reported in the future.

Structures to Consider:

  • Irrevocable Life Insurance Trust: This trust allows you to own life insurance outside of your estate. Proceeds are payable income and estate tax free and can be used to pay any residual estate tax liability. Life insurance also provides the necessary liquidity to heirs to prevent arguments over more illiquid assets. As the grantor, you get to establish the rules for when and for what the dollars can be used.
  • Spousal Lifetime Access Trust: This typically constitutes a gift from one spouse to an irrevocable trust for the other spouse's benefit. Each spouse can set up a trust for the benefit of the other spouse during their lifetime. As long as they are substantially different, and careful rules are followed, all assets are excluded from the estate beginning at the time of transfer, and all future appreciation is excluded from estate. Spouses can continue to enjoy income from the assets during their lifetime. The two biggest risks to this strategy are divorce and premature death of one spouse. Life insurance is used as a hedge for the latter.
  • Generation-Skipping Trust: Not only does the IRS tax our earnings and transfers, but they also tax transfers again when we try to skip a generation. Ensuring your trusts take full advantage of the GST exemptions will help to preserve your wealth for multiple generations. John D. Rockefeller has almost 250 living heirs currently, and they all know his name thanks to careful planning around this concept. Consult with a reputable advisor to ensure you are taking full advantage of your GST allocations.

Taxes tie into so many facets of our lives

With Democratic control in Congress and the White House, high net worth individuals may see tax increases headed their way. Due to these circumstances, it’s important they seek help from a fiduciary-level financial professional. That way, they can take advantage of the current tax laws in case the Biden administration’s tax agenda becomes a reality.

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