Some Wealthy Americans Are Already Prepping Their Finances For A Joe Biden Presidency — Here’s How
One San Francisco accountant finishes every client conversation with a discussion about what a Biden administration could mean for portfolios. Some Wealthy Americans Are Already Prepping Their Finances For A Joe Biden Presidency — Here’s How
San Francisco accountant Scott Hoppe had a client who was planning to stretch the sale of founder shares in a tech-sector company over a three-year period.
Instead, the client compressed the installment sale into a one-shot transaction this month.
What Accelerated The Deal?
The 2020 presidential race. “Assuming all else was equal, that was the driver of the choice,” said Hoppe, principal of the accounting firm Why Blu.
Right now, Hoppe’s client, worth between $10 million and $20 million, will be taxed on capital gains at a rate of 23.8%.
If Democratic candidate Joe Biden beats President Donald Trump — and Democrats retain the House of Representatives and flip the Senate — that client could have potentially been staring at a 39.6% tax rate in two out of the installment sale’s three years.
The compressed transaction, then, could have saved the client approximately $320,000 in taxes on the $6 million sale. “The seller, for sure, was motivated, and the buyer had the wherewithal” to pay the full price upfront, said Hoppe.
Biden’s tax plan would put the marginal rate for top earners back at the Obama-era 39.6% rate, up from the current 37% rate. That 39.6% rate would apply to the capital gains of people who earn more than $1 million. It’s one aspect of a tax proposal where the top 1% of earners would pay for almost 80% of an increase in taxes, according to a budget model from the University of Pennsylvania’s Wharton School of Business.
Election Day is eight weeks away, and the mass of expected mail-in ballots could prolong the wait for a final result, with many states not beginning to count absentee votes till the polls close. Though polling averages in swing states currently give Biden an edge over President Donald Trump, and he’s held a steady lead in national polls for most of the year, polls indicated right up till Election Day in November 2016 that Hillary Clinton would best Trump.
Either way, though, many of America’s affluent households, and the experts who advise them, aren’t waiting.
Hoppe finishes every client conversation with a discussion about what a Biden administration could mean for portfolios vs. a second Trump term. One Illinois financial-planning firm has carried out approximately 50 Roth IRA conversions this year with an eye on the election.
One adviser’s left-leaning clients don’t think a Biden win will negatively affect their finances, but the adviser’s right-leaning ones think a Biden win could send their portfolio to ‘hell in a hand basket.’
In Houston, Scott Bishop, executive vice president at STA Wealth Management, has fielded election-related calls and emails from half his clients in the past two months.
Bishop’s liberal-leaning clients want to hear about potential opportunities and tend to downplay the idea of new tax rules upending their finances. As for Bishop’s conservative-leaning clients, “they think this is going to hell in a hand basket” and want to get ready to quickly lock in rates and minimize tax exposure if Biden wins.
Bishop — who recalls talking down one client who wanted to “sell everything” when Trump won in 2016 — counsels everyone to think things through. “I try to get them to not act on their biases,” he told MarketWatch.
The flurry in planning comes at a time when income inequality is more dramatic than at any time in the past 50 years — and the coronavirus pandemic, it is feared, could further deepen the gulf between the rich and poor. Biden says his tax plan would make sure corporations and wealthy Americans pay their “fair share.”
‘We are working in the boundaries that are given to us.’
Is it unfair that wealthier Americans are availing themselves of tax rules that work to their advantage? “We are working in the boundaries that are given to us,” Hoppe said, echoing a point numerous sources made to MarketWatch. Tax rules are written to discourage or encourage all sorts of activity, he said — like a lower capital-gains rate to promote financial investments. When lawmakers “want to change our behavior, the code evolves.”
The Biden campaign couldn’t be reached for comment.
Below, a description of three ways affluent Americans are taking the tax-planning bull by the horns weeks ahead of the election.
Americans will inherit $765 billion this year in gifts and bequests, and that sum will generate $16 billion in taxes, according to New York University Law School professor Lily Batchelder, who says that’s barely a 2% effective tax rate.
The Republicans’ tax overhaul of late 2017 elevated the threshold at which the 40% federal gift and estate exemption phases out. Starting in 2018, the exemption level went from $5.45 million to $11.4 million for individuals ($22.8 million for married couples), and it’s indexed for inflation.
The provision ends in 2025, but observers say Biden wants to end it a lot sooner and bring the estate tax back to its “historical norm.”
Biden also wants to end the so-called step-up in basis. This tax rule states that if an heir sells an inherited asset (like 7,000 shares of Apple) capital-gains taxation on any future sale is pegged to an asset’s value at the time of inheritance, not the date of the original purchase. If an asset appreciates greatly over time, the step-up in basis saves an heir plenty in capital gains.
Michael Whitty, a partner specializing in estate law at Freeborn & Peters in Chicago, is telling his clients to schedule one-hour calls with him now to game out election contingency plans.
How much to give away and what to give away are some of the topics, he said. Whitty wants to have the talks sooner rather than later — especially in light of the fact that lawmakers in the past have been known to make new estate-tax rates retroactive.
‘The client who waits until after Election Day, and some will wait until towards Thanksgiving, well, we’re going to be really behind the eight ball to put together a well-prepared, well-documented transfer.’
“The client who waits until after Election Day — and some will wait until towards Thanksgiving — well, we’re going to be really behind the eight ball to put together a well-prepared, well-documented transfer,” Whitty said.
At Playfair Planning in Brooklyn, CEO Kim Bourne is advising clients more than ever to file estate-tax returns even when they don’t have to. This gets asset valuations on paper — a move that will ease cost-basis determinations later on, she said.
Bourne’s clients aren’t speeding up gifts right now, but she is recommending they think about loans among family members. A loan doesn’t eat into the gift and estate exemption, and it can always be converted to a “gift” later on, once planners know the legal landscape. “Intrafamily loans are a simple way to navigate the uncertainty and take advantage of the low-interest environment,” she said.
The election is influencing other long-term financial planning.
The coming election “was a very critical component, but it wasn’t everything that was discussed,” when Randy Bruns’s Naperville, Ill.–based financial advisory firm, Model Wealth, carried out approximately 50 conversions this year from IRAs to Roth IRAs.
Investors pay tax on IRA distributions once they start tapping the account. With a Roth IRA, they pay taxes during the contribution, and the money comes out tax-free at distribution — so the reasoning for a Roth account is to avoid a higher tax rate in the future.
‘This is all going up and you may never see it as good as it is now.’
When Bruns explains the election implications to clients, he’s not taking a political stance on the merits of potential tax hikes, he notes. Focusing on rates, he tells his clients, “This is all going up, and you may never see it as good as it is now.”
Capital Gains And Ordinary Income
Unlike vanquished rivals for the Democratic presidential nomination Bernie Sanders and Elizabeth Warren, Biden is not proposing a “wealth tax” on the highest earners. But he does want to reset the top income-tax bracket at 39.6%.
He also wants the rich to pay more into Social Security. Employers and employees currently pay a combined 12.4% in payroll taxes on the first $137,700 an employee earns. Biden’s proposal would restart payroll taxation, still at 12.4%, at the 400,001st dollar a person makes.
Under the circumstances, Stacy Francis, CEO of Francis Financial in Manhattan, says she’s telling clients expecting a bonus or other special end-of-year compensation to see if they can arrange for the money to arrive by the end of this year and not at the start of next year.
Capital-gains rates are another consideration. Biden would raise the capital-gains rate to 39.6% for people making at least $1 million. That would go up from 23.8% (which is the 20% rate, plus the 3.8% net investment income tax).
That’s “nearly doubling the tax bite for higher earners,” Francis pointed out — and it could have repercussions for people with large transactions coming up. For example, if a family needs to sell off a brokerage account because of an upcoming college tuition bill or a house purchase, Francis said “it makes sense to do that sooner than later.”
‘It’s only if you know that you’re going to have to sell investments in the next year or so that we recommend you do that now versus later.’
Francis is not advising investors with long-term positions and goals to contemplate selloffs now.
Election Day 2020 is uncertain, but the uncertainty only increases from that point forward. “Ten years from now, the tax landscape is so uncharted,” Francis said. “It’s only if you know that you’re going to have to sell investments in the next year or so that we recommend you do that now versus later.”
‘We can only protect what we know about’
Broader tax rules are one way to generate more revenue. Another is making sure taxpayers are paying all their taxes to begin with.
The 2020 presidential campaign comes with an increasingly short-staffed Internal Revenue Service auditing fewer returns. The agency data show the IRS audited 1.73 million returns (almost 1% of all returns) in fiscal year 2010. The IRS audited just over 770,000 returns in fiscal 2019, which is fewer than 0.5%.
Figures like former Treasury Secretary Lawrence Summers — a Biden campaign adviser — say the IRS could reap an extra $535 billion if it brought audit rates back to their level of 10 years ago and trained its focus on the super-rich.
This summer, the IRS announced it would be launching hundreds of new audits of high-net-worth individuals. Around the same time, Biden unveiled a plan for universal preschool and higher caregiver pay; the campaign says it’s a $775 billion plan underwritten, in part, by increased “tax compliance for high-income earners.”
Tax attorney Cameron Hess expects both parties to support increased high-net-worth audits.
Political attitudes about the IRS’s audit rates swing like a pendulum, said Hess, a partner at the California-based law firm Wagner Kirkman Blaine Klomparens & Youmans. At one point, starting around the 1990s, the IRS was seen as too aggressive.
‘Perhaps there’s more support by Democrats than Republicans, but there is a push to swing the pendulum back the other way.’
Now it’s a question of whether the IRS is doing enough. “Perhaps there’s more support by Democrats than Republicans,” said Hess, “but there is a push to swing the pendulum back the other way.”
Looking ahead to Election Day and beyond, Hess has been telling clients, and tax-business colleagues, how important it is for them to have access to permanent records related to the costs of their capital assets. That’s something the IRS has become increasingly curious about, Hess said.
When Hoppe talks to clients about the election, one thing he’s doing is flagging the potential for an audit. Specifically, Hoppe is making sure he knows about all the offshore accounts a client may have, or if a client has any cryptocurrency holdings he might otherwise be unaware of. Hoppe says he’s already meticulous in his documentation, but still, “We can only protect what we know about.”
Financial Firms Gear Up for Biden and an Emboldened Consumer Watchdog
Biden team envisions Consumer Financial Protection Bureau issuing harsher penalties; companies are pushing to resolve pending cases.
Lenders are worried the days of a business-friendly Consumer Financial Protection Bureau are numbered.
Mortgage lenders and financial-technology firms negotiating with the agency over potential settlements are pushing to resolve their cases quickly, according to people with knowledge of the cases. Their thinking, these people said, is that penalties and enforcement will be much harsher if Joe Biden becomes president in January.
A Biden administration is expected to embrace a more aggressive role for the CFPB, which in many ways has grown less forceful during President Trump’s time in office. For the financial sector, a reinvigorated CFPB could be one of the most immediate impacts of a Biden presidency.
Under a new CFPB director, “you will see some pretty big changes pretty quickly, both on the enforcement and rule-making side,” said Dennis Kelleher, chief executive at Better Markets, an advocacy group that lobbies for tighter financial regulations.
“It’s one of the very few places where you could easily see a 180-degree turn.”
The Biden team expects the agency would issue more fines, try to recover more money for consumers and give priority to protecting people hurt by the coronavirus recession, according to people familiar with the matter. For example, Biden’s team wants to make sure lenders who have let borrowers temporarily skip mortgage payments don’t rush to foreclose on them next year.
A Biden spokesman said the former vice president “believes we need to reverse the Trump administration’s efforts to weaken the CFPB” and wants to “hold financial institutions accountable for discriminatory practices.”
A CFPB spokeswoman said the agency’s current director, Kathy Kraninger, who was installed by the Trump administration, “continues to carry out the Bureau’s mission of protecting consumers through regulation, supervision, enforcement and education.”
A Biden administration would expect the CFPB to renew its focus on areas that were central to its earlier years. That would include reining in payday lenders, monitoring student-loan servicers and ensuring that minority borrowers have access to affordable credit, according to some of the people. But it would also expand the CFPB beyond its early scope. For example, the Biden team wants to establish a public credit-reporting agency as an alternative to the companies that create credit reports.
Under a new CFPB director, ‘you will see some pretty big changes pretty quickly, both on the enforcement and rule-making side.’
— Dennis Kelleher, chief executive at advocacy group Better Markets
The CFPB was launched in 2011 in the wake of the financial crisis, when Mr. Biden was vice president. The brainchild of Sen. Elizabeth Warren, it holds a unique mission among federal financial regulators: protecting consumers. Regulators such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. ensure the safety and soundness of lenders.
Richard Cordray, a Democrat and former Ohio attorney general, ran the CFPB for about six years, securing about $12 billion for consumers who were harmed by mortgage companies, credit-card lenders and auto lenders over deceptive sales practices, discriminatory lending and mishandled consumer accounts.
The bureau under Mr. Cordray frequently bumped heads with businesses. Companies accused the CFPB of penalizing them without providing a heads-up that they were breaking the rules and giving them a fair chance to comply. New rules, the companies also argued, created needless costs that made financial products ultimately more expensive for customers.
Mr. Cordray said the bureau under his leadership “went after companies that violated the law and hurt consumers.”
“The Trump administration made concerted efforts to roll back the CFPB and go easier on financial companies and not stand up for consumers, and I think that was a big mistake,” Mr. Cordray said. He said Mr. Biden views the CFPB “as an aspect of looking out for the middle class.”
Mr. Trump ran for president on promises to ease regulation and to roll back Dodd-Frank, the postcrisis financial law that created the CFPB. After Mr. Cordray resigned in late 2017, the Trump administration appointed Mick Mulvaney to run the bureau on an interim basis.
Mr. Mulvaney, a Republican, had proposed abolishing the agency when he was a congressman and called it “a sad, sick joke.” He quickly put all existing enforcement actions under review and requested a budget of zero dollars for one quarter, holding that the bureau could operate on existing funds.
Mr. Mulvaney said this week that he had wanted to focus on companies that were acting in ways the CFPB had already established as violations of consumer-protection laws.
“We did not want to waste time on harassing people that were undertaking legal activities that some people just didn’t like,” he said.
After Ms. Kraninger took over from Mr. Mulvaney in late 2018, she said in one of her first speeches that the agency must not “impose unmanageable burdens” on financial companies. Ms. Kraninger’s CFPB has blended enforcement with more emphasis on teaching consumers to distinguish the good financial products from the bad. The agency has also rolled back rules for some companies, including payday lenders, but it filed an increasing number of enforcement actions over the past two years.
The CFPB spokeswoman said the agency was on pace in 2020 to file the highest number of new enforcement actions in five years. The CFPB has filed about 65 enforcement actions in the roughly three years since Mr. Cordray left, about half the number filed during the final three years of his tenure.
The agency in the Obama era regularly argued cases under the “disparate impact” standard, which essentially prohibits discrimination regardless of whether there was an intent to discriminate. The bureau has largely moved away from the principle in the Trump years, but the CFPB in a Biden presidency would employ it more frequently, according to some of the people familiar with the matter.
The Supreme Court said this year that the president can replace the agency’s director at will. The Biden team would move quickly to appoint an interim director to replace Ms. Kraninger, according to a person familiar with the situation.
Getting a permanent replacement could take time, though, because that person would have to be confirmed by the Senate. A Biden administration could consider both current and former CFPB staffers, according to some of the people.
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