The election is just around the corner but, as 2016 demonstrated, determining an outcome and the policies that will accompany it is still a long way off. That said, there are several policy proposals in play that carry broad implications for investing and wealth planning strategies.
Higher Income Tax Rate
Vice President Biden has proposed raising the tax rate on income above $400,000 from 37% to 39.6%. This suggests high-income households should consider accelerating income into 2020 and deferring current losses into future years. It also means investors should consider converting their traditional IRAs into Roth IRAs. Some insurance vehicles, like Private Placement Life Insurance, also become even more advantageous in a higher income tax rate environment.
Higher Capital Gains Tax Rate
The Vice President also proposed raising the tax rate to 39.6% for capital gains and qualified dividends in excess of $1 million. Business owners who are considering a sale should aim to close their transaction in 2020 and may want to consider opting out of installment sale treatment if proceeds will be received over several years. Investors should similarly consider accelerating gains, particularly in positions where sales are a near-term possibility. In certain instances, it may also make sense to roll a portion of realized capital gains into a Qualified Opportunity Zone as a strategy to defer capital gains tax payments and shelter a portion of their remaining proceeds. Investors with large capital gains may also want to consider taking advantage of some of the tax benefits associated with foreign pension plans and exchange funds.
Estate Tax Hike
Biden has proposed eliminating the step-up in basis at death, effectively creating a double tax: a transfer tax on the market value of the estate and a capital gains tax on the difference between market value and cost basis. This onerous proposal has several planning implications. First, families with taxable estates may want to consider accelerated gifting. Utilizing vehicles like dynasty trusts can be especially effective for moving assets out of your estate and preventing double taxation. If the step-up in basis is eliminated investors will also want to consider some of the strategies addressed above for capital gains during their lifetime.
Corporate Tax Rate Hike
While Vice President Biden has talked about reversing President Trump’s corporate tax rate cuts, his proposal suggests raising the rate to a flat 28%, not to the prior rate of 35%. We expect a higher corporate tax rate could result in a 10-percentage point pullback in most major US equity markets. From a business perspective, C-corp structures would remain more attractive for certain taxpayers than pass-through entities. A corporate structure would also benefit owners should additional Social Security taxes be levied on incomes over $400,000.
One policy on which both candidates agree is rebuilding America’s manufacturing capabilities, particularly for products that serve the country’s vital interests, like medical equipment and pharmaceuticals. Cresset forecasts increased demand for industrial real estate, both manufacturing and warehouse space, over the next five years. Investors should consider investing in industrial real estate.
The political landscape remains uncertain and the likelihood of most of these proposals is cloudy. With the election set for little more than a month away, many of these issues will become clearer in November. Please do not hesitate to reach out to your Cresset advisor or the Family Office team to discuss a game plan.