WealthPoint Announces New Insurance Partner

DENVER, March 16, 2017 – WealthPoint, a leading provider of business and life insurance advisory services with a focus on succession, exit and wealth transfer planning to entrepreneurial family groups and affluent clients throughout the U.S., expands into the Denver market with the hiring of Kevin McMahon, its newest Insurance Partner. “Adding Kevin to our team enables us to provide our insurance and business advisory services to the Denver market,” said WealthPoint’s Managing Partner, Ryan Barradas. “Kevin brings a tremendous amount of respect within the Advisor community. His reputation and experience in the insurance industry put us in a position for sustained success.”

Kevin brings a wealth of experience in both employee benefits and life insurance. In 1980, Kevin founded McMahon & Co., an employee benefits consulting business, and successfully managed it for 30 years until he sold it. Since then, he founded KMM, LLC, an independent, client focused insurance practice. He has a proven track record of consistently identifying the best solutions for his clients, which he has demonstrated throughout his successful career. His core belief and determination to put his client’s needs first, are directly aligned with WealthPoint’s mantra, Know your story.

“I’m excited to take the next step in my career with WealthPoint,” says Kevin. “I look forward to joining a firm that has the staff, processes and resources in place to allow me to best service our entrepreneurial and affluent clientele.”

The Candidates and the Markets: How Would Clinton or Trump Govern?

As the personality-fueled presidential campaign rages on, little time has been spent on how a Clinton or Trump presidency might affect the economy and the markets. Yet the candidates’ respective policy objectives are likely to have profound effects on investors. This paper discusses the fiscal policies a Trump or Clinton administration would likely pursue, whether those policies are likely to be implemented, and how those policies could affect businesses, borrowing, taxes, and the markets.

Our Election Predictions A Review

Here are the predictions from our July white paper, Sizing Up the General Election:

  • The Republicans will keep control of the House of Representatives.
  • The party that wins the White House also will control a majority of the Senate.
  • Neither party will hold the 67 Senate seats needed to override a presidential veto or the 60 seats required to break a filibuster and allow legislation to proceed. The metrics underlying the presidential election (evolving demographics and the Democrats’ natural advantage in the Electoral College), combined with the manner in which the candidates have operated their respective campaigns to date, make Clinton the heavy favorite. But it is too early to declare the race over. Trump’s uncanny ability to control and bend the rules of engagement give him a “puncher’s chance” of prevailing. Facing a heavily favored opponent, he still could pull off an unlikely win by landing a rhetorical punch that gets through Clinton’s defenses and severely rattles her. Until we see how — and whether — Clinton handles the Trump onslaught in their debates, it is premature to declare her the clear winner.

A Clinton Presidency

Hillary Clinton’s fiscal and tax policies hue to the Democratic Party line. She believes that capitalism has hard edges, and government programs are needed to help those in lower socioeconomic classes move up to the shrinking middle class. Clinton advocates for new or expanded government education and jobs initiatives and a higher minimum age. She would not reduce entitlements, instead leaving in place (or increasing) current Social Security and Medicare benefits even for young workers.

Clinton would pay for her initiatives with new taxes that would fall almost exclusively on affluent families. Higher income families, she asserts, have done far better financially in the economic recovery than have working Americans, and can afford to help those left behind.

Based on our predictions, Clinton will face a Republican-controlled House. In our view, Clinton’s unpopularity (over 50% of voters view her unfavorably), coupled with extant Republican antagonism, will significantly compromise the honeymoon period that typically follows a presidential inauguration. We look for a contentious relationship between the House and the White House from the beginning.

House Republicans are exceedingly unlikely to agree to Clinton’s call for higher tax rates and higher domestic spending. Thus, we see a Clinton presidency as a continuation of the Washington gridlock of the last six years (since the Republicans assumed control of the House in 2010). Few initiatives will be enacted and sweeping legislation will be scarce to non-existent. Instead, Washington will address fiscal deadlines with eleventh hour short term extensions, kicking the can down an abbreviated road.

Although such gridlock is frustrating to many American voters, it might not be detrimental to the markets. Markets react negatively to uncertainty. When one party controls the White House and Congress, the possibility of sweeping legislation antithetical to businesses remains a possibility. During the first two years of his presidency Obama enjoyed a filibuster-proof Congressional majority. Those years saw the passage of the Affordable Care Act, Dodd-Frank bank reform, and other sweeping legislation viewed by many as harmful to business. Gridlock virtually eliminates the risk of major legislative changes, freeing the markets to focus less on Washington policy and more on economic developments.

A Trump Presidency

Donald Trump is anything but predictable. That attribute alone has the potential to roil the markets. A number of months ago, Donald Trump, drawing on his bankruptcy experience, ruminated that it might make sense for the U.S. to negotiate a “haircut” on its loan repayments, giving Treasury debt holders less than the face amount to which they are entitled. Trump walked back that comment shortly after making it, but a similarly explosive comment from a sitting president likely would cause significant market turmoil.

Consistent with his “America First” policy, Trump wants to impose hefty tariffs (reportedly as high as 40%) on foreign goods entering the United States. Our trading partners presumably would retaliate with their own tariffs on goods from the United States. Most economists believe the resulting drop in U.S. exports could have a devastating effect on domestic businesses.

In contrast to Trump, most of the House Republican leadership supports broad free trade principles, and thus is unlikely to enact Trump’s radical trade policies. But failure to derail those initiatives quickly could precipitate nervousness in the markets.

On the fiscal side, like Clinton (and unlike the other Republican presidential candidates), Trump would not reduce Social Security or Medicare benefits even for young workers. Also like Clinton, Trump would initiate a large scale infrastructure repair program. And he would spend significantly more to shore up the military. But while Clinton calls for increased taxes on the wealthy, Trump would reduce taxes significantly across the board. Trump’s tax plan is in line with that of the House Republicans, and thus would have a good likelihood of passage.

Although markets initially might cheer lower taxes, the negative consequences to the federal deficit of more spending and reduced taxes could cause overleveraging problems down the road. Thus, a Trump presidency could follow the arc of the George W. Bush presidency, with exploding debt leading to an economic (and market) downturn.

The Fiscal Situation and Taxes

Over the past several years, the deficit has declined steadily from its all-time high in 2009. But, according to the nonpartisan Congressional Budget Office, the deficit is now rising again: the 2015 deficit will grow by a third in 2016. Congressional Budget Office, Long Term Budget Outlook (August 2016). Even in the absence of additional spending, this deficit increase will accelerate in coming years as major entitlement expenditures (Social Security and Medicare payments) grow with the aging population.

Neither presidential candidate seeks to reduce the federal deficit. With spending up, entitlement reform off the table, and the deficit growing, we believe the deficit hawks in the House leadership will be forced to undertake a constant search for revenue. Of course, Republicans will not seek to enact broad tax increases – such as higher tax rates or the elimination of popular deductions or exemptions. Instead, the House leadership is likely to look at less controversial tax changes — smaller items that curtail tax treatment that many in Washington believe is inappropriately generous.

Indeed, this process has already begun. The last government funding compromise (in December 2015) sought partially to recoup increased spending by eliminating a popular (and, in the eyes of many politicians, overly generous) Social Security planning strategy called “file and suspend”.

We believe eliminating the “file and suspend loophole” is a harbinger of things to come. Future funding bills could close other perceived loopholes, resulting in a whittling away of techniques investors use to reduce taxes. Examples of other loophole closures that have been under discussion include:

  • Tax the sale of “carried interests” as ordinary income.
  • Curtail “stretching” of inherited IRAs and 401k’s.
  • Apply required minimum distribution rules to Roth accounts beginning at age 70-1/2.
  • Limit Roth IRA conversions to pre-tax dollars.
  • Treat all distributions from S corps and partnerships to owner-employees as subject to employment taxes.
  • Curtail sophisticated wealth transfer techniques.

Most investors note that taxes already are high. In 2013, tax increases to avoid the “fiscal cliff” and to fund the Affordable Care Act caused the top tax rates on investment income to jump by ten percentage points. As a result, the top 10% of tax returns by income now pay 82% of all federal individual income taxes, the highest number ever recorded. Fairness and Tax Policy, Joint Committee on Taxation (February 2015). Tax rates imposed on upper income taxpayers are now the highest they have been in the past 35 years. The Distribution of Household Income and Federal Taxes (CBO November 2014). And the effort to raise revenue through loophole closers could eliminate many current tax reduction techniques, effectively raising taxes further.

High and increasing taxes make effective tax planning for investments paramount. We review a number of tax planning suggestions – and discuss possible loophole closers in more detail — in our white paper, Investing in a Rising Tax Environment 2016, published earlier this year.

After the election and before the new administration takes office, we will prepare a white paper that discusses in more detail the new president’s policies and their likelihood of enactment, including how the policies could affect individual economic sectors.


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2016. Reprinted by permission. All rights reserved.

The opinions expressed in this article are the author’s own and may not reflect the view of M Holding Securities or WealthPoint, LLC.

File #1658-2016

Government funding and tax extenders legislation affects investors

After weeks of negotiations, Congress reached agreement on a bipartisan bill to fund the government through September 2016.  Following are provisions of particular interest to investors.

The legislation makes permanent (including retroactively for 2015) some provisions that previously had expired every few years:

  • IRA / charitable contribution provision for account holders over age 70-1/2
  • Tax credit for research and development expenditures
  • Enhanced write-off of small business capital expenses under section 179

The legislation extends (including retroactively for 2015) other provisions:

  • Extension and phase out of bonus depreciation through 2019

The legislation includes a number of new provisions:

  • Repeals the forty-year-old prohibition on exports of domestically produced crude oil
  • Expands 529 plan qualifying distributions to include student computers and technology

The legislation delays sources of funding and government reimbursements under the Affordable Care Act:

  • “Cadillac tax”(40%)  imposed on high cost employer health plans delayed until 2020; thereafter tax becomes deductible
  • Medical device tax delayed until 2018
  • Annual fee on health insurance provider premiums written (“belly button tax”) delayed until 2018
  • Government reimbursements for insurance company losses limited to amounts collected from profitable insurers (reimbursement fund must be revenue neutral)

Of interest to financial advisors, the legislation:

  • Does not prevent the Department of Labor from finalizing and implementing the proposed IRA account fiduciary rules
  • Does not make significant changes to Dodd-Frank

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

Another government shutdown?

Congress returns from recess next week facing a month-end deadline to fund government operations for the next fiscal year. I’m concerned we could be looking at a reprise of 2013. That year, the federal government shut down on October 1 for sixteen days over a Republican proposal to defund the Affordable Care Act. Now, Republicans are talking about defunding Planned Parenthood, a proposal the President is almost certain to veto. More broadly, there is significant disagreement on funding for social programs generally (the President wants increased funding; the Republicans are calling for social program cuts). If these disagreements cannot be breached, the government faces an October 1 shutdown.

 

The difference this time is when the debt limit must be raised to allow the federal government to borrow additional funds. In 2013, the government ran out of money and had to borrow by mid-October, setting up an incontrovertible deadline that Congress had to address, reopening the government in the process. This year, we’re told that the government will not need to borrow more money before November or even December. So, if the government shuts down, what will force Congress to compromise and reopen it in the near term?

 

Historically, markets often are volatile as fiscal deadlines approach and Congress appears unable to agree on a solution – until it does. Investors might consider taking action to protect against volatility until these deadlines have been addressed. More aggressive investors might view a pullback as a buying opportunity; markets tend to recover nicely after Congress finally agrees to raise the nation’s borrowing limit (as Congress invariably will do here, likely at the last possible moment).

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015. Reprinted by permission. All rights reserved.

Obamacare upheld again: Consequences for Business Owners and Investors

Presidential Seal

 

 

 

 

Last week the Supreme Court ruled that all qualifying Americans are entitled to receive subsidies to purchase health insurance under the Affordable Care Act, regardless of where in the country they live.  The decision leaves the status quo in place but nonetheless raises considerations for investors and business owners:

  • As interpreted by the Administration, the ACA requires small business owners with more than fifty employees to provide health coverage to their employees beginning in 2016.
  • There remains a concern about inadequate ACA enrollment, particularly by middle- and higher-income Americans.  If enrollment continues to lag, it could lead to significant premium increases, as the insurance pool will not have sufficient “good” risks to balance out the less favorable ones.
  • Speaker Boehner’s legal action against President Obama remains outstanding.  Boehner’s suit objects to the Administration’s unilateral decisions to delay the employer mandate and to reimburse insurance carriers for losses incurred from insuring high-risk people.  A Boehner victory (which most legal experts consider a long shot) could end the carrier subsidies, which likely would prompt carriers to increase premiums or cut coverage to recoup the lost revenue.
  • The decision avoids a decline in health care stock values.  Many companies – particularly for-profit hospitals – benefit from the greater insurance coverage provided by the ACA.  However, premium increases discussed above could cause the feared “death spiral”, in which higher premiums leads to fewer healthy enrollees, which leads to higher premiums, etc.  That consequence could hurt health care stock values down the road.
  • The decision eliminates any realistic possibility of repeal of the 3.8% surtax on investment income for higher-income taxpayers.  Revenue from that tax is used to pay for the bulk of the insurance subsidies that the Court upheld.  There is no realistic prospect of a reduction in tax rates in sight.

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

Wake Me Up When September Ends

Please read this article written by Andrew Friedman of The Washington Update LLC

In my legislative update early this year, I noted that ongoing acrimony between Congressional Republicans and the Obama White House likely precludes agreement on any broad new legislative initiatives this year.  Instead, Congress and the White House are likely to reach agreement only in the face of “forcing events” – deadlines that compel action to ward off a draconian result.

As it turns out, Congress appears to be arranging for all of the major deadlines to occur around a single date – September 30.  This schedule sets up a massive negotiation for September, when Congress returns from summer recess.  Investors should be aware that this negotiation is likely to lead to market volatility and some new tax changes.

I discuss the upcoming imbroglio in more detail below.  But first, two quick announcements:

  • The Affordable Care Act is affecting retiree medical costs in a number of ways, most of them adverse.  A new white paper on the site, Preparing for Rising Medical Costs in Retirement, discusses how retirees and near retirees can develop an estimate of their likely retirement medical costs and a plan to help defray those expenses.  Subscribers can access the paper here.
  • My colleague Jeff Bush recently launched a new way for you to keep with what he and I are reading each day.  You can now follow us on Facebook to see our daily must read articles:  https://lnkd.in/eJAdh88 .  This is our way of keeping you abreast of the latest happenings out of Washington, happenings that can affect your investments and your business.

Now back to the legislative outlook.  By or around September 30, Washington must reach agreement on:

  • Raising the debt ceiling:  Congressional borrowing authority ended on March 15, 2015.  Current estimates suggest the government will run out of money and need to borrow by around early October.  Failure to raise the debt limit by that time would impinge on the government’s ability to pay interest on debt outstanding, leading to default on U.S. debt.
  • Highway funding:  Funding for summer infrastructure work (road and bridge repair) runs out on May 31.  All indications are that Congress will pass a short term “patch”, funding construction through September 30.  After that date, Congress will need to find a permanent source for highway funding.
  • Government funding:  The federal government’s fiscal year ends on September 30.  By that date Congress must appropriate money to run the government next year.  Otherwise the federal government will shut down on October 1.
  • Tax extenders:  Congress wants to extend a popular group of tax provisions that expired at the end of last year.  Paul Ryan, the chairman of the House Ways and Means (tax writing) committee, said he wants to take up the extenders during the funding discussions in September.

Longtime readers will remember that Washington reached a similar September 30 impasse two years ago, causing the government to shut down for sixteen days beginning October 1, 2013.  In that instance, with the debt limit deadline approaching, Congress and the White House agreed on a plan to reopen the government and raise the debt ceiling.  That plan included caps on future spending on defense and domestic programs.

As in 2013, reaching consensus on these knotty budget issues will be challenging.  With U.S. military involvement expanding, both parties agree that next year’s defense budget must be higher than the spending caps set in the wake of the 2013 budget impasse.  The President, though, insists that any increase in defense spending be matched with a corresponding increase in spending on domestic programs.  Republicans not only oppose additional spending on domestic programs, they are looking to further cut those expenditures.

For investors, the September 30 deadline is important for two reasons.  First, as the deadline to raise the debt ceiling gets closer and Congress and the Administration (likely) continue to bicker, the markets often turn volatile.  I have long said that a market decline over concern about Congress’ impending failure to act is a buying opportunity.  Congress will act – likely at the last minute – at which point the market will recover.  It is incumbent on investors and financial advisors to keep these “forcing event” dates in mind as investment opportunities.

Second, meeting these deadlines requires funding for new government initiatives, such as additional defense spending and funding long-term highway construction.  Congress typically does not like to spend money unless it raises taxes (or cuts spending elsewhere) to defray the additional cost.  Congress thus searches for “loophole closers”– provisions in the tax code that arguably provide unduly favorable benefits.  (An example of a loophole closer that keeps arising – but has never been enacted – is to curtail the use of “stretch” IRAs and 401(k)s.)  Thus, as September approaches, investors would be wise to consider how Congress intends to fund additional expenditures.

One way to fund these new initiatives could be corporate tax reform.  As if addressing these deadlines was not enough, Chairman Ryan hopes to have a corporate tax reform plan ready by the end of the summer.  (It appears that reforming individual taxes is now recognized as too difficult politically.)  If Congress and the White House can agree on corporate reform (possible but difficult), then the funds from a deemed (Democrats) or optional (Republicans) one-time repatriation of foreign earnings could be used to fund the permanent highway bill.  Otherwise, Congress will have to find revenue raisers to pay for highway funding and extenders; Ryan says using repatriation funding without tax reform is a no go.

 

Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

U.S. HOUSE PASSES ESTATE TAX REPEAL DESPITE VETO THREAT

US House of Rep

By Richard Cowan and David Lawder

WASHINGTON (Reuters) – The U.S. House of Representatives on Thursday ignored a White House veto threat and passed legislation to repeal the estate tax that hits inherited assets worth $5.4 million or more.

By a mostly partisan 240-179 vote, the Republican-backed bill will be sent to the Senate, where Democrats are expected to use procedural hurdles to try to block it. Even if it passes the Senate, it would likely fail to achieve a two-thirds majority needed to override a veto.

House passage was timed for the week when most Americans file their tax returns. Conservatives, who refer to the estate tax as the “death tax,” have long railed against it, arguing it hurts the families of small business owners and farmers.

“It’s past time to repeal this unacceptable tax. Every American deserves the ability to pass their life’s savings to their kids,” said Representative Tom Graves, a conservative Republican from Georgia.

Repealing the tax would boost the federal deficit by about $269 billion over 10 years, according to Congress’ Joint Committee on Taxation.

Few Americans pay the 40 percent tax on assets above the $5.4 million exclusion amount. About 5,400 estates, equal to 0.2 percent of taxpayers, will owe such taxes in 2015, according to the JCT.

(Reporting By Richard Cowan and David Lawder; Editing by Dan Grebler)

Obama comments on IRA fiduciary rules

Presidential Seal[The update is of interest primarily to financial advisors.]

Last week the President gave a speech in which he focused on forthcoming Labor Department rules intended to ensure that IRA holders receive investment advice unencumbered by financial advisor conflicts of interest.  In conjunction with the President’s speech, the Labor Department will be re-issuing proposed rules addressing the extent to which financial advisors may receive compensation in connection with investments made by IRAs and other retirement accounts they advise.  The new proposed rules should be available in the next 60-90 days.

The Labor Department first issued proposed rules on this subject in 2010.  Of great concern to the financial services industry, the 2010 proposed regulations effectively would have precluded financial advisors from receiving commissions and other payments on IRA transactions and investments.  DOL withdrew the proposal in 2011 due to public pressure and concern.

The President’s comments last week contained a good bit of anti-Wall Street rhetoric (“A system where Wall Street firms benefit from backdoor payments and hidden fees if they talk responsible Americans into buying bad retirement investments – with high costs and low returns – instead of recommending quality investments – isn’t fair.”).  They make clear that the Administration is determined to continue to press this issue in some form.  At the same time, the White House material accompanying the comments states that the new proposal will “ensure that all common forms of compensation, such as commissions and revenue sharing, are still permitted.”  This language suggests that the new proposal will be more lenient than the original.

For instance, the new proposal could permit all forms of advisor compensation but require the advisor to disclose to the client conflicts of interest, such as where particular investments result in higher commissions or other payments to the advisor.

The Administration’s continued concern about arrangements that heretofore had not been thought to pose problems is worrisome from the perspective of the securities industry.  On the other hand, the fact that all forms of compensation will remain acceptable suggests that the newly proposed regulations will be at least somewhat less harsh.  My guess is that the industry is still likely to be unhappy with the new proposal, and will push back once it is announced.  The DOL has said the public will have the opportunity to comment on the proposal, including at a public hearing, before final regulations go into effect, so the matter is far from resolved.

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015. Reprinted by permission. All rights reserved.

 

President Releases Major Tax Change Proposals

Information provided by:  Thompson Reuters

As outlined in a Fact Sheet released by the White House and a Jan. 17 conference call with reporters by senior administration officials, President Obama has proposed a number of tax increases that would generate revenue of approximately $320 billion over the next decade. He has suggested new and revised tax credits as well as a program to promote retirement savings. Among the President’s tax-related proposals are the following:
. . . an increase in capital gains and dividend tax rates to 28%; for couples, the 28% rate would apply where income is more than $500,000 annually;
. . . a fee of seven basis points on the amount of liabilities of financial institutions with assets greater than $50 billion. The fee on large, highly-leveraged financial institutions would
discourage excessive borrowing;
. . . a new tax credit worth up to $500 for households with two wage earners with combined income of up to $210,000. Families could claim a maximum credit equal to 5% of the first
$10,000 of earnings for the lower-earning spouse in a married couple. The maximum credit would be available to families with incomes up to $120,000, with a partial credit available to
couples with income up to $210,000;
. . . increasing the child tax credit to as much as $3,000 for each child under the age of five.  Families could claim a 50% credit for up to $6,000 of expenses per child under five. The
maximum credit for young children, older children, and elderly or disabled dependents would be available to families with incomes up to $120,000. In addition, enhanced benefits under the credit which are scheduled to expire after 2017 would be made permanent;
. . . making the following changes to the earned income tax credit (EITC) for workers without qualifying children: doubling the amount of the credit, increasing the income level at which the credit phases out, and making it available to workers age 21 and older. In addition, enhanced benefits under the credit which are scheduled to expire after 2017 would be made permanent;
. . . the consolidation of six education-related tax incentives into just two, while improving the American Opportunity Tax Credit (AOTC) to provide students up to $2,500 each year over five years as they work toward a college degree. The refundable portion of the AOTC would be increased to $1,500. Part- time students would be eligible for a $1,250 AOTC (up to $750
refundable). In addition, enhanced benefits under the AOTC credit which are scheduled to expire after 2017 would be made permanent;
. . . requiring employers with more than 10 employees that don’t have a 401(k) retirement plan to automatically enroll full- and part-time employees in an individual retirement account (for which small employers would receive tax credits to cover the costs involved); and

. . . the closing of the so-called “trust fund loophole” by requiring payment of capital gains tax on the increase in value of securities at the time they are inherited; however, for couples, no
tax would be due until the death of the second spouse. In addition, no tax would be due on inherited small, family-owned and operated businesses unless and until the business was
sold, and any closely-held business would have the option to pay tax on gains over 15 years.  Capital gains of up to $200,000 per couple ($100,000 per individual) could be bequeathed free of tax, with this exemption automatically portable between spouses. Couples would have an additional $500,000 exemption for personal residences ($250,000 per individual), with this exemption also automatically portable between spouses. Tangible personal property-other than expensive art and similar collectibles-(e.g. bequests or gifts of clothing, furniture, and small family heirlooms) would be tax-exempt.

 

Four Reasons to Consider a Trust to Protect Your Assets

Nest EggFrom: Andrew H. Friedman

For many years, trusts have been the province of the wealthy, mysterious vehicles used to escape taxes and preserve assets for future generations. And for couples with joint assets approaching or exceeding $10.68 million — the current gift and estate tax exemption amount — a comprehensive estate plan that incorporates trusts is crucial for minimizing estate taxes.

More recently, however, families with assets well below this threshold are using trusts to help them protect assets from creditors, manage and grow assets for future generations, and ensure that their assets ultimately are distributed in accordance with their wishes to their heirs.

In setting up a trust, an individual appoints a trustee (an individual, a corporate trust company, or both) to act as a surrogate to manage and distribute assets in accordance with his or her wishes when (i) the individual later is not able to do so directly (due to, for instance, death, disability, incapacity, or geographic unavailability) or (ii) the individual wishes to shield the assets from possible later creditors. The individual sets out instructions in a trust document and appoints a trustee to act in his or her absence on his or her behalf. In this way, the trust ensures the ongoing preservation, protection, and control of assets.

Let’s consider some of the situations in which a trust can help someone control, protect, and preserve assets and address philanthropic goals.

 

Allocating assets among family members. Individuals often are concerned about leaving assets outright before heirs are ready to handle them. A child could dissipate assets too quickly, or lose assets in a later divorce. A spouse might remarry into a blended family. By placing assets in a trust, an individual can ensure that the assets are later distributed among family members in the time and manner intended.

Children: Suppose you have children who are young or irresponsible and might squander assets they receive outright. You can instruct your trustee when to distribute income and principal to each child. Such instructions can be based on age or on a specified accomplishment (e.g., college graduation). In this manner, you can seek to influence your children’s behavior even after your death.

Future generations: Suppose you wish to ensure that your assets remain available for future generations of your family, and that intervening generations do not squander assets to the detriment of generations that follow. For instance, if assets are left to a son, he might later give them to his wife, either voluntarily or in a later divorce, rather than leave them to your grandchildren. A dynasty trust ensures that each generation will receive sufficient income to live but be unable to divert remaining assets from future generations.

Surviving spouse: Suppose you want to preserve your assets for your offspring in the event you predecease your spouse. If you leave your assets to your spouse outright, he or she will have the power to determine their later distribution, perhaps giving them to a prior or later spouse’s offspring. By putting the assets in trust and providing for distributions to your spouse to maintain lifestyle, you can ensure that remaining assets go solely to your children. This planning can be particularly important if you have children from a prior marriage.

Education: An education trust can set aside assets to be used solely for educating or your children or grandchildren.

Special needs child: A special needs trust can be used to provide funds for an incapacitated child after the parent is no longer able to do so.

 

Provide for professional management. Individuals might be concerned that their heirs’ lack of financial sophistication – or the heirs’ divergent interests and needs — will preclude the effective management of the assets. A trust allows an individual to ensure that assets continue to be managed properly and to grow.

Incapacity: A trust can ensure that your assets are managed properly and your family’s financial needs are met in the event you suddenly become incapacitated. By specifying elements of incapacity in the trust document, your family typically can avoid a lengthy court proceeding. Providing for a smooth transition in the event of incapacity is particularly important for non-financial assets, such as real estate or a family business, where ongoing management is crucial.

Unsophisticated investors: Suppose your surviving spouse and/or your children are not sophisticated investors and will have difficulty managing assets to provide a reasonable return. By placing assets in trust, you can provide broad instructions as to how the assets are to be invested and identify a professional financial advisor to manage them.

Squabbling heirs: Often heirs cannot agree on how to manage a family asset, such as a home or business. By putting the asset in a trust, you can appoint a trustee to manage the asset and distribute income to your heirs per your instructions, helping to preserve family unity.

Shifting fiduciary duty: Naming one of your children to administer assets for all your children could expose the managing child to a suit by the others for breach of fiduciary duty if they do not approve of his or her actions. Naming a professional manager alleviates this concern by shifting the management duties away from a family member.

 

Preserve assets. Individuals in certain professions or businesses often are concerned that they might lose assets to creditors rather than preserve the assets for family members. Assets held in trust frequently are beyond the reach of creditors, allowing the assets to be preserved for heirs.

Creditor protection: Suppose you are a professional (such as a doctor) who might be sued for alleged mistakes. Or you are concerned that your business operations could expose you to financial risk in the event of an economic downturn. By placing your assets in trust before the actions giving rise to a suit or downturn occur, you can shield the assets from future creditors.

Children: Suppose your child has incurred significant debt, or you are concerned your child may do so in the future. Assets placed in trust for the child’s benefit are kept out of the reach of creditors seeking to collect on debts the child has incurred. A trusteed IRA program is designed to provide the same protection for your qualified assets.

Divorce protection: Placing assets in trust in some circumstances may shield the assets from split upon a later divorce property settlement.

 

Facilitate philanthropy. Individuals might wish to donate the bulk of their assets to a charity, but still provide needed income for family members and heirs. A charitable trust can accomplish these goals.

• Suppose you want to ensure that a portion of your assets goes to a charity, either during your life or upon your death (or both), while still providing income to you or your dependents. You can achieve this result by putting your assets in a charitable trust. Properly structured, a charitable trust also can provide immediate benefits, such as an income tax deduction for contributions to charity, and tax-free growth for future investment income.

 

Revocable vs. Irrevocable Trusts

A trust can be either “revocable” or “irrevocable”. An individual placing assets in an irrevocable trust cannot later reclaim the assets or make significant changes to their disposition. Thus, the donor must be comfortable with the arrangement at the time assets are placed in the trust. In contrast, a revocable trust can be changed at any time as long as the individual setting up the trust is alive and healthy. Upon the individual’s death or incapacity, the trust becomes irrevocable.

Which trust makes sense depends on the particular situation. Many individuals prefer the flexibility of the revocable trust. However, an irrevocable trust often is necessary for certain functions, such as estate tax minimization or asset protection. 

In choosing the type of trust, there are other considerations to keep in mind: 

State taxes. For purposes of applying their state inheritance tax, some states have adopted – or have suggested they will adopt — a gift tax exemption amount below the federal exemption of $5.34 million. Thus it is important to consider state tax consequences before undertaking any gift or estate plan. For states with lower exemptions, use of an irrevocable trust can help minimize state taxes.

Tax on trust income. Investment income earned within a revocable trust typically is taxed at the donor’s tax rate. Virtually all investment income earned within most irrevocable trusts, however, is taxed at the highest tax rate. Taking into account all surtaxes, that tax rate currently is 23.8% on dividend income and long-term capital gains and 43.4% on other types of investment income. To achieve both estate tax and income tax efficiencies an irrevocable trust should invest in assets that generate income exempt from tax or taxed at low rates. For this reason, life insurance can be a good investment within an irrevocable trust. When investing trust assets, a professional management strategy that seeks to enhance after-tax return by balancing investment and tax considerations is exceedingly important.

Stepped-up basis. In most cases, when a donor gifts an appreciated asset to an individual or an irrevocable trust during his or her lifetime, the recipient assumes the donor’s basis in that asset. Thus, the recipient will be taxed on any appreciation when the asset is later sold. By way of contrast, most assets transferred at death (including through a revocable trust) receive a “stepped-up” basis, relieving the heir of income tax on existing appreciation upon a later sale. Thus, the benefits of placing assets in an irrevocable trust during life must be balanced against the additional income tax a recipient might pay when the gifted asset is later sold.

Choosing between an irrevocable and revocable trust can be critical depending on the circumstances. For this reason (and others, including tax minimization and effective creditor protection), it is important to consult with a qualified attorney when establishing a trust, gifting assets, or considering any of the techniques described in this paper. Individuals establishing trusts also should retain a qualified professional fiduciary to assist in managing and administering the trust and directing the investment of trust assets.

 

Conclusion

A comprehensive estate plan, which typically involves the use of trusts, is crucial for couples with joint assets approaching or exceeding $10 million. But trusts also are important for couples or individuals with fewer assets, allowing them to protect assets from creditors, manage and grow the assets effectively, and distribute the assets to heirs or charities in accordance with their wishes when they are no longer able to do so themselves.

 

 

Andrew H. Friedman is the Principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

 

Copyright Andrew H. Friedman 2014. Reprinted by permission. All rights reserved.