Initial Thoughts on the Presidential Election

Last week, America witnessed the conclusion of one of the most talked about elections in recent memory, as Donald Trump defeated Hillary Clinton and was elected to become the 45th President of the United States. Not only did Trump win the toss-up states he needed to in order to capture 270 electoral college votes, he even turned some states red that had historically been blue. While we await to see which promises made during Trump’s campaign become true, we wanted to share our initial thoughts on the election and the potential impact of those promises on America’s tax code and fiscal policy.

Map

First, we must acknowledge that Trump is becoming President at an opportune time, with the economy and unemployment rates being in significantly better positions than when President Obama took office in 2008. In addition, Republicans have gained control of both the House of Representatives and the Senate, providing a seemingly unobstructed pathway for his legislative initiatives to be passed into action. However, Trump does face some pushback within his own party and must deal with the Republicans not having 60 votes in the Senate. Although the “reconciliation” process (whereby most spending and tax legislation can be passed with a simple majority) can be utilized to pass some of his tax reform, he will have more difficulty passing non-budgetary items, which include the Affordable Care Act’s individual mandate or altering the Dodd-Frank legislation.

Unfortunately, there is still tremendous uncertainty about the specifics of all of Trump’s proposals for tax reform. Some of these proposals are in alignment with the House Republicans’ plan while others are in misalignment. Trump’s Tax Plan website lists the following proposals:

  • “Low-income Americans would have an effective income tax rate of 0%”
  • Income tax brackets would be simplified and tax rates would be reduced
    • Less than $75,000: 12%
    • More than $75,000 but less than $225,000: 25%
    • More than $225,000: 33%
  • Carried interest would be taxed as ordinary income
  • The Affordable Care Act would be repealed, including the 3.8% tax on net investment income
  • The corporate and personal Alternative Minimum Tax (AMT) would be repealed
  • The standard deduction would be increased and personal exemptions would be eliminated
  • The estate tax would be repealed, but capital gains on property held until death and valued over $10 million would be subject to tax
  • Corporate tax rate would decrease from 35% to 15%
  • Deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%
  • “Most corporate tax expenditures” would be eliminated (except for research and development)

In all likelihood, there is going to be some form of substantial tax reform during Trump’s presidency. The questions are how significant will the reform be and in what method will the reform take place. For example, the repeal of the estate tax has occurred a few times in the history of the United States, with it being reinstated in times of war or as part of a budget or tax reform. The last time there was a repeal of the estate tax was in 2010 as part of the Economic Growth and Tax Reconciliation Act of 2001. This Act called for a phase-out of the estate tax over a 10-year period. However, additional legislation in 2010 and 2012 led us to our current estate tax policy. Therefore, will Trump be able to repeal the estate tax or possibly reform it over a period of time? The answer will come down to a careful negotiation between Trump and Congress and the balancing act of tax reform, entitlement reform (which Trump has said he will not change), and managing the federal deficit.

For our insurance practice, the potential repeal or even reform of the estate tax may change why and how insurance policies are purchased in the future. However, even if the estate tax is repealed, Trump has proposed there would be capital gains taxes on assets held until death (with capital gains not applying to the first $10 million of assets). Even if the reason to own insurance to provide liquidity for estate taxes is minimized, there is still a need for liquidity. The death benefit could offset the capital gains tax incurred on the sale of the inherited property.

The other reasons for having life insurance remain valid, such as providing spousal security, income tax diversification, supplementing your retirement income, succession planning for a business, estate equalization, creating a family legacy or funding philanthropic objectives. Given Trump’s proposal to reduce income tax rates in the near future, we will likely see a surge of individuals purchasing insurance policies to serve as a cash accumulation vehicle to supplement their retirement planning. Generally, most qualified retirement plans only make economic sense when you defer paying taxes at a higher tax bracket and withdraw the funds at a lower tax bracket. However, if income tax rates are decreased, it may make more sense from a tax planning perspective to participate in more after-tax planning as opposed to continuing to promote and invest in qualified retirement plans. It really comes down to two questions; would you rather pay taxes at a higher or lower tax rate and would you rather pay taxes on a higher or lower amount? Utilizing insurance would result in investing after-tax dollars to purchase a policy, allowing those funds to grow tax-deferred and withdrawing those funds income tax-free.1

The concern of many, including Paul Ryan and other members of the Republican Party, is how much will these potential tax cuts add to the federal deficit. Trump has also discussed increasing military spending, which would further exacerbate the federal deficit problem. Some argue that his tax reform lowers tax rates but increases the tax base so there shouldn’t be any change in overall tax revenue. There were also discussions during the campaign of imposing tariffs to generate additional revenue for the government. Although monetarily this may work, trade agreements would have to be negotiated which could have severe political ramifications and strain our relationships with Allies across the globe. While it’s still unclear what impact these changes will have, most Americans agree there needs to be a defined path for how we are going to navigate our ever-increasing debt burden. Potentially decreasing tax revenue and increasing spending does not appear to be in alignment with reducing our country’s debt. In fact, while increasing our revenues or decreasing spending on their own would be a start, it will most likely take both actions to change our fiscal policy, make an impact on our national debt and put the U.S. on a path towards financial stability. It seems that any other path will compound the debt burden and lead us toward an unsustainable and uncertain financial future.

Perhaps more than we have seen in recent memory, there is a tremendous amount of uncertainty surrounding what the future will hold. The capital markets reflected this on election night, as we saw the futures market predict the market would be down 5% the day after the election. Anytime there is uncertainty and especially after a Presidential election, the markets usually act negatively. Throughout history, we have seen this occur, such as when the markets dropped by 5.27%, 4.61% and 4.42% the day after President Obama, President Truman and President Roosevelt were elected. However, maybe there is reason for optimism as the markets actually gained by 1.40% the day after Trump was elected and continued that upward trend the rest of the week.

Trump will also be the first President to have never served in a government position. However, Trump’s supporters showed they are less concerned about his lack of political qualifications and more concerned about challenging and changing the status quo. They were dissatisfied with Washington and felt alienated amongst all of the change that has been occurring around them. As Andy Friedman pointed out on his Washington Update blog, Trump supporters “see a political system that at best has ignored them and at worst is stacked against them.”

Whether you voted for Trump, Clinton or anyone else, we need to be reminded that our government was designed on a system of checks and balances to serve in the best interests for all Americans. It was structured this way to prevent one man or woman from making unilateral decisions. Trump must work closely with our elected representatives in the House of Representatives and Senate in order to pass legislation. Furthermore, he must work collaboratively with his Cabinet members to navigate the multitude of domestic and foreign issues he will face while in office. Regardless whether Trump or Clinton was elected the 45th President of the United States, we should look optimistically toward the future and remember that we live in a country where our opinions are heard and our votes can inspire change.

Should you have any questions about how President-elect Trump’s proposals may affect your individual, estate or corporate tax situation, please feel free to give us a call.


This information does not reflect the political views of WealthPoint, LLC or any of its employees or affiliates. WealthPoint, LLC does not provide any tax or legal advice. 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.

1 Subject to policy performance and product specifications.

 File #: 1861-2016

 

What is the Generation Skipping Transfer Tax?

Recently, M Financial posted a brief blog on the generation skipping transfer tax.  Please copy and paste the link below into your internet browser to read.Transfer Tax

http://mfin.com/m-intelligence-details/Understanding the Generation Skipping Transfer Tax

 

Life Insurance in a Rising Tax Environment

In March, we posted an article about investing in a rising tax environment.  We at WealthPoint thought the article in the link below would be a good follow up to that article.  Please take a moment to read through it.

Rising Tax Environment

Please click the link below.

WP_Marketing Intelligence Report – Life Insurance in a Rising Tax Environment

Life Insurance Basics

M Financial put together a piece on life insurance basics that we thought our readers would find educational.  Please take a moment to read through it and use it as a reference.

To view the file, select the link below:

WP_Life Insurance Basics

Life Insurance Policy

 

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)

The Impact of True Collaboration

Recently, Ryan and Tim were asked by STAFDA, a large national trade association we have spoken to, to write an article for their upcoming trade magazine.  This article highlights the impact of collaboration with an entrepreneurial family group and their advisory team.

Please click the link below to view the PDF file.

The Impact of True Collaboration – Ryan Barradas – Tim Young

Common Life Insurance Mistakes

We at WealthPoint continually strive to provide insight to our clients and advisory community.  The attached piece was written by M Financial and discusses life insurance policy issues that have been encountered through the years.  Please click the link to review the white paper.

 

 WP_AMI_Common Life Insurance MistakesMistake

Importance of Life Insurance Policy Reviews

M Financial is constantly writing material for member firms to share with the advisor community and clients on the subject of life insurance.  WealthPoint is a member firm of M Financial and we wanted to make this article available.

WP_AMI_May 2014_Importance of Life Insurance Policy Reviews

Click on the link above to view the full article (PDF)

How To Get Started

Part 4 of a 4 part series

Provided by Ryan F. Barradas and Tim Younggetting-started

In order for you to confidently move forward with big decisions in a manner you haven’t previously, you need an approach that invites three key dynamics into the room: your entrepreneurial spirit, the relational factors unique to closely-held or family business and the technical aspects of sound planning. You have to get to that point of instinctual clarity about how you’d like your story to play out from here forward.

However, your advisors also have a responsibility to know your story. In order to do this, there must be a process that allows them to take the time and have the respect to hear the full story of all the stakeholders in the planning process before recommending any action. You need to learn how potential planning will affect their lives; how they make decisions and the motivations they bring to their role. Sometimes people just need to be heard. Yet sometimes they have a legitimate issue that will impact the plan. I believe it’s imperative to get all the necessary players into the arena and on the team at the onset. Anything else is inefficient.

So how do you do this? You do it through deep discovery with all key stakeholders – meaning anyone who’s going to be affected by decisions you will make either financially, emotionally or from a business perspective. This can include: spouses, business partners, key employees, active and inactive children, key advisors, bankers, key business relationships and more. It’s the people part where most if not all planning processes get derailed, technical solutions come later.

Once this deep discovery is complete, the findings should be organized and distilled down into a document that outlines ten to twenty of your macro goals. These are goals and objectives that absolutely cannot be violated, period. Regardless of the effectiveness of a strategy, if it violates one or more of the macro goals, it should never be presented for consideration. This will keep you on track and provide you with benchmarks for measuring success.

Next, you must embrace a process that allows advisors to truly collaborate. Some families feel that bringing advisors together for group meetings may increase fees. Ironically, if organized properly the opposite occurs. With communication occurring real-time amongst all parties, better ideas are formulated in less time, often reducing fees, taxes or other expenses. The team arrives at more relevant solutions faster and there’s less chance of one person’s style driving the result.

Last but not least, do not try to do this yourself! It’s hard enough to run your business, but doing it while managing a complex process with so much at stake is nearly impossible. As soon as the process diverts your attention from what makes you money, you’ll table the subject until the “right time” which never comes. Procrastination can cost money and more important, it limits your choices. Hire a professional with a multidisciplinary background. Make sure they have the capacity to understand all the dynamics at play (entrepreneurial, relational and technical), and will hold all the accountable parties accountable.

Ryan Barradas (ryan@wealthpoint.net) and Tim Young (tim@wealthpoint.net) are co-founders and partners of WealthPoint, LLC in Phoenix, AZ.  WealthPoint is a nationally recognized firm focusing in the areas of succession, exit and wealth transfer planning for entrepreneurial family groups.

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.