Not If, But When – Preparing for the Biden-Tax-Boost Era

Not If, But When – Preparing for the Biden-Tax-Boost Era

My old friend Jim called me after midnight from a parking lot in Houston.

He sounded winded, distracted. Apart from the cellphone, this is how 1930s noir films begin. I prayed what he wanted didn’t involve digging in the forest.

Jim was in Texas to finalize a deal. The pitch had been thrown; now, he was waiting. Houston’s a ten-gallon town, but offers small entertainment, particularly when your career hangs on a client’s slow pondering. So Jim, who stays fit for no reason, went jogging. Next door to his hotel was another hotel – shuttered, its parking lot empty. So he ran and he ran, next to the freeway. Everything in Houston is next to a freeway. Thankfully, he called me solely for a bit of comfort.

Like many of my stories, this one began in Moscow, 1997. It was a good year, Russia’s last for a while. Two decades later, we would cross paths in Singapore, liked to walk to the Kopitiam for chicken rice, he in embarrassing madras shorts, savoring the humidity. He’d learned to love heat growing up in Madrid. His father was a nuclear engineer, and his American boy got to live globally, while dad worked on US government funded projects.

You know that song by the band War, ‘Why Can’t We Be Friends’? There’s a line in it, “I know you’re working for the see-eye-ay; they wouldn’t have you in the maf-eye-ay.” I whistle it whenever he mentions his old dad. Still, Jimmy got around, learned to flourish in sweltering locales. Switching base camps boosts the diversification of one’s humanity portfolio, Jim says – he’s writing a book on this idea, so don’t steal nothing, now.

Me, I’m a cargo-shorts sort of doofus, when I’m not dressed in Italian wool, British ties, French shoes and XXXL boxer briefs from the US of A. Singapore changed me: it made me sweat up my shirt dramatically, finally give up smoking – it’ll kill you in that heat – and moan without end about the humidity.

I don’t like to gripe as a lifestyle, though sometimes, I give in to worry. Today, I’m concerned, and as often, I’m anxious about taxes.

We know where they’re going: up. I’ve written repeatedly over the last few months, pre- and post-election, about what a President Joe Biden could, should or most assuredly will do to force tax planners to adjust all their strategies. We’ve moved from the possible to the inevitable stage, yet we still have nothing solid to chew. Still, my editor keeps harping for more. Around and around we go – like Jim tracing the perimeter of that lot with his jogging.  As though something were chasing us: invisible, barely imagined, formless for now. It’s there; my editor senses it gaining. When will it catch us?

The administration says that for now, stimulus is king. It’s too early for tax rises – that will wait for the economy’s recovery. There’s a stimulus bill on the table: the $1.9 trillion American Rescue Plan. Next up will be the Build Back Better Recovery Plan, that formless thing mentioned, which will likely include spending on infrastructure, green energy, healthcare and more.

The BBBRP (swell name) aims at longer-term recovery and may become a first step toward economic transformation – the thought gives me a chill. Don’t expect major tax reforms until these two steps have been taken. There, at least we nearly know something.

We may hate the anxiety, but delay is good here, based on one fearsome word: retroactivity. Plan A: If the expected changes go through, we’ll always have Paris, can adjust to a new normal, count on better days ahead. The best bet is to act now on today’s favorable rules. Logical, yes? But what if eventual changes to the tax rules are made retroactive to January 1, 2021? Even marathon Jim couldn’t outrun that kind of nightmare.

Congress hasn’t made a tax change retroactive since 1993, so while it’s uncommon, there is precedent. Given the legislative body’s current temper, I’m concerned. Yet here is our hope: the later in the year any tax reforms come, the better our chances of avoiding retroactivity. I’d guess – any wording more solid, in absence of firm plans and figures, is misleading – that if we make it through June, the odds are against retroactive. Right now, we have a window for action.

Let’s run down the basics. The Democratic Party doesn’t like the Tax Cuts and Jobs Act of 2017; they plan to replace it, though we don’t know with what. What we do know is our guide: the estate and gift tax exemption rests today at $11,580,000 per individual, double that amount for married couples. On TCJA’s schedule, these rates will fall to $5.85 million on January 1, 2026. If you’re planning to exploit these elevated exemptions, I shouldn’t think waiting for ‘sunset’ is wise. Take advantage of it while it’s there to enjoy.

At 40%, the tax rate for estate and gift transfers seems high today. One day, this may seem a golden, not to say gilded age. Democrats have been heard muttering ‘higher’ – perhaps 55%. Don’t wait for the holidays – give now. Congress may also change the rules on grantor retained annuity trusts (GRAT), possibly by increasing the initial annuity term to ten years (two years currently) and setting a minimum taxable gift level, perhaps 25% of the GRAT’s contributed property value. If you don’t have a GRAT and want one, wait until the situation clarifies . The proposition’s too risky today.

Some things we can’t fix. The step-up in basis will likely be cancelled. We cannot counsel dying early to take advantage of the current advantageous system – that’s not even funny, and no matter how delightful, no heirs are worth it. A higher top tax bracket, increased capital gains rates – these are things we’ll need to accept, eventually. If current tax laws are in tune with your plans, don’t jog in circles – get cracking.

If only we knew ‘when’; I’m hankering to write something new. Congress is mulling changes to familiar building blocks of estate planning and investment. As always – and I don’t tire of saying it – stay in touch with your advisory team for alerts on up-springing changes. Alas, the year ahead looks to be cursedly interesting.

Have You Heard of the

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Reduce BOTH Income & Inheritance Taxes, Increase After-Tax Inheritance to Beneficiaries
& Maintain Post-Death Control of Distributions


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