The top policy issue for family offices

As the nation continues to battle the devastating effects of COVID-19, a number of family offices have taken a greater interest in reviewing or creating various wealth succession plans. In a 2020 Campden Wealth survey, 46% of succession plans by families were put into place within the last five years. These multi-faceted plans designate who would handle the office if key members of the office were no longer able; they also establish a strategy for estate planning for families who have amassed considerable wealth from selling their founding business and are seeking ways to leave more of their earned wealth to the next and succeeding generations.

If Trump wins

The President has not unveiled any proposals to amend any laws regarding estate and gift planning. Through the Tax Cuts and Jobs Act of 2017 (TCJA), the President signed into law a number of provisions that have been favorable to many high-net-worth individuals and family offices.  The President has stated that he wants to make the TCJA provisions permanent.

Under current law:

  1. Estate, gift and generation-skipping transfer (GST) tax emptions are $11.58 million per person and $23.16 million per married couple in 2020 (indexed for inflation). These increased exemptions are scheduled to sunset on Dec. 31, 2025 and return to their pre-2018 levels of approximately $5.5 million per person.
  2. Estate, gift and GST tax rates are 40%.
  3. The basis of assets acquired from a decedent is adjusted to fair market value.
  4. Valuation discounts and other wealth transfer tools remain widely available.

If Biden wins

Joe Biden has publicized little about amending laws governing estate and gift planning, but the 2020 Democratic Party platform states: “Estate taxes should also be raised back to the historical norm.” Of course, the balance of power in the Senate would influence the probability of any changes under a new president.

Statements from the former vice president and proposals made during the Obama administration suggest the following:

  1. Estate, gift and generation-skipping transfer (GST) tax emptions would be reduced to rates that pre-date tax reform. However, the specifics are open to speculation, as exclusion amounts have ranged from $675,000 in 2001 to $3.5 million in 2009 to $5.49 million in 2017.
  2. Estate, gift and GST tax rates would increase.
  3. The step-up to a mark-to-market tax on appreciated assets upon the death of the owner would be repealed.
  4. Favorable valuation discounts and other wealth transfer tools would be curtailed.

Other family office issues:

Both candidates have been quiet on the future of estate and gift taxes. However, in considering a Biden presidency, relevant proposals under the Obama administration offer clues as to what Biden might be thinking.

Three items from President Obama’s proposed budget plans in the mid-2010s are worth noting:

  1. Grantor retained annuity trusts (GRATs) would be required to have a minimum trust term of 10 years and require gift tax to be paid at the time the trust is created.
  2. Dynasty trusts would be subject to tax after the trust has been extant for 90 years.
  3. Grantor trusts would be subject to gift tax for any distributions made out of the trust; any value in the trust would be included in the estate upon the grantor’s death.

Moreover, family offices come in all shapes and sizes, so not everyone follows the same playbook. In a post-Lender Management world, family offices have looked toward a C corporation structure due to deductibility of expenses, a lower tax rate than a flow-through entity and other eligible tax benefits. The Biden proposals have called for higher taxes for C corporations but still considerably less than flow-through tax rates, and that might push more families to think about restructuring their organization. Family offices that hold profits interest will need to reevaluate their current structure sooner rather than later due to the possibility of higher long-term capital gain tax policies.

The Trump administration’s effect on the industry:

The administration over the last 3½ years has loosened regulations, reformed the tax code and opened opportunities for investment. The policies put forth by this administration have resulted in stronger corporate profits, which pushed the equity markets to all-time highs before the pandemic.

Specifically, family offices are now officially defined under the accredited investor rules, per the SEC: That provides them regulatory cover when they invest.

Also, the increase in the exclusion amount for estate and gift tax was the largest in the last two decades, which has fueled wealth transfer activities.

By the numbers: $30 trillion

Millennials are set to inherit about $30 trillion from their parents in the coming decades, according to Bloomberg. And that estimate is on the low end; others range up to $68 trillion. The stakes in this election are significant as family offices look for ways to transfer wealth between generations while being mindful of current estate and gift policies. Given what we know three weeks before the election, a change in administration could result in a decrease in the amount of wealth a family office can transfer to the next generation.

In preparation for the outcome, family offices and the families they serve should consider:

The following five action items:

  1. Perform a comprehensive review of all estate and gift plans overseen by the family office.
  2. Determine how much lifetime estate and gift exclusion members of the family have utilized and whether the exclusions should be utilized this year.
  3. Ask whether family members are maximizing the annual gifting exclusions.
  4. Review their investment portfolio to determine if a GRAT strategy makes sense.
  5. Educate the next generation about wealth preservation and responsibility, as a number of wealth advisors have indicated the next generation has some anxiety regarding acquiring such great wealth.
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This article was written by Jason Kuruvilla and originally appeared on 2020-10-19.
2020 RSM US LLP. All rights reserved.
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