By Peter Mallouk
JD, MBA, CFP®
Any letter involving politics is always interesting for me. Once the letter is ready to go, I hit “send” and just wait for the commentary to pour in! While most feedback is relatively harmless, insightful or even complimentary, occasionally a client will remark that we should simply not discuss politics at all. I received several comments like that after the recent Brexit letter and anticipate a few here as well.
At our Connect16 event held this past Friday, I shared a few notes I received after sending the most recent Brexit letter out; and for those that missed it, here is a sampling of the feedback I received regarding our thoughts on the topic:
- For a Communist, you aren’t doing a bad job of managing our money.
- Why don’t you just endorse Trump at the end of your letter?
- If the tree in my backyard leaned as far left as you do, it would fall onto my house!
- It’s Right Wingers like you that are driving the country off the ledge in a party bus; at least enjoy the ride, and I hope you have a drink in your hand!
- Great letter, but while the economic outlook is worthwhile, it would help to know where you stand politically.
Of course, these are rare, but they do give insight as to how polarized politics have become over the last few decades.
The reality is there are many factors that go into investment management and performance, as well as decision making around the types of securities to own, tax strategies to utilize (even as simple as which year to make a charitable contribution), as well as estate planning decisions. Anyone that thinks politics is irrelevant to their financial life is naïve. Because of that, we need to understand present proposals, monitor their progress, and ultimately make investment and planning decisions that comply with the law while ensuring our clients are always informed and understand all of the options available to them.
As with America in general, our clients are divided into three camps: Clinton supporters, Trump supporters, and those praying the world does not end in 2017. Regardless of your feelings, being informed is a good thing. Clinton and Trump have very different tax proposals. What they mean for our country depends on your point of view. What they mean for you is easier to understand.
First, regarding income taxes, Clinton has proposed the “Buffett rule” which would impose a minimum 30% effective tax rate on Americans making more than $1 million annually, as well as a 4% “fair share surcharge” on those making over $5 million annually. Trump has proposed reducing the 7 tax brackets to 3, all at lower rates: 12%, 25% and 33%.
Regarding capital gains taxes, Clinton has proposed raising the short term capital gains rate while Trump has taken no position.
Both candidates agree that the “carried interest” deduction should be eliminated. Carried interest allows hedge fund and private equity managers to have their earnings taxed at capital gains rates rather than ordinary income tax rates. This break is arguably the most unfair tax break that exists, and it’s about time it has been eliminated. Hopefully this actually gets done.
Clinton has not addressed how she will handle corporate taxation, while Trump wants to make the top bracket 15%, and also have it apply to certain individuals that own businesses.
Clinton has proposed putting rules in place to prevent retirement accounts, which are exempt from taxation while they grow, from becoming too large under certain circumstances. If this sounds vague, it’s because it is. There are no specifics as of yet. Trump has been silent on the issue, and you can’t get more vague than “no comment.”
Nowhere though are the candidates as far apart as they are on the estate tax. First, let’s address the basics of the laws as they exist today:
- Each individual is allowed to give away up to $5.45 million on their death without being subject to the estate tax.
- An individual can instead give away the $5.45 million (or part of it) while they are living, which enables the money to grow outside the individual’s estate.
- Each individual is allowed to give away $14,000 per year to whomever they want.
- The above amounts adjust for inflation.
- The estate tax quickly gets to 40%.
An estate includes not just your assets but your insurance as well. If you have assets totaling $1 million and a $5 million insurance policy, your estate is worth $6 million. Most estate planning revolves around items the candidates aren’t discussing, such as avoiding probate, making sure the intended beneficiaries receive the estate, asset protection, and covering financial and health care decisions in the event of incapacity. The rest of estate planning revolves around reducing or eliminating estate taxes by utilizing strategies including gifts to foundations and charities, and making the most of the “free passes” Congress allows in items 1 through 3 above.
Now, let’s get to the proposals, which could not be more different.
Here is the Trump plan: Eliminate all gift and estate taxes. Yes, that is the entire plan.
Here is the Clinton plan:
- Reduce the amount that can pass tax free on death from $5.45 million to $3.5 million.
- Reduce the amount that can be passed while living from the full $5.45 million to $1 million.
- Eliminate the inflation adjustment.
- Increase the tax rate from 40% to 45%.
- A few days ago, Clinton adjusted her stance on #4 to more align with Bernie Sander’s plan, and she is now proposing new brackets of 50%, 55% and 65%, beginning with those with over $10 million in assets.
Those that support the elimination of the estate tax argue that the individuals paying the tax have already been subjected to income, capital gains, property, sales and other taxes, and the estate tax simply taxes money that has already been taxed. Second, they argue that individuals are more likely than the government to deploy the money in ways that will help the economy.
Those that are for the estate tax argue that it is not good for the country to have concentrated wealth in the hands of a few families, as was a problem in Europe for centuries. They argue that if families led by Bill Gates and Warren Buffett kept the money for generations, they would essentially “own” the country, or at least the political process. Some, like Gates and Buffett themselves, argue that an estate tax is good for America because (1) it forces the wealthy to donate money to charities or pay a very high tax, which the government can use to fund programs and debt , (2) it leads to greater equality across generations, and (3) the extra revenue from taxes helps to offset the costs of social programs.
Regardless of where you stand on income, capital gains and estate taxes, there will be a lot to watch after the election. We will keep you informed along the way.