These are challenging and uncertain times for our country. Last year’s contentious election left some of you stressed out and others hopeful. The first month of Trump’s presidency has seen no shortage of activity. Whether you agree or disagree with the administration’s actions, the one thing we do know is the pace of change won’t slow down anytime soon. We are awaiting a proposal on major tax reform, which could be announced any day now, along with a new plan for health care and possible changes to Social Security and Medicare.
I have the pleasure of being part of the CCH Estate and Financial Planning Advisory Board, a group of national leaders in the field that meet several times a year to discuss issues of importance to our clients. We had a call last week, specifically talking about the impact of the new administration on our clients’ financial situations. Here are some of the major discussion points from that call.
Estate planning and wealth transfer taxes – As we’ve explained before, the Trump administration would like to eliminate the estate, gift and generation skipping taxes (GST) completely. In addition to their repeal, they have also proposed eliminating the current “step up” in basis assets receive on death. This could mean some form of capital gains tax on death but the details of such a plan are still unclear. There is also the possibility that a repeal might only be effective for a specified period of years, like the changes in 2001 that expired in 10 years.
Since we do not know what form these changes might take, the important thing is not to do anything irrevocable now. We would not suggest making taxable gifts (over your lifetime exclusion) until we have more clarity on this issue. Continuing to do planning with vehicles like GRAT’s and 529 plans makes sense and Grantor Trusts still provide good flexibility to your planning should the rules change.
Income tax rates and deductions – Both the Trump proposal and the House Republicans’ (under Paul Ryan) proposal have some common ground on what individual tax rates might look like. Instead of the current 39.6% maximum rate, both plans would top out at 33%. Trump would maintain the current long term capital gain rates (20%) but Ryan would reduce it to ½ of the ordinary income tax rates. Both would repeal the AMT (Alternative Minimum Tax) and also the Surtax on Net Investment Income which is part of the Affordable Care Act. Itemized deductions are an important part of your tax calculation and the Trump plan would cap itemized deductions at $200,000 on a joint return while the Ryan plan would eliminate all deductions except for mortgage interest and charitable contributions.
There appears to be real momentum to simplify the tax code along with reducing rates but it remains to be seen what the actual proposal will look like and what they can get through Congress. A lower ordinary tax rate environment may create opportunities for Roth conversions while lower capital gains taxes may enable you to take gains on low basis stocks with less tax impact. Losing the benefit of the state income tax deduction would be significant for those in high tax states like CA, NY, and MD.
Impact on the investment markets – Despite dire predictions from many market analysts of what might happen if Trump won, we’ve seen US stocks continue to climb. Many speculate the administration’s proposals to lower corporate tax rates will have a positive impact on earnings and this has helped lead to higher stock prices. Unfortunately, we know the stock market can be volatile in times of uncertainty and we will likely have a good bit of that until the Trump administration plans take shape.
The election results had the opposite impact on the bond markets as rates rose in the aftermath of the election and bonds were down in the 4th quarter. It is certainly possible rates could rise several times this year if the Federal Reserve sees the continued improvement in the economy. That means your bond portfolio could see further declines, although as cash is reinvested in new bonds the higher rates will eventually be a positive for anyone with a bond portfolio. Municipal bonds could also feel the impact of lower tax rates as their yields are lower than corporate bonds because of the tax break. You should also be looking at the debt side of your balance sheet to make sure you’ve taken advantage of the current interest rate levels.
We think it is important to keep perspective on your overall goals and objectives as you look at your portfolio. Making sure you have sufficient cash reserves if you are using your portfolio to fund living expenses is important and should be done on a regular basis. Reviewing your asset allocation to make sure it is in line with your targets is always important, especially after strong performance of one asset class as we’ve seen with US stocks lately.
Impact on insurance planning and Social Security – A potential repeal of the estate tax would have a significant impact on the use of life insurance, which is often used to fund estate tax liabilities on the second death. Long Term Care insurance, which has seen significant premium increases in the past few years, might experience slower premium increases as interest rates rise. We encourage you to regularly look at your overall situation to make sure you have protected against all risks.
We know some changes to Social Security will be necessary in the coming years and means testing is a possibility. Another approach would be to raise the retirement age as they have done in the past. Any changes here would be contentious as 2/3 of Americans get half or more of their retirement income from Social Security so we would anticipate any changes that are made would be done very carefully and gradually.
We will continue to closely monitor this changing environment and keep you informed as the new administration’s plans develop. We are centrally thinking about how all of these issues impact your personal finances and are always glad to discuss it with you.
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
Please see Additional Disclosures more information.