ECONOMIC COMMENTARY

The Biden agenda: day one and the next 99

Listen to our discussion as we look at the Biden Administration’s agenda during the first 100 days in office. Our panel of experts was joined by a Washington Strategist for a conversation on the current landscape and planning considerations for 2021.

They covered:

  • Current market conditions and reaction to the Administration’s agenda.
  • The impacts on business and regulatory environments.
  • Wealth management and tax implications.


MODERATOR

Gerald Baker, Head of Trust & Fiduciary Services, Co-Head of Center for Wealth Planning Excellence, SVB Private

SPEAKERS

Jason Cain, Managing Director, Family Office Team, Co-Head of Center for Wealth Planning Excellence, SVB Private

Doug Fisher, Washington Strategist

Shannon Saccocia, CFA, CIMA®, Chief Investment Officer, SVB Private


Audio Transcription

Gerald: Hello, everyone, and thank you for joining us today. I'm Gerald Baker, Head of Trusted Fiduciary Services and Co-head of our Center for Wealth Planning Excellence at Boston Private. Welcome to our client town hall. Today's webinars discussion are focused on Biden administration's first 100 days in office and their agenda. We will take a look at current market conditions and reaction to the administration's agenda, its impact on business and regulatory environments, and wealth management and tax implications.

I'm joined today by my colleagues, who I'm sure you recognize from our previous webinars. Jason Cain, Chief Wealth Strategist and Co-head of the Center for Wealth Planning Excellence. Shannon Saccocia, our Chief Investment Officer at Boston Private, as well as Washington strategist Doug Fisher. We're looking forward to digging into our conversation today and looking ahead following this historic election.

Please note, listeners, that we are happy to take any questions you may have. Feel free to submit them throughout our discussion today. And we will answer them during our Q&A period at the end. To ask a question in real time during today's call, simply click the Q&A feature on the right hand side of your screen and type in your question. And so from there, let's get started with a conversation on stimulus legislation. Doug, talk to us a bit about what we can expect from President Biden as administrations typically move more aggressively on their policy agendas during the first 100 day period.

Expectations (1:29)

Doug: Yeah. So Gerald, what's happening now is that, of course, Washington is the land of best intentions. So what has happened is the administration has reached out to a group of bipartisan members of the Senate. And of course, I'm gonna focus most of my comments on the Senate, that's where legislation either succeeds or fails, because of the general 60 vote requirement for passage.

So what's happened is proving very, very difficult to move the President's 1.9 trillion stimulus package, and we'll cover the highlights of that in a moment. And so, the House and Senate leaders are pivoting to a new process to draft and move the legislation. And we'll be hearing a lot more about that in the coming weeks, and that's called reconciliation.

And in a nutshell, reconciliation is just a complicated budget-related process that both political parties use when they can't seem to forge a bipartisan majority to move legislation. So the stimulus legislation will likely move through that vehicle. And so, currently, the House and Senate leaders have instructed the House and Senate Budget Committee that...it's kind of interesting that Bernie Sanders actually, our perennial candidate for president, actually chairs the Senate Budget Committee, and is working towards producing a reconciliation bill as early as for senate floor action next week.

That's like lightning speed compared to other times in Congress that have used this process. So what will happen then is that reconciliation process will likely go to the House and Senate floor and in the next week or 10 days. It will pass by a simple majority vote. And that will become the vehicle with which a stimulus package that will likely pretty much follow the President's campaign proposal at about 1.9 trillion will be attached to it. And then we'll go back to House and Senate vote, I'm guessing by the end of February. That would also be lightning speed for final passage. And I can cover a few of the top highlights, if you'd like, in a second on it.

Gerald: Yeah.

Doug: Okay, so the package will pretty much center on an additional $1,400 of direct payments to individuals. I think what will be different will be the eligibility of individuals, families and dependents. I think they'll reduce the income eligibility from the last payment to help reduce the cost. There will be unemployment supplements of $600 extending, most likely, through September. Those currently end in March now. A hundred and sixty billion for vaccine distribution, production and testing, which is much needed. Four hundred and forty billion for state and local governments. That was a sticking point with the last bill for republicans. A hundred and seventy billion for schools, universities, to help reopen. A minimum wage hike of $15, at least.

That's one of those provisions where it is unlikely it will survive the reconciliation process. Because one of the limitations in reconciliation, even though it creates a path for a majority vote, is there's limitations on what kind of legislation can be carried through that legislation. And basically, in a nutshell, and it's a complicated process, but legislation has to affect the revenues of the government either positively or negatively through spending or tax revenue. And a minimum wage hike might be scored as not impacting the budget. So that may have to wait for another legislation in something like an extension of the mortgage, for example, assistance, or the eviction moratorium, if that's included, that may fall out as well. And I think the administration has other plans to move that through different ways.

There could also be...and this is something we talked about in our planning, there could also be some surprise provisions in this version of reconciliation. Because again, reconciliation can be used to carry tax and revenue provisions as well. I mean, we could see a reinstatement of the SALT tax deduction for this year, that might be a surprise provision for taxpayers in filing their 2020 taxes. We don't know that yet. But the bill can carry a lot of those things.

So I would say, in total, this legislation has clearly a path to passage, and it will likely... I'm just sort of looking at the tea leaves now with when all is said and done, it could happen in mid to end of February.

Gerald: Thank you, Doug. Well, as you've mentioned, that's a lot of legislative activity in a very condensed period of time, at the start of a new administration. So Shannon, what policy changes and continuations are you looking at, that should be of interest to U.S. investors?

Policy Changes for U.S Investors (7:17)

Shannon: Well, I think first and foremost, Gerald, the market has been enthusiastic about additional stimulus. We've continued to see this divergence between the market activity over the last year, as well as the economy. So if you think about this divergence and you take it to the next level, there's really a divergence between the manufacturing economy and the consumer economy. And so I think, overall, additional accommodative spending, whether it's from the Fed infusing liquidity into the markets, or the fiscal on the fiscal side, the federal government adding additional funds that, frankly, will be funneled, probably directly into consumption, for many of the recipients of those stimulus payments, I think, is a positive.

And so, kind of peeling back the layers of the Biden agenda. There are some other areas that investors are looking at. And they fall into sort of four camps, regulation, energy decisions about the oil and gas industry, and healthcare, and taxes.

And I'll take each of those just for a quick second, and I'll start with healthcare. One of the things that we've been hearing about, for the last several years, has been rising drug prices. And so, from a bipartisan perspective, we do expect there to be some movement on drug prices over the next year. On the energy front, we've already started to see some moves from the Biden administration as it relates to oil and gas companies. So investors in those companies are certainly interested in the decision to stop the Keystone pipeline project, as well as a suspension, and probably eventually a longer suspension of fracking on federal lands.

On the regulation side, big technology. There have been a lot of questions over the last several years, questions that have frankly been going on for some time in the European Union, as it relates to the reach of big tech, whether it's Google and search, Facebook and advertising. Those are questions that we don't really have answers to. The federal government has made, and Congress has made an effort in the past to try to understand how they could potentially regulate the technology industry. But I do think this is gonna become more in focus.

And then the fourth part of the Biden agenda, I guess, you could say is taxes. And I know we're gonna spend several moments on that. But I think that those are the four things that, coming out of the election, particularly with what happened in the Senate. Those are the four areas of emphasis. They offer both opportunity as well as, potentially, some risks for investors in those sectors. But those are the four things that I think you're gonna hear most about, as we go through the rest of 2021.

Gerald: And when you look at those four themes, and you think about all of the policy and legislation at play, what is your general view on the market's reaction to this proposed stimulus package and broader legislative agenda?

Shannon: Well, I certainly think, coming up through the November election, there was this feeling that this would be a positive, just from the amount of spend that would be infused into the economy. And so, the markets, at this point, are perhaps a little bit fatigued. We have been seeing a bit of choppiness more recently. There is still significant enthusiasm about the support. You know, the democrats have made it clear that they intend to spend the appropriate amount of money to support the economy during this nascent recovery.

And so, we do expect that combining that fiscal stimulus...and the numbers are extraordinary when you actually add up the amount of liquidity that's been infused into the economy over the last year. When you combine that fiscal stimulus with the monetary stimulus, the markets are very excited. Now, I will say, overall, we've been in a deregulatory environment over the last four years that really, apart from issues with China, and perhaps some targeting of some of the technology companies that I mentioned previously. There really wasn't much on the Trump administration's agenda, as it relates to additional regulation, if anything, it was peeling back regulation that had occurred during the Obama administration.

And so there could be areas of the market that are a bit more concerned with this new regulatory eye. However, I think overall, just this...the liquidity has continued to be the foundation and really has helped to craft the narrative of the outperformance of risk assets as we move through the rest of this year.

Gerald: Thank you. So Doug, as Shannon alluded to, tax becomes a big topic of conversation and discourse over this quarter and beyond. Could you walk us through how the tax bill is shaping up, and what you think it would look like, given the current composition of the senate?

Tax Bill (12:19)

Doug: Sure. The House and Senate Democrats will, again, use the reconciliation process to move a tax bill. I think they sort of understand now that they cannot construct a bipartisan tax legislation soft bill that will attract 10 Republicans. And then crafting the tax bill and even crafting the stimulus legislation, which will both sort of attach to a reconciliation package, you know, it's not...the drafters, the tax writing committee in the House and Senate have to be sensitive to their own members, because they have a handful of conservative members that will have a great deal input on the tax bill.

So that provides the successful path for tax legislation. So what's happening right now? Currently, the House and Senate tax committees, in anticipation of this passage of a budget reconciliation, which is moving ahead of the tax legislation, as it normally does, they've tasked the members in the staff to start crafting, what approximately $4 to $5 trillion tax increase will look like. Now, that's $4 or $5 trillion of new revenue over 10 years, it doesn't happen in one year. That's generally how they score it in the government, over 10 year periods. And it will follow...the reconciliation process will allow it to follow the Biden tax plan.

And so let me talk...before I sort of start with the corporate taxes, I know you have questions about the individual and the estate tax, and we'll talk about that in a second. Let's talk a little bit about timing here. Tax legislation usually starts drafting and proposing in the late summer to early fall. That was clearly true in terms of how the Republicans move their tax cuts and job acts of 2017. And again, they also use the reconciliation process to move it through the Senate with a simple majority.

But I think what's gonna happen, I think there's such an urgency to generate some revenue, including revenue to offset this upcoming $2 trillion stimulus plan. I think the administration will really push the tax-writing committees to start drafting and proposing a plan as early as...and this a little bit of guesswork, in the March and April timeframe, which is pretty quick. And I think you wanna think about when...and you say, "Okay, so what matters in terms of introduction?"

Well, the actual proposal to the public, which can be through a release to the press, or it can be a press via press release, or both, it will set forth the effective dates for the various provisions. And that kind of matters in taxes. And we'll have a conversation about some of those on whether they're perspective or retroactive. I think that's gonna be on the top of mind for many of you that are viewing today.

So let me just talk a little bit about...I'll start with the tax, the corporate tax, just mentioned that. I know we have a robust dialogue coming in terms of planning on the individual and capital gains, and estate proposals, in there. So on the corporate side, there is very likely to be an increase from the 21% current corporate rate to 28% or 29%. I don't see a lot of pushback on that. And I think Shannon will tell us that, at least on the grand scale of revenue generation in the country, and we knew this as tax staffers, the more we looked at the revenue and receipts of the government, that corporate tax doesn't generate the majority of taxes in the country, it's really on the individual tax rate.

It's also kind of... An interesting sort of reminder is that the corporate tax rate reduction in the tax cut and jobs act of 2017 was one of the few provisions that was made permanent. So obviously, it's very impermanent at this point. The other areas in corporate tax that, just to keep in mind, is the...and this is related to small business corporations, including LLCs, partnerships, sole proprietorships, Subchapter S companies. That special 20% reduction in tax rate in the 2017 bill, which really is about a 5% to 6% reduction in taxes for many successful small businesses, that may be reversed as well in this bill for higher-income businesses as well.

And third, couple of interesting things in the corporate tax area is there's a provision for those of you that have produced goods in foreign countries, it's called the Round trip rule. As we know it inside the tax world is if you're producing goods offshore in the United States, and you're bringing them in and selling them into the United States, which was proposed in 2017, as a revenue raiser, generate a ton of opposition. That is included in this tax proposal as well. And then, there's a minimum corporate, sort of like an AMT or minimum tax on corporations above 100 million. So that's a fairly substantial corporate tax package. And I expect to see the contours of that pretty much being in the bill.

Gerald: Great. Thank you, Doug. So Jason, we've covered a lot about the Biden administration's agenda, including the tax bill and the implications on the corporate side. But as all of us know very well, we deal with high net worth and ultra high net worth clients, so what are you speaking to about clients when they're coming to you and asking you about tax and transfer planning and ways to mitigate a higher tax bill, but still be thoughtful and timely in their transfer and planning strategies?

Transfer & Planning Strategies (18:50)

Jason: I think two things. The estate tax side and then the income tax side, two very different taxes, and they affect folks in different manners. On the estate tax side, it's almost...it's like Groundhog Day. It's a recreation of what happened at the end of 2020 when we were running up to the election. Folks were concerned that a Biden administration would eliminate the 2017 estate tax increases and exemptions that's currently at about $11.7 million per person, that that would be cut back to half of that amount with a Biden change, or maybe even 3.5 million. So a lot of families, as we ran up to the back half of 2020, were implementing strategies to lock in that IRA exemption by doing lifetime gifting structures.

So we saw a lot of that, a lot of very busy families and professionals trying to execute prior to the end of the year. We got a little bit of a reprieve when we hit the election because of what happened in the Senate and the presumed maintenance of Republican control in the Senate. So we kind of took our foot off the accelerator...many families took their foot off the accelerator and instead of pushing through last minute and doing things haphazardly, they took a wait-and-see approach.

The election in Georgia has now put us in a scenario where the likelihood of a rollback of that $11.7 million is very, very high. I think it's gonna happen. As Doug mentioned, it's one of those agenda items. And now we're, again, full force talking to families about how they can utilize the higher $11.7 million per person exemption in 2021 before it expires.

Now, there are... I think majority of commentators believe that we'll have a balance of 2021 to do that planning. So we'll be, in essence, in a scenario very similar to what we had last year. But there are some who believe that it could be one of those items that is a mid-year change. So for many families that are contemplating this, they're just going to go ahead and get it done ASAP, to make sure that they lock in these strategies and use that exemption.

And that's been a rather large part of conversations with families that... The difficult part, and many of our families fall in this spectrum, is the families that are gonna be dramatically affected by this tax legislation on the estate side, reside in what's called $10 to $20 million range. If you have $10, $11, $12, $13 million under the former legislation 2017 act, you have no estate tax. That number could be for a family with $13 million after this legislation, that tax could be a million plus dollars.

So there's a lot of thought that needs to go into the planning and a lot of consideration, many factors. But we're rebated 2020, let's get some stuff done. We can't wait around. We see this as inevitable that the exemption is gonna be reduced.

Doug: Yeah, I would equally say

Gerald: Well, I...

Doug: Well, I was just gonna mention...

Gerald: Go ahead, Doug, please.

Doug: ...Gerald, and just touch on...it's a good time to touch on the state tax. It is something I'm very confident will be, as Jason said, in the final package. What I'm hearing is they'll reduce the unified gift and estate down to about 5.4 per individual where it was before the...I guess that's the pre-2018 level. I'm not hearing they're going below that. I think the estate tax is something that's very important to Democrats, although it only affects just a handful, a few thousand people, when you kind of work through the exemption. But I think it's something worth noting because it probably will be in the final package.

Jason: Doug, can I ask a quick question?

Doug: Sure.

Jason: Following the legislation, we go back to 2011, we had an exemption that was three and a half million dollars, but you could only use a million of it for lifetime giving. Have you heard any ripples out of DC that that might return? I had a few questions with regard to that, and just was curious if there's any bubble up of that coming back in this piece of legislation?

Doug: Yeah, so I haven't... And again, you know, we're just sort of reading the tea leaves and sort of have our ear to the ground, what's going on there. I think, although they've discussed that idea, I think they'll...my guess is they're gonna just move simply to the pre-2018 level. It's a simpler way. It's a little bit less disruptive and it kind of meets the need...it pretty much meets their sort of revenue need. I think they're going to get at, Jason, additional taxation of higher net worth individuals through capital gains, rate increases, individual rate increases, and so on. And I think they're gonna be able to do it through those vehicles.

Jason: And those are typically much more productive, as you mentioned. Productive means we're raising revenue when only a few 1000 people a year are filing state tax returns at those exemption amounts.

Doug: Yeah. Yeah. They were able... Those other provisions raise a lot more money.

Jason: Okay.

Gerald: And so, Jason, that sort of leads to a natural question of, given the anticipated change in the estate tax exemption threshold, gifting exemptions in strategies for clients... You know, we get asked all the time, how do we implement those to mitigate tax exposure, but also achieve a client's charitable giving objectives? What are you talking to clients about there?

Jason: So, I think, from a wealth preservation perspective, I use the term access trust to strategy where a husband will create a trust, he'll include spouse as the beneficiary of that trust. And he'll transfer assets worth exemption amount, let's say it's $5.4 million into that trust, for the benefit of spouse and family members. What that does is it accomplishes really two things. One, it locks in your exemption. So if you did it right now, you could put 11.7 million into a trust like this. But it's almost like giving it away without giving it away, as long as your spouse is alive and you're married to him or her.

That's a strategy that began to take hold and become very popular as these exemption amounts started to increase. Everybody's always worried about access to assets. And if we create structures that allow our spouses access and achieve the optimal state and gift tax results, then that's a happy medium. So we're spending a lot of time talking to families about that strategy, the annual exclusion gift, 15,000 per person. So a husband and wife can get 30,000 per person. That's...I always say, that's a use it or lose it proposition. You get it each and every year. Families, particularly those families with lots of offspring and grandchildren, they can effectively use those strategies, which is very helpful. But the hardest part is recognizing that there are ways to lock in the entire exemption amounts without literally giving the assets to your children, and having them run off and spend your hard-earned money.

Gerald: Exactly. Thank you. So Doug, this sort of segues nicely into income tax and capital gains, right? Because if we're not talking to our clients about the state tax exemption and the gift tax exemption, it naturally flows into, what about income tax at the individual level? And what about capital gains, and long-term capital gains in particular?

Income Tax (28:10)

Doug: Yeah, so that's a very, very hot topic in Washington right now, in terms of what do capital gains...new taxes on capital gains look like? So we'll touch on capital gains first, then I'll mention the individual rate increases and what kind of changes might happen there. And then we...at some point, we can talk about effective dates because that's a topic that's top of mind for a lot of people and affects planning.

In the capital gains... So the Biden proposal, the President's proposal on the campaign, was to increase the capital gains rate from 23 to the top marginal tax rate. That's what implicates an increase in the individual rates back to 39.6. And so the individual rate proposal is to increase the individual rates from 37 to 39.6, and to do that for top-bracket earners. And that's taxable income right now, about $618,000. I would not be surprised if they reduce that level back to $400,000, and perhaps then index it. That would raise a tremendous amount of revenue as well.

So think about then, the proposal would likely be raising capital gains rate. So in essence, eliminating capital gains differential for higher net worth individuals by taxing it at the highest individual rate. Now, the question becomes, and we don't know the answer to this, is what level of income will that apply to taxpayers? The Biden's presidential proposal was that taxable income over a million dollars, I could see that and this just sort of my...Doug looking into the crystal ball, which is a little hazy still, but we'll come into more greater focus here in a couple of weeks, is do they move that levels down, to some level above? I mean, most of the Biden tax proposals triggered off higher income, which is around $400,000.

So we could see a higher capital gains rate for individuals of a million or less. And I don't know...we don't know where they'll cut that number. Normally, how you do it in the tax-writing committee is you figure out how much revenue you need, and you move that rate down to a certain level and you can generate revenue. They have tables and charts that the tech staff work on. And they know exactly, almost to the dollar, what they can generate.

The other proposal on capital gains, and it's just worth mentioning is, Senator Ron Wyden is the chair of the Senate Finance Committee. He has a mark to market capital gains proposal, which is of great concern, and pretty scary to a lot of people. I see Shannon nodding her head, it is a tax administration nightmare, the IRS will say so. Basically, what that proposal basically does is it taxes the unrealized appreciation and capital gain assets every year. Imagine that? Trying to report that on audit, that is a nightmare. I will say, with a certain level of confidence, that is not going to be in the final package. I think the simpler solution is to just increase the capital gains rate for certain higher-income individuals as well.

A couple other things, just to mention, and then we can talk about sort of effective dates, is there is an increase in the payroll tax for those earning above 12.4%. Now that 12.4 is shared equally between employers and employees. So that could be a tax increase on small businesses as well. And we talked about... Oh, and then there's also, for those clients that deduct the interest on their mortgages, and so on, there is a proposal that's been around a long time, which is to reduce the value of itemized deductions to around about 28% tax rate. So you could see that's about 11% reduction in the value of those. So that kind of rounds out the capital gains as we think. And again, some of these things will change as they work through the process, depending on revenue and votes.

Gerald: Thank you, before we hit on timing of not just the legislation, but when these would go into effect, Shannon...so clearly, you must get clients saying, "Oh, my God, capital gains are going to increase, should I be selling out of my gains now? I'm tax-averse." What are we messaging to clients about that? And how are we telling them we expect markets to react to any type of change in that taxation?

Market Reactions to Changes in Tax (34:51)

Shannon: So it's a really good question. And I wanna preface this being the investment person on the call, and not the tax person, and not the policy person. But we have always, whether the capital gains tax was 5%, or 40%, we believe that the tax waive should not drive the investment dog. And what that means is that, when we think about constructing portfolios, we're looking to deliver a set outcome. And being able to eliminate positions, being able to sell investments, frankly, that have gains and have posted positive performance relative to other investments, and then reallocate that capital into better opportunities, in and of itself, if we're successful, there will be a capital gains component to that.

The other thing that I would say is that, we're looking at this in terms of the overall portfolio construction. And so, in this sort of shorter-term environment...and we had a great dialogue about this while we were prepping for this webinar, it really depends on your time horizon. If you know, for instance, that you are planning on creating liquidity out of your portfolio over the next six months, then maybe we do accelerate some of those capital gains. If your portfolio is overweight, the equity market, because it's done very well relative to other parts of the market over the last couple of years, perhaps we reallocate the portfolio ahead of those capital gains.

The reality is, is that the conversations that we have around capital gains, in many cases, are based on very low or essentially zero cost basis position. So they're, at any point, if you're looking to sell those positions, you're going to take a meaningful capital gain and pay meaningful taxes on that.

So that's where we target things like gifting strategies. We talked about it earlier, Gerald, and I'm sure Jason has some comments on this as well. But that's the importance of taking capital gains, it's just one component of both your investment portfolio construction, but also your overall wealth plan. What I would say is that, from a market perspective there... I've seen a number of articles, as we always do when people start talking about higher capital gains, talking about the potential for that to create disruption or declines in the equity market. Typically, what you find is that, after those stocks are sold, and the capital gains are realized, those are reallocated back into the equity market. And typically, that's because these taxes are increased during periods of improving equity expectations or improving economic expectations, or a strong economy or a strong market.

So investors are not going to sell these stocks, realize the gain and then put them into some other market, they'll be reinvested back into the equity market. And so, we do not expect there to be a significant disruption on the equity side of the coin.

Gerald: Thank you, Shannon. So before we go to Jason to talk about the approaching tax season, and what we should be...what we are working with our clients on, I think it's important to talk about, Doug, when do we think, if the legislation passes, these changes in tax legislation would come into effect?

Doug: Yeah. So Gerald, being from the Senate tax committee for four years, one of the things that, whether you like these tax increases or not, there is a tax staff and the members of the committee have a sense of fairness. So they're gonna be very careful about the selection of effective dates. For the most part, I anticipate the effective dates, for example, the individual rate, the estate tax increase, those kind of things, those should be perspective, meaning it's always better from a tax administration standpoint, to make those effective on January 1 of '22. That's most likely for most of those provisions, including the corporate tax rate. There's very little gaming that committee feels can be done.

And so when we look at the capital gains rate, because there's the potential, at least that's how the staffers look at it, if I step into their shoes for a moment, they will be concerned about a far-out effective date for people then realizing...sort of artificially disrupting transactions in the market. What they'll likely do is they'll select a prospective effective date, but it will be announced in the proposal.

So when the Ways and Means Committee, which will usually act first, and start the drafting process, meaning producing the bill that will go into the reconciliation process, they will announce a outline of their proposal. They may introduce legislation, and when they do, it will have the capital gains effective date, which will usually be transactions on or after that date, that will likely be subject then to whatever rate they decide.

Gerald: Right. Thank you, Doug. So Jason, in light of that we've just covered here, and the fact that we're very well aware of the fact that we are in the midst of tax season, as we speak, what should our clients be working with us on? What should they be asking us questions about, as they engage with us and their tax professionals to prepare for the 2020 tax filing?

Questions to Ask Your Advisor (38:32)

Jason: I think Shannon hit it right on the head, let the tax tail wag the dog. We have to be very thoughtful and explore what the client is trying to accomplish before making decisions. I think there's a natural psychological reaction to, "Oh my God, taxes are going up, let's sell." The vast majority of the time that might not end up with the best result. An example where it could work is if you're looking to raise liquidity to buy a second home in the next 6 to 12 months, pay prepaid tuition at a private college that could run into the $200,000, $300,000, those are all certainly scenarios where we know we have liquidity requirements in the very near future. We can fairly certainly anticipated increase in tax rate.

So that might make a great deal of sense to do so and to raise those funds, pay the lower income tax rate currently, and live another day with some savings. Once you get out, above and beyond liquidity needs in the immediate future, the next 12 months, I get very concerned about selling into lower tax rates. If your allocation is off of what it should be, yeah, it makes sense. But from how we advise clients, we're taking a long term approach to deploying capital. And we have certain tools and techniques that we can use to mitigate capital gains, as we recognize them throughout the year.

So I always tell our families, avoid the natural gut reaction of selling, and let's have a conversation. And after that conversation, we might do a little bit of selling, we might not do any. But let's avoid that psychological reaction. In addition, we're really not clear at this point, we will get more clarity about whether these increased taxes will be at a million dollars or higher, or whether it'll be 400,000 or higher, whether it'll be blended somewhere in between.

So I'd wait for a little bit more clarity, even if we're in the selling mode. But the point being, most important component is dialogue. Reassess what the goals or objectives are, reassess how you're allocated and how you're performing, and reassess what your short-term needs are before making any reactionary decision about selling into a lower tax environment.

Gerald: Thank you.

Jason: And I will say one other thing, my apologies, is that before we jumped on the call... I went back...last 25 years, the capital gains rate has gone both up and down. And it will go both up and down in the next 15-20 years. So that's why you have to really be strategic about what you're trying to accomplish, and align your goals and objectives in your portfolio with maximizing the economics of our tax structure.

Gerald: Well, thank you. You hit the nail on the head of...I mean, just given the past few years, look at how tax legislation pendulum is swinging one way to the other, and two years prior to that. And there seems to be a cycle that we're going to be living through for the foreseeable future. So we've covered a lot during our discussion today. It's important to reiterate that events like the ones that we were covering today, and that we covered last month, and months prior to that, are the perfect opportunity to revisit your plan.

As Jason and I, and Shannon, always say to clients when we're talking to them, they're living, breathing, iterative things that needs to be constantly engaged in conversation, to consider what your risk tolerance is, to consider what your tax exposure is, to make necessary adjustments based on your long term goals. And Jason alluded to this, Doug alluded to it in his discussions about timing, Shannon, with regard to the market performance. Your long-term goals are what we are here to work with you on.

So your team at Boston Private is committed to providing all the guidance and support that you need. I wanna thank you all Jason, Shannon, Doug, for the very interactive and thoughtful discussion that we had today. To our clients and other participants on today's call, please know that we will continue to send you updates, so keep an eye out for those via email, social media, and importantly, on bostonprivate.com. Thank you for joining us today, and I wish you and your family all good health.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of SVB Private or other members of Silicon Valley Bank Financial Group. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein