Examining the impact of recently introduced tax & regulatory legislation on Family Offices

Hear Bill Woodson and law and lobbying firm Brownstein Hyatt Farber Schreck discuss the implications of the Biden Administration’s tax proposals and recently introduced legislation to regulate family offices. The team from Brownstein has served in the highest levels of the administration and Congress and brings insight into how the current political, legislative, and regulatory landscape could impact the industry.

The speakers discuss:

  • Specific tax provisions in the current legislative text of the reconciliation bill.
  • SEC Chairman Gary Gensler’s and Rep. Alexandria Ocasio-Cortez's (D-NY) regulatory agendas as they pertain to family offices.
  • Existing proposals and efforts to mitigate legislative threats to the industry.


Bill Woodson, Head of Strategic Wealth Advisory and Family Enterprise Services, SVB Private, an SVB company and co-author of The Family Office: A Comprehensive Guide for Advisers, Practitioners, and Students.


Katelynn Bradley, Shareholder, Brownstein Hyatt Farber Schreck

Travis Norton, Shareholder, Brownstein Hyatt Farber Schreck

Russ Sullivan, Shareholder, Brownstein Hyatt Farber Schreck

Mark Warren, Shareholder, Brownstein Hyatt Farber Schreck

Audio transcription

Bill: My name is Bill Woodson, and I'm head of strategic wealth advisory and family enterprise services at Silicon Valley Bank. It's acquired firm, SVB Private. I also am active in the academic community, particularly as it pertains to wealth management, family offices, teaching class at both Columbia School, for their Master's in Wealth Management program, and on the Stanford University Family Office and Global...the Stanford Family Office Global Advisory Committee.

Today, I wanted to really focus on trying to bring some expertise around the implications of the Biden administration's tax proposals, and recently introduced legislation to regulate family offices. You've read a lot about, no doubt, the tax proposals. Probably less so about the regulation, the regulatory proposals, so we want to emphasize both. And some of the topics that we'll cover will be specific tax provisions in the current legislation, as well as what came out, SEC Chairman Gary Gensler's and Representative Alexandria Ocasio-Cortez's bills to regulate family offices, and really try to give you a sense for what's the likelihood of that going through Congress, just so that you could plan, and as needed, seek guidance, and ways to influence.

I'm joined by a team of law and lobbying experts from Brownstein Hyatt Farber Schreck, who, for those of you who understand the industry, are one of the top firms, in both D.C. and broadly, at both lobbying and tax and related advice, and you'll find, when you hear the backgrounds from the speakers, that they have enormous both tax technical, and regulatory technical, but also experience on Capitol Hill. So, they'll give you some keen insights into not just what's being proposed, but what's the likelihood of those proposals making their way through into either legislation or law.

Before we get started, please note that your microphones and webcams are automatically muted, and the chat function has been disabled, but we would encourage you to ask questions. The easiest way for you to do that is to just type the question in the Q&A tab. You can choose to send it anonymously if you'd like. It will come to me and then I will accumulate those questions and ask them when the time is right. We'll also try to leave a few minutes at the end for you to ask questions after the presentation has been concluded. So, with that, let me first turn this over to Joe Jerabek who is a lobbyist, on a formal basis, who really has brought the Brownstein team together, and he'll make some overarching remarks and introduce the Brownstein attorneys. Joe?

Joe: Thank you, Bill. Yes, my name is Joe Jarabek, president of Jarabek and Co., and this conversation came about in regard to conversations I was having with family offices, and also understanding in that there was a gap in terms of information flow, what they're receiving, and what was really going on in Washington, especially as we look at everything that's going to impact family offices moving forward. So, with that, Bill and I had some dialogue, Bill found the same to be true, and through that, we thought it'd be a great idea to be able to provide some information and help educate family offices as to what is going on in Washington, and the implications of that moving forward. And with that, I'm going to go ahead and hand it over to Barry Jackson, strategic partner at Brownstein.

Barry: Bill, Joe, thank you guys very much. My name is Barry Jackson. I work at Brownstein as a strategic advisor. Real quick, my background is that I'm one of only two people in the history of the country that's had the honor and privilege of serving as assistant to the President of the United States, and Chief of Staff to the Speaker of the House. That's why I would find myself sitting at the intersection of policy and process, politics, communications. And to build off what Joe said, and Bill's very kind introduction, Brownstein is a 50-year-old law firm headquartered out of Denver. We operate in multiple states. We're also the top lobbying firm in the country. It's a bipartisan firm. And our practice extends everywhere from tax and financial services, to private equity, real estate, energy, environment, gaming, copyright, IP. So, we're able to cover a broad, broad landscape.

Today I brought with me four of my colleagues, and I'll let them introduce themselves, and we're going to start with our financial service team, which is Travis Norton and Katelynn Bradley. So, Travis and Katelynn, over to you.

Travis: Sure. Good afternoon, everybody, if you're on the East Coast. Good morning to the West Coasters. My name is Travis Norton. It's great to be with you. I'm an attorney and a policy professional here in the D.C. office. I approach our practice here from the Republican side of the aisle, and my colleague, Katelynn Bradley, whom you'll hear from in a moment, from the Democratic side. The two of us effectively run our financial services practice here in D.C., which is a service that helps clients across a variety of financial services industries gain access to policymakers, influence policy, understand what's happening, and try to educate policymakers about the consequences of their actions.

My background, I've been at Brownstein for about four and a half years now. Before that, I was banking and tax counsel to South Carolina Senator Tim Scott, and before that I worked on the Financial Services Committee as general counsel in the House of Representatives, and as general counsel to the House Judiciary Committee, and I was a lawyer at WilmerHale in SVB before that. So, most of our work concentrates on the House Financial Services Committee and the Senate Banking Committee, is principally where we spend a lot of our time, as well as in the regulatory agencies. Let me pass this over to my colleague, Katelynn.

Katelynn: Thanks, Travis, and thanks Bill and Joe for having us today. Katelynn Bradley, as Travis said, I work with him on our financial services practice at Brownstein. I have been here for about a year and a half and loving every minute of it. Before that, I was on the House Financial Services Committee staff, under Chairwoman Waters, as the director of investor protection and capital markets policy, for about 6 years. So, a lot of these bills, issues, are very, very familiar, and some of which I've worked on in the past. And we'll get into that, and then, before that, I was at a non-profit think tank in the city, known as Better Markets, and before that, I was at the SEC, working on the securities-based swaps regime, following Dodd-Frank. So, with that, I'll go ahead and kick it off. I know we are limited time, so I'll try to keep it somewhat high-level, and if we want to get into some of these more detailed discussions, feel free to ask questions at the end, and we'll be happy to answer those, and also follow up as well.

Historical family office regulation (7:37)

Just to table set, historically, Congress and the regulators, the SEC, Securities and Exchange Commission, have taken a hands-off approach to family office regulation, and oversight. And that's because, basically, the rationale is they can fend for themselves, right? They have enough wealth, sophistication, that they really, they don't need the protections of the conflicts of interest regime under the Advisers Act, or any of the other reporting, or other regulations that would be applicable under the securities laws. And so, as you'll remember, in Dodd-Frank, we had a specific exemption for family offices, and it's basically, family offices, as defined by the SEC, which is just extraordinarily broad, and we'll get to that later.

In 2017, one of the bills that they worked on with Congresswoman Maloney, who's over Financial Services Committee, and is the chairwoman of the Oversight Committee in the House, was the Family Office Technical Correction Act. And that was a strong bipartisan bill, which basically would have add, or did add, eventually, family offices to the definition of accredited investor for purposes of Regulation D. And they had, we had a good, strong lobbying cohort behind that, heard from a lot of family offices. And, as I said, it was bipartisan. It passed the committee unanimously, and then went on to the floor, and was voted under suspension of the rules, meaning it was broadly adopted. And that then led to the SEC, under Chairman Clayton, to amend the accredited investor definition to include family offices. This is part of the theme that we'll be talking about, is really, what Congress does, and how that impacts what the agency does. So, that's an example where the bill didn't become law right away, but the SEC acted.

Regulatory agendas as they pertain to family offices (9:34)

Then fast-forward to this year, and the market's grown exponentially. I think it's about $6 trillion worth of assets under management by family offices. And then in March, we saw the default, the billion-dollar default by Archegos. And that was very concerning for lawmakers and policymakers, not just from a transparency level and an oversight level, because it caught them off guard, but also from a systemic risk perspective, in that it impacted the other banks and brokers that Archegos was dealing with.

All that coincided with the GameStop market volatility. And so, the way that the House Financial Services Committee addressed that was looping the two issues together. They don't have anything to do with one another, aside from, in the chairwoman's mind, investor protection issues. And so, they had a three-part series of hearings, on GameStop, and they looped in a bill, which Bill mentioned, on family offices. It's sponsored by Congresswoman Alexandria Ocasio-Cortez. It's H.R. 4620, The Family Office Regulation Act, and basically, what it would do is it would require any family office with over $750 million assets under management to register with the SEC as an exempt reporting advisor. And so, you'd have to fill out Form ADV Part 1A, and then you would also be subject to other regulations, like 13F reporting of specific securities.

Bill had a number of Democrats concerned, but also supportive. I think there was some interest on the part of the chairwoman, or some belief on the part of the chairwoman, that this could be something, an easily suspension-able bill, and it turned out that that was not necessarily true. I think there was some discussions behind closed doors. At the end of the day, it was marked up in committee, in July, and there was a robust discussion around it. They...and I'll let Travis sort of give the Republicans' views, which I thought were quite good, but they ended up voting on it on block, with two other bills. And so, the other bills were on 13F, and a bill on trade ahead. And what that meant is basically, we don't know for sure where the Democrats are. Right, so, the Democrats voted for the three-bill package. Could be for one of the other bills, being supportive, it could be basically that that one family office bill alone didn't cause them to vote no.

The next steps for that is the chairwoman intends to put the package on the floor, a package of bills, related to GameStop and Archegos, and is still building up that list of package, the package of bills, so they're going to be marking up additional bills, and then bring it to the floor as one big package. And it's the same thing that happens with unblock, it, sort of, is the family office bill enough to be a "but for," for members to vote against? Like, a, “I will vote against this bill because of this family office regulation act." And it's not at all clear at this point. There's not a lot of heavy lobbying on this. I think many Members come to this bill with their prior understanding of family offices, like Mrs. Maloney, and are critical of it, but at the end of the day, it's hard to say whether that vote is going to...that bill package, depending on what it looks like, is going to pass with widespread support based on the other components of the package.

So, I'll stop there. Well, let me just say, on the Senate side, too... And Bill hinted at this. The prospects of the bill, even if the House votes on it, and gets widespread Democratic support, the prospects in the Senate are slim, and that's largely because of the slim margins in the Senate. But I would say that, you guys probably saw this, Senator Brown sent a letter around several brokers asking about their connectivity with family offices, so that's something that's definitely of interest to the Senate...chairman of the Senate Banking Committee, and it's one of these issues that could continually manifest itself, kind of have an accretion effect, I think, as my colleague Travis says, where if you don't hear enough from those that have concerns with the bill, then maybe at some point, it does get broader support. And then, I'll turn it over to Travis now, but we can talk about that going to the agencies, and why what's going on in the House matters with the agencies.

Travis: I know, that's a great summary, Katelynn, and I want to be mindful of our time and our tax team, but I do think that one of just the dynamics on the House Financial Services Committee and the Senate Banking Committee is that you have a lot of Members who are very busy with their schedules, and the more intricate securities regulation and policy becomes, the more difficult it is to get people's attention, and so it really is important for this industry to build some champions. We have a saying here in D.C., "It's better to have friends before you need them." And that really is true when it comes to more remote or arcane or obscure areas of financial services policy. These are people dealing with bank regulation, credit union, insurance, you name it, so it's really important to get out there and educate people about the value of family offices, the exposure, or the risk to people who use family offices to invest, and why investor protection needs to be weighed carefully against capital formation and other purposes of the SEC, and take a broad lens as to what's going on in the capital markets.

But it is true that there's a slim margin on the Financial Services Committee. The Senate Banking Committee is split 50/50, and the House of Representatives has a three-vote Democratic margin. So it's going to be difficult to get a lot of things done in this Congress, except that, as Katelynn just alluded to, there are these opportunities for the Democratic leadership to essentially dilute opposition to a specific bill, by bundling it with other bills. And that's something that I think you must be wary of. But as Katelynn's about to discuss, there is a pattern here, especially with the House Financial Services Committee, where Members will introduce a bill, they will gain cosponsors, and that bill is primarily for the purpose of signaling what Congress wants the SEC to do by regulation. The bill is introduced with no desire on the part of the sponsors to have it be enacted, but really to give cover to the SEC. I think Katelynn can talk about how Chairman Gensler, who's a fairly progressive, and I think a very active chairman, and will be even more active in promoting sort of a more progressive, disclosure-oriented agenda at the Commission, how Mr. Gensler will find comfort or support from the Hill in these kinds of scenarios. So, to flip it one back over to Katelynn, and then I think we can turn to our tax folks.

Katelynn: Yeah, that's a great lead-in. And before we get to the SEC, I would also mention, too, FSOC, the Financial Stability Oversight Council, which is a council that has members of all of the financial services, the market regulators, the prudential regulators. During their first meeting in March, I think the number one or number two topic, to say the least, was Archegos. And so, you saw Secretary Yellen from Treasury expressing strong concerns about it, and the systemic risk implications of it. I think this was kind of a misnomer at the time, she did kind of refer to it as hedge funds, like the issue is sort of like in the hedge fund bucket. And I think that's largely because in regulators' eyes, they've seen certain hedge funds convert to family offices, maybe perhaps to avoid regulation or whatever. But I don't think they're making that distinction. I think just because she called it a hedge fund doesn't mean that when the FSOC is looking at this, they're only going to be focusing on the hedge fund aspect. They will be focusing on both.

She reestablished the working group that Trump had previously, President Trump previously disbanded, on hedge funds, and so I think we'll see something coming out of that, and I think that's another agency, the Treasury, and also the members of FSOC, that could really use education. And then, specifically, on the SEC, on Chairman Gensler, so, as I'm sure you guys saw, he testified before the House Financial Services Committee during the last GameStop hearing. His initial response was that he's going to instruct staff to look at the beneficial ownership reporting requirements for total return swaps and other swaps. And indeed, that's on his agenda, on his rulemaking agenda. He's also, on his rulemaking agenda, has updates to Form PF, which could be another avenue that he tries to address family offices, similar to the way that Dodd-Frank addressed the lack of oversight in the hedge fund and private equity community.

Then, I would point out, too, the agenda notably lacked anything on family offices. And so, if you go back, former SEC chair Clayton had family offices specifically listed as an agenda item. However, I wouldn't read too much into that. He has a new agenda that's coming out relatively soon. It could be added to that. Or, as I said, it could be looped into some of these other rulemakings. But, and I would reiterate this. The SEC has broad authority to redefine family office. So he doesn't need any additional Congressional authority there, but he is, as Travis said, looking to Congress for cover on his political decisions, on his prioritizations, and also, looking to address the top-line concerns of Members. And so, as this bill gets more movement, as it goes to the floor, I think we can see more from the SEC chair in response.

And the other thing I would point out is that the SEC is now controlled by Democrats. There's three Democrats and two Republicans. The Democrats are widely aligned on everything that is on the agenda, so I don't expect them to necessarily break ranks with the Chairman on a lot of issues. And the Chairman is a bit of a steamroller, I guess I would say. If you look at the way he ran the CFTC, he has a very robust list of items that he wants to address, he keeps updating that list. He just testified before the Senate Banking Committee this month, and added new things on topics he wanted to address. And so, I think it is evolving, and I think he's going to try to tackle as much as possible, and really, as Travis said, in response to what Congress wants.

Bill: Travis, before you continue, because I want to be mindful of some of the topics that you're bringing up, just for some definitional help, so, can you describe what the 13F reporting requirements would be? You've referred to that a couple of times now.

Katelynn: Yeah, so, the 13F bill that was considered in the markup basically changes the reporting timeline, from right now, it's quarterly. You must report your securities holdings on a quarterly basis, 15 days after the quarter. And that's, applies to any asset manager with over $100 million in assets under management. So, what the bill would do, and how family offices could get looped in, if they were an exempt reporting advisor, for example, is move the timeline, the threshold, to monthly reporting. So, it would say the SEC, now you have the authority to go to monthly reporting, which is disallowed in the statute, so it would be monthly reporting plus a certain amount of days. So, just increasing the frequency of these reports.

Bill: They would incorporate family offices, and not all of them have to do 13F now, right?

Katelynn: Right. So, it would be wholly dependent on the SEC readdressing the family office exemption.

Bill: Exactly right. And then, what are the implications of the Commissioner Peirce, and her op-ed in Bloomberg a couple months ago coming out publicly and saying that both she and the Commissioner from the CFTC do not believe that family offices ought to be regulated?

Travis: So, I think generally, what you're seeing is, so, Commissioner Peirce is one of the Republican appointees to the Commission. I think what you're seeing is...and I'm going to say this from a slightly Republican point of view. Katelynn may want to correct me, but I think what you're seeing is that the FTC has long been the agency that maintains a disclosure-based regulatory system. And the reason you would want family offices to regulate them, typically, or the reason you would want to regulate investment provide disclosure to investors, is to protect them. That's one of the tripartite missions of the SEC is investor protection. The argument being, well, these are highly sophisticated investors who know what they're getting into. They don't need the government to guarantee their protection. I think that's where she comes at it from.

She's fairly libertarian in that regard, but it is one sort of concluding point I want to raise and highlight, which Katelynn drew attention to, which is, you have the SEC, sort of, the most the SEC can do... I mean, it's a disclosure system. They can prohibit certain things under certain authorities, but it is true that increasingly other areas of government, and other financial regulators, have the power to actually further regulate specific activities. Katelynn raised the Financial Stability Oversight Council, which, if folks remember, a couple years ago, was, designated entire insurance companies, like Prudential and MetLife, and placed them under the regulation of the Federal Reserve, for the first time now, regulating insurance companies.

So, it's important that everybody listening understand that the SEC will do what it's going to do in sort of the corridors of disclosure and investor protection, but there is lurking other regulators with greater authorities to affect this marketplace, who I think have not yet been well-exposed to the benefits of family offices, to the relatively low need to protect family office investors, on the same plane as sort of your retail investor, buying a share of Ford Motor Company, and I think that that's why you really need to make your way around government with your story, talk about the benefits you provide to capital formation, contributions to fair, efficient, and liquid markets and those kinds of things, so that's really how I would wrap up this segment of our presentation, Bill, unless you have anything else.

Bill: Well, I'll just make some overarching comments. First and foremost, I've been around the block long enough, and as a former tax practitioner myself, I used to watch legislation work its way through Congress, and more than a few times, everybody's view would be, "Well, they will never let that happen." And then sure enough, it happens. And that's happened too many times, in my experience, for me to be completely confident in representations about bills having low probability, and I think the reason for that is exactly, Katelynn, what you said, which is it's possible this bill gets rolled into a broader bill, which makes it very difficult for congressmen and women and senators to vote against it, and we must be very mindful of that. But even if that isn't the case, you also both made a really important point, which is it gives cover to a Commissioner in the SEC, who is quite progressive, with a Democratic majority, to implement policy that they would like to implement. And therefore, may ultimately not matter if Congress passes this particular legislation, because it's going to come into effect anyway.

And so, in order for that to be, I guess, addressed in advance... Because not many people know what a family office is. They don't understand the importance of family offices. The ineffective if I suspect that that regulation, in light of what family offices can and will do, in terms of changing organizational structure and how they behave, and those types of things. Family offices need to be more active, and they need to get the word out, they need to be connected. And there's some of that that happened because of the legislation that was proposed during the '08-'09 crisis, and I certainly hope that that is being re-emphasized, re-engaged, and if not, that the family offices engage with folks like you to ensure that that happens in advance of this stuff.

So, with that, Katelynn and Travis, thank you very much. It's a good time for us to pivot over to the tax and related components of the Biden administration's proposals, and Barry, I'll turn it over to you, and maybe you can introduce the tax team that will take us through that part of the webinar.

Barry: Thanks, Bill. I'm going to just go straight, head of our tax practice, Russ Sullivan. Russ, you and Mark take it from there.

Russ: Good afternoon, ladies and gentlemen. I worked for the Democrats in the Senate Finance Committee for 18 years. That's where I learned about tax and tax policy before I came to Brownstein. Great to be with you today. I turn it over for introduction to my colleague, Mark Ward.

2021 Democratic tax proposals (29:00)

Mark: Good afternoon. Thanks to everybody for having us. I come from the other side of the political spectrum from Russ, and have worked both in the Finance Committee, for Senator Grassley, as chief tax counsel. And prior to that, worked in the House of Representatives for the Ways and Means Committee, and I've also had the privilege of working in the administration, at the end of the Bush administration, with the Treasury Department in the Office of Tax Policy and Legislative Affairs. So, got to see it from a number of different perspectives.

Russ: Great. Thank, you Mark. So, I started my career at the Finance Committee with the late, great Patrick Moynihan of New York. And then he retired, and Senator Max Baucus of Montana, I worked for him for about 10 years. But before I did, he sent me out to Montana, and he told me I needed to meet some of his bosses. He sent me to Bozeman, a small town then, of about 30,000 people, and had me meet with a small software company that had been started there in Bozeman, a rancher on the edge of town, and a company that made pasta from a lot of the wheat that's grown in Montana. Now, they all talked to me about the estate tax, and taxation of ownership, owners of businesses. Some were family enterprises that were privately held. And so, I learned a lot about that.

Back then, in 2001, then, as I did start to work for Max Baucus, he cut a deal with Chuck Grassley and President Bush in 2001 to lower taxes, including eliminating the estate tax, repealing it. Times have changed, let me say. So, I still hold to that position that the right thing to do is to eliminate the estate tax, but you can rarely find a Democrat in the United States Congress who believes that today. We have one in the Senate, Kyrsten Sinema, who's voted to repeal the estate tax, and I'm not sure, but we may have one or two in the House.

But now, let's move on to where we are and how things have changed. The evidence of the change came in the campaign of 2020, when President Biden and many of the other Democratic candidates focused on two big things in the tax arena. One, they said that corporations don't pay enough tax. And they cited studies that show that the number of companies that were reporting profits on their books but not paying federal income tax had increased from 6% to 12% of the Fortune 500. Second, they focused on reducing income inequality. And they cited studies that shown that the wealthy in the U.S. had gotten more wealthy than the middle income and lower income people, in terms of their increase in take-home pay and assets over the past couple of decades.

The policy prescriptions that President Biden put forth in his budget soon after he was elected reflected these two big general themes, and those are some of the items that we're debating today. We'll go through anything y'all are interested in, but let us point out to you some of the proposals that you should be concerned about, that will affect your family office, the business, or the family members who started the business or run it today.

2021 Individual and business tax proposals (32:45)

So, we'll start with individual issues. Let me point out two here. The bill that passed in the Ways and Means Committee recently, and is sort of the basis of discussion in the House at least, it reinstates the 39.6% top individual rate. It does lower the point at which that tax rate is triggered, down to the magical $400,000, which is the amount President Biden says he won't increase taxes for individuals below that amount. And it establishes a 3% surtax on income greater than $5 million. This is the idea I think Mark and I both have explored or watched being debated on the Hill. During my time there, they were talking about a possibility of a bracket at $1 million. I suspect the Democrats may have floated that but found that some were uncomfortable, so they raised it to $5 million. And this tax is on individual income tax, but also on capital gains, as we read the statute, although it's not 100% clear.

And I will say to you on these, I think both of these are likely to be included in the bill. I have not identified any Democrat who's opposed to the 39.6% top rate, and the surtax hadn't got that much discussion, but I haven't heard anyone who thinks that one is not going to be included as well. Mark, you want to talk about capital gains?

Democrats in Congress to increase the taxes by the wealthy side deal with capital gains, and the proposal that is in the Ways and Means Committee bill would increase the current 20% top rate to 25%. It would begin for individuals, single individuals, at $400,000, married individuals at $450,000. I guess the good news is that this is far lower than what the Biden administration had proposed, which was really to align the top capital gains rate with the ordinary income tax rate, so we're not looking at a 39.6% rate, just, we're at 25%. That new rate, if the bill is enacted, would be effective, at least in the Ways and Means version, for transactions on or after September 14th. That was designed primarily to kind of capture transactions, and avoid planning into a higher rate. That fixed date, though, does come with a transition rule for binding written contracts that were in place before September 14th of 2021, provided that the transaction closes before the end of this year.

Well, the rate could end up changing. I think we're pretty confident that it'll probably be in this range. And the date itself, in terms of the effective date is less extreme than what President Biden had proposed, which translated really into a date of April 28th. And so this date likely will stick, but could end up being extended if this bill drags longer into the year and more toward the turn of 2022. Russ?

Russ: Mark, what do you think the chances are that 25% goes up to 28%, or some higher amount in the Senate?

Mark: I think that's unlikely. I think it will probably be around this 25% rate, because, as we'll get to in a minute, the net investment income tax, the 3.8%, is being expanded, and so, in effect, on capital gains and qualified dividends, the rate will be 28.8%. That's about the point that the budget estimators in Congress estimate that the revenue gains kind of top out. If you go much higher on that, unless there's some change in terms of stepped-up basis, which we'll also get to, the kind of quirky budget rules mean that you start losing money after that.

Russ: Okay. Let's go to the next slide. Let me hit a couple more capital gains like provisions. I'll point out the like-kind exchange proposal, to eliminate that deferral for real estate transaction, is not included in the House bill, and I don't think it will resurface again in the debate this fall. The legislation also makes modifications to the carried interest rules. This has been the case in most major tax bills over the last decade or so. This time, there are several components. One would extend the holding period from three years to five years, except for real estate, which gets to keep the three-year provision. But Mark, there's probably, there's some hidden features people may want to be concerned about here too, right?

Mark: You're absolutely right there. There's a transfer rule. Under current law, transfers are taxable if they're to related parties, but the Ways and Means Committee dramatically expanded that rule, and basically, any transfer of a carried interest partnership interest, will trigger a taxable event, and there is no exception for what under current law would be tax-free reorganizations. And I think that's a little bit of a sleeping issue. There's also a question about when the five years actually starts. The language in the bill is not particularly well-drafted, so it could end up being that the five years doesn't start until all of the funds in the partnership...the terminology is "substantially all," which is generally 80% to 90%, the point at which all of those funds are invested in assets. So, you could be looking at anywhere from 8 to 10 years, in terms of a holding period, depending on how that is ultimately defined.

Russ: All right. In addition to that, I remember when Joe Lieberman actually got enacted Section 1202's qualified small business stock. He was a Democrat at that time. And it had fairly generous provisions, but the Democrats are trimming that back substantially as well, eliminating the 100% and 75% exclusion tiers from that legislation. So, that's included in this bill as well.

Limitation on IRA accounts (39:50)

One area that was a little more robust than many of us expected, if you can go to the next slide, was the number of provisions regarding IRAs. Chairman Neal and the Ways and Means Committee included his legislation sort of requiring auto-enrollment of IRAs for a broad range of businesses. It could affect this group. So, if you have six or more employees, and you don't have another retirement plan, with a 401(k) or something like that, then you're required to set up this mandatory IRA auto-enrollment plan as well.

But, there's some other provisions that Mark's going to go through here, that could dramatically affect those of you who've used IRAs for your planning strategy.

Mark: Thanks, Russ. So, to kind of understand this slide, the purple on the left hand side, we really should label more clearly, is, relates to traditional IRAs and other types of defined contribution plans, 401(k), 403(b) plans. On the right-hand side, that column relates to the changes affecting Roth IRAs. So, what you'll see is a lot of kind of commonality here, that the primary rule is once you hit a combined amount of all your different types of accounts at $10 million, under the proposal, there would be kind of a hard stop on making additional contributions into any of those types of plans. That limitation would kick in for single individuals at $400,000, and married filing jointly at $450,000.

The difference is that for IRAs, traditional IRAs, they, once you hit that $10 million limit, the excess amount over $10 million would be subject to a 50% disgorgement requirement. And for Roth IRAs, when you go over $20 million, it would be subject to 100% disgorgement. And under the way it is drafted right now, there would only be about a two-year period to do that. I think there's going to be significant pressure to try to ease up on that transition rule, to the extent that these limitations remain in the final bill, which, based on some of the higher-visibility, kind of, they're referring to as "Mega IRA" cases, we expect that a limitation like this will likely be in the final bill.

It's important to note that to the extent that an account holder would be subject to disgorgement, there would be no 10% early distribution penalty, but the account manager would have to apply a 35% withholding rule, which would apply to the estimated tax payment for the year in which the distribution occurs.

Bill: Yeah, Mark and Ross, while we're still reasonably close to the QSBS slide, one question that came through is why would they take away the advantages of the QSBS, given its benefits in promoting investments in arguably small, $50 billion and below companies, at a time when we want to continue to foster that kind of investment?

Mark: I'll give you one perspective, and let Russ come in with another. I think the driving force there was because they are preserving the 50% exclusion, even for higher income, but the current law more, a bigger benefit for individuals below the $400,000 limit, this was really an effort to try and take away some of the tax benefits that are perceived to overly benefit wealthy individuals.

Bill: If memory serves, it was 50% to begin with, when it came out, many, many years ago.

Mark: Exactly. Exactly.

Bill: So, they might largely be saying we're taking away the benefit that was given to you at a time of need, and now we're just going back to the way it was before, and then, just for the benefit of everybody in high state taxes, you have to understand the state tax rules are often different on a QSBS the federal rules, so you need to understand whether or not you're going to benefit from that as well.

Russ: Bill, I have another theory on this. So, let me try this out. So, you remember Elizabeth Warren, in the presidential campaign, really proposed a wealth tax. She wanted a 2% tax on wealth above certain number of millions. I can't remember what it was. Fifty million or something. And then, but she didn't win. Senator Ron Wyden, chair of the Finance Committee, he proposed this mark-to-market regime, where there'd be no deferral, really, of any kind of income. All investment income would...well, most of it, would be taxed annually on the appreciation. Those proposals are not viable, even in this more progressive Democratic caucus.

So, what I think we have a little bit of, and I think it's true in this IRA provision we're discussing, now, too, is they're trying to get at wealth, through different proposals. Maybe a little more targeted, small proposal, where they can say, "Okay, we're going to require you to distribute some money out of your IRA if you've got amounts over this, over $50 million, or $20 million, $10 million. And then, you make, you're going to pay tax on that, unless you're over age 72, or otherwise will get it tax-free. And so, I think there's a little bit of that going on here.

Bill: Yeah, no question about it. And then, there is a question about whether or not we'll make these materials available, and we can... I guess it's for the Brownstein team to indicate whether or not they're comfortable doing that.

Russ: And the answer is, of course, yes. We'll provide this, and for those of you who are CPAs and tax attorneys, we've got the more detailed version as well.

Bill: Thank you.

Mark: So, a couple other limitations in the House bill, on IRA investments. Roth conversions will largely be prohibited after 2031, so there's a 10-year period that is not applicable to conversions of after-tax contributions into a Roth. That would be prohibited starting next year. There are two kind of sleeper issues here. While the main caps kick in at $10 million, and as we talked about, on, for traditional, and $20 million for Roth, there are two investment limitations that apply to accounts of any size. So, dollar one, if this bill is enacted, it would not be permitted to invest in private placement or securities that would require basically accredited investor disclosures, and...basically, accredited investor requirements. And also, you would not be able to invest in any non-publicly traded entity in which you held more than 10% of the ownership interest in that entity, or are an officer or director in that entity. And that is raising some significant, both of those limitations, are raising pretty significant concerns, given that a lot of small businesses, family-owned businesses, have used partnerships and S corporations for succession planning, and some of those interests have been placed into retirement accounts.

If these rules become the law, these limitations would mean that disqualified investments like this would have to be removed from the account, again within that kind of two-year period, which could be extended, but the penalty if you don't remove them is that the entire IRA would become disqualified. So it's a fairly draconian consequence for what I think many would view as a pretty restrictive and largely unwarranted rule for investment limitations.

Russ: And to clarify here, Mark, these limitations you just described have nothing to do with the size of the IRA, correct?

Mark: That's right. Dollar one.

Russ: Any IRA, of any size, any taxpayer of any income level, it would be subject to these restrictions.

Mark: That's right.

Bill: Then just a confirmation question that we got, which is, distributions from Roth IRAs are still non-taxable...

Mark: They are, but if you trip over the $20 million limit, and you're below 59-and-a-half, it's fully taxable. Or it would be. Again, this is just the House proposal. Some of these kind of gotcha aspects of the proposals are coming to light, and I think are catching a lot of Members' attention, because they were not aware of really how harsh some of these rules are. So, I think our assessment is that, again, there likely will be some type of a cap on the size of the IRAs, that would probably at least trigger a prohibition on new contributions. There may be some adjustment in terms of the disgorgement requirements, and likely some longer period to do that, especially with illiquid investments. And I think these two account-of-any-size investment limitations are potentially on the chopping block. Or, they could be dialed down to, for instance, just applying to private placements, and not SEC-registered, non-publicly-traded...for instance, registered real estate investment trusts that are not publicly traded.

Russ: All right. So, the net investment income tax expansion is also included here. Mark referenced it before. This came in in the Affordable Care Act, the tax title which I was responsible for. We did not cover everyone, though, with the net investment income tax. And the Ways and Means Committee does expand the base, generally by applying the tax regardless of whether the taxpayer materially participates in the trade or business. Now, it can't sort of deal with income that's subject to FICA or SECA, because that violates special budget rules applicable in Congress. If any of you have global investments, they want to look at that, because certain Subpart F and GILTI income also gets folded into the net investment income calculation.

Mark, 199A.

Section 199A deduction reform(51:43)

Mark: In 2017, in an effort to try and better equalize the effective tax rate between pass-through businesses and corporate structures, we put in a new deduction, or a reform of old Section 199. It became Section 199A, which provides a 20% deduction for qualifying pass-through business income. What the Ways and Means Bill would do is in effect put a $500,000 cap on the size of that deduction, and that cap is at $500,000 for married filing jointly, and $400,000 for single individuals. That translates basically into $2.5 million worth of qualifying pass-through income that would qualify for the 199 deduction. Unlike the proposal that Senator Wyden put out earlier in the summer, it would not change any of the requirements for larger businesses within this cap, where you have to have...or the deduction is dialed down based on types of business, specified services versus active, and the amount of W-2 wages that the business has.

So, this will be a fairly significant limitation on that deduction, and increase the effective rate for larger pass-through business structures, and undoes some of the equalizing that we had intended with the 2017 tax reform bill.

Russ: This one, I'm 50/50, Mark. I'm not sure whether this is going to pass or not. When Biden came out with his proposal, in the campaign, I thought it was dead. When Wyden made his proposal, I didn't think it had legs to it, but this one with a, basically, an income cap to it, I'm not quite as sure.

Mark: Right. And it doesn't exactly fit with the corporate rate going up to 26.5%. That corporate rate may also be adjusted down, if they're trying to...end up trying to kind of shrink down the currently very large size of the House bill. But it is going to increase the effective tax rate for pass-through business owners, and that lobby is pretty vocal, especially within the agricultural and the small manufacturing community, and that will resonate with some Members.

Bill: We've got only a few more minutes, so maybe you can make some overarching comments on the tax legislation. Or if there's a critical piece of legislation that we haven't touched on, do so next, if you wouldn't mind.

Russ: Yeah. We're going to have a big, long negotiation, regardless of what you hear from the press. There are 10 moderate Democrats in the House who don't like a bill near this size, $3.5 trillion in total spending and tax cuts, and there are five Democratic senators who don't like it. And it's hard for the progressives in the Democratic Caucus to accept that, so they have held on to the hope that it would be a larger package. That's not going to happen. And as soon as the Democrats realize that, the quicker they'll be able to sort of negotiate the terms. They've got to have everyone in the Senate, because there are only 50 Democratic Senators. And they've got to have all but three of the House Members who are Democrats, and one of them has already said he's not voting for any bill. So, it's going to be a long, hard slog, and if you live in West Virginia or Arizona or Nevada or New Hampshire or Montana, you've got a Senator from your state who's going to have a lot of leverage to dictate the terms of which of these items are included, which ones are going to be left on the chopping block, before we're done.

So, hold on, and we'll know more after tomorrow, when we find out whether the infrastructure bill passes. But it's going to be a number of weeks, and possibly into Thanksgiving and Christmas, before they can figure out how to all get on board on a bill, the same bill that President Biden gets on.

Bill: That's helpful. One question that just came in, and I think it's a good question, which is, "Are there any proposals to change how nonresident aliens are taxed?" So a non-U.S. person, to invest in the U.S., for instance, as it pertains to taxation of capital gains.

Mark: I have not seen anything recently that's being... There's nothing in the Ways and Means Bill right now, and that doesn't... I haven't seen those proposals getting much traction on the Senate side, and I know that the group of American expatriates have been pushing for kind of equalized treatment for a number of years, but I'm not seeing it at this point.

Closing remarks(57:12)

Bill: That was good. All right. Well, look, I want to thank everybody. I'll make the point again, which is, to the extent that these provisions impact you, particularly as it pertains to regulation, do feel free to reach out to Joe Jarabek, who can help bring the broader resources of the Brownstein team, and we'll make sure that we make the contact information for Joe and Barry Jackson on behalf of Brownstein available. We will have a video recording of this that we will disseminate, and also share how to get access to the slides themselves.

With that, I really want to thank the Brownstein team. You gave an enormous amount of information. Some deep insights, not just on the what, but the potential for how, and the implications. And I think, even though it's a crystal ball, it's about as accurate a group, I suspect, in reading the crystal ball as exists on the Street, so to speak, and I'm hoping that the participants in this webinar appreciate that, and will do something about it, or try to engage with folks like you to try to influence stuff, because a number of the provisions don't make any sense, particularly as it pertains to the regulatory piece.

Tax rules change. I've grown up with that. It's regulated family offices, the way that they're proposing it, which, as I've said many times, doesn't solve the problem, and I think does more harm than good, because it dissuades wealthy families from using family offices, and family offices are a force for good, because they provide the professional managerial assistance to an enormous amount of wealth. And that wealth will be used for good. We can help raise well-adjusted children, we can make investments in impact, philanthropy, and to do anything to discourage the vehicle by which that is achieved makes absolutely no sense.

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 and SVB 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