Many IMARK members have been in business for more than 50 years and they have always found opportunities to thrive regardless of legislative or administrative changes. The Biden wish list, between additional infrastructure, environmental projects and other areas, could increase the budget more than $11 trillion over the next decade. These programs and additional stimulus could be a boost to the economy. Infrastructure spending could benefit IMARK members, from spending on construction to stimulus programs for homeowners. This has the potential to be advantageous for plumbing supply houses.
We expect the Biden administration’s No. 1 goal will be to control COVID-19 and continue with Operation Warp Speed to deliver vaccines to the gen-eral population as quickly as possible. We anticipate additional lockdowns and struggles for small businesses during this period. To combat these economic struggles, the expectation is that there will be multiple stimulus packages to prop up the economy. There will be a “whatever it takes attitude.” This should provide a bridge until the vaccines are distributed but may cause long-term issues with government debt.
Biden’s programs call for higher taxes on businesses and wealthy individuals. His administration may have tax implications for high net-worth individuals:
- Corporate tax rate to be raised from 21% to 28%.
- Capital gains taxes are expected to increase for higher earners, reaching up to 43.4% (not including state capital gains).
- The estate tax exemption would drop by about 50% (currently $11.18 million for singles and $22.36 million for married couples will fall to $5.5 million for singles and $11.18 for married couples).
- The top individual federal income tax rate would rise from 37% to the pre-Trump rate of 39.6%.
- Individuals earning $400,000 or more would pay additional payroll taxes.
It is important for IMARK members to consult with advisors to determine if they have their business and estate plans in place in the event of any tax policy reform. Albert Einstein said, “In the midst of every crisis, lies great opportunity.” COVID-19’s impact on the economy may provide an opportunity for business owners to make changes to their estate tax planning. Low interest rates and depressed valu-ations allow for gifting and inter-family lending to buy stock at a great value.
Here are four planning opportunities that you can deploy now to take advantage of current tax law:
INTRA-FAMILY LENDING
An intra-family loan can be used as a simple and effective wealth transfer device for IMARK members looking to transfer their business from one generation to another. Intra-family loans allow a shift of wealth from one family member to another family member, in IMARK’s case a younger generation purchasing shares in an older generation’s business equity. The current AFR is .14% (short-term) and 1.34% (long-term). The economy and COVID-19 suggest historic opportunities in low interest lending.
OUTRIGHT GIFTS
For those who wish to “lock in” and take advantage of the current exemption amount, the simplest method is to make “outright” gifts to children, trusts or other individuals.
GRANTOR RETAINED ANNUITY TRUST
The Grantor Retained Annuity Trust (GRAT) may allow a person to share the future appreciation of an asset with to the next generation with no gift tax.
CHARITABLE LEAD ANNUITY TRUST
Setting up a charitable trust to leave property to a qualified charitable organization can reduce estate taxes similar to the way giving gifts to charitable organizations offers the charitable deduction to reduce gift taxes.
We believe that free market capitalism always wins, whoever is the leader of the free world. As the entrepreneurial spirit lives with the distributors that we speak with on a daily basis, we believe that opportunities will exist regardless of future legislation, executive orders or any changes to the tax code.
Whatever estate planning you were thinking about around the election, it is still very important to do it now: freezing growth, low interest rates, favorable valuations.
To discuss any of the ideas in this article, please contact Bradley S. Williams at bwilliams@theberingergroup.com or 717-951-2800.
