If you are reading this before November 8, 2016, Barack Obama is still president, and you have not yet cast your vote for either the Democratic candidate, Hillary Clinton, or the Republican nominee, Donald Trump. But whomever you favor, it is time to get your financial strategy ready for a policy change almost certain to occur no matter who takes the oath of office.
History teaches us that a change in presidents nearly always predicts new approaches to the relationships among government and businesses and the individual. Perhaps the starkest example was the election of Franklin Delano Roosevelt who, six months before being elected for the first time, signaled the dramatic changes he would propose. He said:
“The country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But, above all, try something.”
Whatever one’s opinion of FDR, without question he tried all kinds of “somethings,” many of which are still with us seven decades after he left office, Social Security being just one example.
In more recent history, Ronald Reagan campaigned so vigorously for the reduction of the federal government that we still call his economic policy by his name: Reaganomics. And, while Reagan was a “conservative Republican,” one has to be careful with party labels, vis a vis economics. Bill Clinton, a “liberal Democrat,” ended up being an advocate for business, and he left behind something dear to all conservatives: a budget surplus.
Your advisor should offer dual strategies for your estate tax plan: one applying a ‘Clinton plan’ and another applying a ‘Trump plan’.
George W. Bush promoted his own economic vision, tax breaks being the centerpiece. And Barack Obama dramatically overhauled the government approach to health coverage with a new healthcare policy that bears his name, Obamacare.
Whether we reach back 80 years or eight, the good news is that candidates usually outline what economic changes they envision. And high net worth families in particular should take advantage of this “heads-up” notice and adjust their personal finance strategies in a way that anticipates change. So, our suggestion is: Sit down with your advisor now and create a “Clinton” strategy and a “Trump” strategy. The candidates diverge on many issues that will affect your financial plan, including individual tax rates, pass-through income and, central to many of you, estate taxes.
The current estate tax rate is 40 percent. Clinton wants to raise it to 45 percent; Trump wants to eliminate it altogether. The 2016 estate tax lifetime exemption is $5.45 million, for both you and your spouse. For the time being, then, if you give $10.9 million to your kids, nobody pays any taxes. Clinton wants to lower the exemption to $3.5 million, and with Trump the issue becomes irrelevant because there is no estate tax. If it is not clear already, we will restate it:
You and your advisor need a strategy that takes into account no estate tax whatsoever, and another that prepares for a tax rate rising 5 percent and the exemption dropping by almost 20 percent. If Trump wins and gets his way, you probably have about four years to transfer any amount of money out of your estate free of taxes. If Clinton gets elected, you, and perhaps your spouse, too, may want to exercise your exemption before the end of the year.
And that is only the beginning. Your advisor should offer a “Clinton plan” and a “Trump plan.” Or, as an associate of ours said, “It’s like before the Super Bowl when they print two sets of Super Bowl champion shirts, one for each team; and whoever wins gets the shirts.” Our advice?
Make sure you have a Clinton shirt and a Trump shirt before November 8.
Investing involves risk. Investment return and principal value of an investment will fluctuate, and an investor’s shares, when redeemed, may be worth more or less than their original cost. Advisory Services offered through Strategic Financial Group, LLC (dba SFGI, LLC in Illinois), a Registered Investment Advisor.
This article was originally published in the October/November 2016 issue of Worth.