Our Latest Policy Pulse: June 2021

The policies that come out of Capitol Hill can have significant consequences for you and your wealth. Here's a summary of recent developments.

Since taking office, President Biden has signed into law the $1.9 trillion American Rescue Plan, and  proposed a further $3.8 trillion of legislation to create jobs, expand social programs and build infrastructure, in part to lay the foundation for the U.S.’s transition to a zero carbon-emitting economy.   

To pay for it, the Administration is proposing a raft of tax increases on corporations and wealthy individuals. Here we summarize proposals aimed at the affluent; how and when they may become effective and suggest some potential strategies to mitigate the impact.

While many details remain unclear – and it’s doubtful all proposals will be enacted immediately, or even at all – there seems to be some consensus around the most likely initial targets. The first chart summarizes proposed tax changes we think have a high probability of being enacted, albeit with some possible adjustments. The second chart lists tax proposals considered less likely to occur, yet could still become higher priorities given the mercurial nature of negotiations. 

Exhibit 1: American Families Plan-Tax Legislation High Probability Changes 

table showing biden tax proposals with high probability of being passed

Exhibit 2: American Families Plan-Tax Legislation Medium/Low Probability Changes 

tax proposals with low probability of being passed

Related Policy Proposals

Restrictions on Popular Charitable Structures

In mid-June there were several new initiatives aimed at increasing the pace and amount of funds distributed to working charities with active programs.

The Accelerating Charitable Efforts (ACE) Act is a bipartisan proposal to hasten grants to nonprofits from Donor Advised Funds (DAFs), by requiring donations – for which donors receive upfront tax deductions – to be distributed out to operating charities within a certain timeframe. To claim the tax benefits, donors must also receive contemporaneous written acknowledgments from the sponsoring DAFs.

Other important takeaways from the ACE Act:

  • It adds significant complexity to the DAF rules, by differentiating between funds donated to DAFs established by Community Foundations versus those sponsored by other organizations, as well as by the types of contributed assets.
  • It restricts qualifying items that satisfy the payout obligations of Private Foundations.  Salaries and expenses of a donor’s family would not count, nor would distributions to Donor Advised Funds.
  • Donations to DAFs and Private Foundations prior to enactment would be grandfathered and do not need to meet the new qualifications for tax deductibility.
  • Notwithstanding the bipartisan origin of the ACE Act, nonprofits have reacted with vigorous opposition, fearing these restrictions would discourage potential donors.

Coordinated Global Tax Policies

Under Secretary Janet Yellen and President Biden, the U.S. is leading the charge in global tax initiatives. The U.S. Administration’s support of a global minimum corporate tax rate has re-energized the OECD and added momentum to efforts to curtail profit shifting to low tax jurisdictions. 

Concurrently with the suggested 15% minimum corporate global tax, the U.S. as part of the G7 is supporting a change in the taxation of profits of multinational companies, so that corporations will pay taxes in the countries where they operate, and not just where their headquarters are domiciled. 

President Biden’s Stopping Harmful Inversions and Ending Low Tax Developments (SHIELD) proposal is intended to address the scenario under which large companies locate their headquarters (and their tax base) in low tax jurisdictions, while selling their products and services in countries with higher corporate taxes.
We think it will be challenging both globally and within the U.S. to find agreement for these or other global tax initiatives. It nonetheless poses the threat of significantly higher taxes for some multinational companies.

Funds for IRS Enforcement

The Treasury Department estimates that the difference between how much Americans owe in taxes and how much they actually pay will balloon to $7 trillion over the next decade. President Biden is proposing $80 billion additional funds for the IRS to reduce this gap.  Of note for affluent individuals is the allocation of significant funds to the IRS’s Global High Wealth Industry Group, known as the “wealth squad".  This group focuses on taxpayers with complex strategies, with particular attention to losses from small businesses, the use of valuation discounts and multi-tiered structures. 

Market Reaction

Equity markets have likely priced in some probability of higher taxes down the road, and stocks can do quite well under slightly higher taxes – as we saw during the Obama administration. It’s hard to resist the temptation of the thundering herd when negative headlines about potential tax changes send markets reeling. But it will help to keep in mind that these policies are just proposals at this point, and a lot can change as they make their way through Congress.

We certainly do recommend that clients evaluate current estate planning strategies, in expectation that some changes to exemption levels for estate and gift taxes are likely. But talk to your investment advisor before making portfolio allocation changes based on knee-jerk market reactions to tax policy headlines.

Over our 200+ year history, we've seen times of prosperity, uncertainty, and possibility. Our team of wealth management experts has the knowledge and experience necessary to guide our clients through all of it. Our ability to protect and grow wealth through customized advice has brought us the success we care about most: highly satisfied, loyal clients whose relationships with us span generations. Our specialist advisors will work closely with clients to ensure that the strategies we recommend are in tune with their lives and provide for the future they want for their family.

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