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The Biden Proposed Tax Law Changes: Planning for Uncertainty


Will your taxes rise under the Biden tax plans? Watch now to plan for potential tax changes.

Josh DeForest: Hello and welcome, everybody. My name is Josh Deforest. I am a managing director here at Mercer Advisors, and we are very excited to have you here with us.

Today we’re going to be talking about the Biden proposed tax law changes and planning for uncertainty, and today we’re going to attempt to cover some very tricky and sometimes polarizing topics.

I think that you are going to find this information very helpful, and hopefully it makes you think little bit more about your own unique situation.

Before we get started, just a couple of housekeeping things. If you have any trouble with your audio, please do go ahead and submit questions in the questions tab and we can and try to help you troubleshoot from a technical perspective.

Also, we want to hear from you, but the audience is going to be muted today, so we do encourage you to please submit questions in that same Questions tab. We want to be able to get to those today, but just do not use the chat function. Use the questions part of the GoToWebinar.

Lastly, we are going to be recording this, and so if you want to go back and listen to it again, if you want to share it with friends and family, this will be posted on the Mercer Advisors website within the next week or so.

Here at Mercer Advisors, we do take compliance very seriously, and the information that we’re going to be discussing today is highly nuanced. It’s designed to be somewhat general in nature. We just encourage you to listen to this information, have a conversation with your tax professionals, your estate planning professionals, your financial planner, to see how this information might apply to you specifically.

We do encourage you to seek help, because some of these topics are very nuanced and are going to be highly dependent upon your personal situation in how they’re applied.

As humans, there is very little that makes us more concerned than uncertainty, especially uncertainly as it relates to our money. I have seen this firsthand in the daily work that I do with our clients as an advisor here at Mercer Advisors. Topics like worry, stress, fear and anxiety, are things that we speak with our clients about on a daily basis.

I’m especially well-versed in this because my wife is a licensed therapist, and interestingly enough, these are some of the very same topics that she has conversations about with her clients. We just apply them in different ways.

In fact, the American Psychology Association last year did a study that was called Stress in America 2020, where they studied some of the sources of stress that we experience as Americans. What they found was that a full one-third of people cited unexpected expenses as a source of stress related to money.

Now, as it relates to people’s health, a full two-thirds of people cited uncertainty about the future as a source of stress negatively affecting their health. The APA had a whole list of recommendations and things that they said would help people to combat this source of stress and fear and anxiety, and there are two things that I found particularly relevant to our conversation today.

One of the things that they said to do was to avoid dwelling on things that you can’t control. In other words, finding things that you can focus on, that are actually in your control, is very helpful.

What’s interesting from a financial planning perspective is that we find that the things that are in our control are the very same things that have the biggest impact on our financial lives.

Another thing that I found really interesting that they said was to seek counsel from someone who you trust. This is exactly why we wanted to bring this type of a topic to your attention today, is to see how a trusted advisor can help you in applying and learning more about some of these situations.

We like to begin every single one of our presentations here at Mercer Advisors with this quote from our founder Kendrick Mercer. In 1986 he said, “We are unconditionally committed to work with our clients to help create the best context possible for their economic freedom so that they don’t have to worry about money.”

We talked about how uncertainty and fear and anxiety can take over and that this is really one of the things that we encounter a lot here at Mercer Advisors, so we really try hard to help our clients focus on the right things at the right times in the right amount of detail so that they don’t have to worry about money.

I really think that this commitment to our clients is what has led to our success as an organization. Today we have more 55 regional offices, we manage over $30 billion of client assets, and we work with more than 18,500 clients.

One of the things that we’re particularly proud of is our investors initiative. That initiative has led to almost 50% of our client-facing staff to be women, which is truly an industry-leading statistic as it relates to firms like ours.

Central to every single thing that we do is comprehensive financial planning. We believe that taking a unified approach to wealth management involves having the professionals on staff who can help meet the vast majority of our clients’ wealth management needs.

We’re going to be talking about three of those areas today. We’re going to be talking about tax, estate planning, and investment management. Additionally, we also have services related to corporate trustee, insurance solutions, and it’s really by fully understanding how all of these things interact with each other that we can make a real difference in the lives of our clients.

I have found that some people can get one area or maybe two areas of these five things correct, but what’s very difficult is to see how they can all be integrated into one comprehensive financial plan, because when you make a decision in one area of your financial life, it always affects every other area of your finances, and sometimes in ways that can be a little bit hard to predict.

I talked a minute ago about how we have 55 offices across the country. This is a visual representation of what that looks like. I really think that we have the best of both worlds. We have local offices where we can get to know our clients on a very individualized and customized basis, yet we have the backing of a large organization to bring to the forefront topics like what we’re going to be talking about today. It’s really integrating these two things that I think really makes Mercer Advisors unique.

With that, I’m going to transition to our topic today. Today, we’re going to be talking about the Biden proposed tax law changes and planning for uncertainty. As you’re listening to our panel talk about these things today, I want you to ask yourself two important questions.

Number one, what are those things that you can control, and what types of actions can you take in light of that? The second is, who fills that role as a trusted advisor in your financial life? Who is it that you can turn to help you integrate all of these topics into one cohesive strategy?

I’m going to invite our panelists to come up here and I’m going to introduce them. First today you’re going to be hearing from our managing director, Laura Combs. Laura is a managing director here at Mercer Advisors. She’s also an investment committee member, and she’s a member of Mercer Advisors senior leadership team.

She’s been with Mercer Advisors for more than 13 years, and a really exciting announcement is that she was just announced the 2021 winner of Investment News 40 under 40 for the entire country*.

She’s going to be having a conversation with Jeremiah Barlow. Jeremiah is our head of estate, tax, insurance, and financial planning groups. He is an estate planning attorney by trade, and he focuses on his time on helping our clients understand the nuances of the tax code and estate planning.

Prior to joining Mercer advisors, Jeremiah managed a firm that really focused heavily on estate planning, business succession, and asset protection. He is also a sought-after thought leader, and he speaks on these topics around the country.

Next, you’re going to be hearing from our chief investment officer Don Calcagni to talk about how investment management might be considered in light of some of these changes. As I mentioned, he’s our chief investment officer. He’s been with Mercer Advisors for over 17 years, and he is really responsible for managing that $30 billion of assets that we talked about earlier.

He is a frequent contributor to Bloomberg News, MarketWatch, and Hedge Fund Weekly. He’s also a prolific author. He has his MBA from the University of Chicago, he has a Master’s in Taxation from Widener University, and he is also a certified financial planner.

I think you’re really going to enjoy listening to these folks as they take you through our topics today. So, Laura, I’ll turn it over to you.

Laura Combs: Thank you so much, Josh, and thanks again everyone for joining us today. It is a pleasure and a privilege to be with you, and we truly appreciate you taking the time out of your busy lives to join us to discuss these important topics.

With the change in administration, 2021 promises to bring new challenges and opportunities to the estate planning arena and to the tax arena. As a mother of four young children, I am thinking not only how these changes might impact my own life today but also how they might impact my kids and future generations, and I’m sure many of you are probably thinking the same thing.

So today we’re going to spend time discussing how families can manage wealth effectively into the future amidst unexpected and uncertain changes.

Let’s take a look at our agenda. These are the give things that we’re going to be covering today, really talking and diving deep into the Biden administration proposed tax changes. Jeremiah’s going to share with us on that. We’re going to hear from Don on a market outlook for 2021, and then we’ll spend some time discussing and answering questions around tax outlook and strategies as well as estate and gift tax.

We want this to be interactive. This is your time, and we want to make sure that we’re answering questions that you are thinking about and asking yourself. So please, like Josh mentioned, submit those questions to the Q&A feature. We really want to make sure that we are answering what’s important to you, and we will be taking questions throughout our time today.

We’re also going to be having a few poll questions to try to make this interactive. We’re going to start with our first poll here, and if you think about this, the question is, “If the top rate for capital gains increases to 39.6%, would you sell assets today to benefit from lower rates?”

Go ahead and answer that question as we’re thinking about that today, because we are going to be jumping into talking about the proposed tax changes. We’ll give you a few more minutes to answer that. Again, if the top rate for capital gains increases to 39.6%, would you sell assets today to benefit from those lower rates that we are seeing in this current year?

We’ll give it a few more minutes. I see a lot of the votes coming in, so this is great to see the interaction. Wonderful, we’re actually split on this, which is pretty interesting. 55% yes, 45% no, so we are pretty split on this. We’ll go ahead and close that and move on.

I’m going to invite Jeremiah to join us for the first section, where we are really going to talk about proposed tax law changes. Jeremiah, when working with clients, with prospective clients, I’ve been getting, as you might imagine, a tremendous number of questions about what’s going to happen with taxes.

There’s a lot of proposals by the current administration, there are even some bills in Congress right now. Jeremiah, talk to us today about the ones that stand out to you as what we should all be thinking about.

Jeremiah Barlow: Absolutely, and thank you, Laura, for having us today. I will highlight what you just said, Laura, and that is, everything that I’m going to talk about, these are all proposals that we’re going to talk about. They are proposals.

Some of them are requests of the Biden administration, some of them are actual bills that have been entered into Congress, but none of them are law, which kind of creates that uncertainty, because a lot of them feel like they’ve been talked about for so long that they are or soon will be law.

Because there are so many proposals, what I’m going to do is highlight these five, because there are a lot of them out there. These are ones that our clients are asking about.

Three of them are focused more on what I’ll call the income tax capital gains components, and then two of them are estate tax related towards the end, estate and gift tax related. So mentally, those are two areas of the code that are separate, so you want to separate those in your mind, but this will give us a good framework as we start to talk about, what are the impacts as a result.

The first three, I’m going to start with the first one there, that 39.6% rate that you see. This is a proposal from the Biden administration to basically unwind the Tax Cuts and Jobs Act that are currently in place that set our highest marginal tax rate at 37%, and the desire is to increase that to 39.6%.

That would basically apply, under current proposal, to anyone who has income over $400,000, so that would be lowering the threshold and increasing the top marginal rate.

So, it’s a big deal, obviously creating a lot of angst around possible future income that people might be generating and whether they should do it today or not. We’ll expand on that a little bit.

The second one is this new social security tax, or additive social security tax, above $400,000. For background, the current law says that there’s a social security tax applied up to the first $142,800, and that tax is 6.2%.

The new proposal would say they’re going to insert an additional 6.2% tax if your income is over $400,000. So basically, there’s a window between $142,800 and $400,000 where there would be no social security tax, and then they’re slotting in a new tax of 6.2% over $400,000.

If this $400,000 keeps jumping out at you, it’s a theme that we’ve heard being campaigned on as well as discussed around no income tax being increased for those over $400,000. That’s kind of the theme that might be taking place.

But the big change is that there never used to be social security tax over that threshold, which is currently $142,800, and they would be layering this on that.

The last income tax piece that we’re going to highlight today is this capital gains tax on income over $1,000,000. Right now, as many of you probably aware, the capital gains rates are either 0%, 15%, or 20%. If you are in the 20% range, that’s the maximum long-term capital gains tax rate that you’ll pay, plus the 3.8% NIIT which might move it to 23.8 as a whole.

The proposal is to create a new capital gains tax rate at the top which would say, if you have income over $1,000,000, you’re going to get taxed at the top marginal rate of what would be in the current proposal 39.6%, so creating that additional layer there on top.

Since this new proposal is at 39.6 and this new rate would apply, we’ll talk today around these strategies around managing to those thresholds to see how we can make sure your income from an adjusted gross income perspective is not higher than that.

We don’t have clarity on that yet, but we expect all of these income thresholds to be adjusted gross income, so there could be opportunities to drive that income down with deductions and credits.

That’s the first three. The second two are gift tax related. There is a bill in Congress right now that proposes to reduce the current estate tax exemption amount. That current estate tax exemption amount is $11.7 million, and as you can see here, the proposal is to slice that by almost 75%, down to $3.5 million.

That’s a significant change. Right now the law already will have the estate tax exemption amount cut down to roughly half of the $11.7 million in 2026, but this would propose to accelerate that and cut it even further, effectively putting us back into our 2009 limits where any estate tax would apply over $3.5 million, and looking to cut the gift tax threshold down to $1,000,000, so going back to our mid-2000 realm where we had a split taxation method between gifting during life and giving assets at death.

And then the last one, which is the one that brings angst to a lot of people, is this deemed gains problem. I’m going to try to wrap our heads around it because it seems almost unfathomable, because it would literally upend a century of how we’ve been planning for taxes.

It’s very interesting. The current proposal seeks to basically trigger gains on a transfer of an asset even though the asset wasn’t sold, there was no realization of actual gains to pay the taxes.

Today, if I were to pass away and I were to give all my assets to, say, my children, they could inherit those assets and not trigger any gains on those. Say it’s a piece of property, they would inherit that piece of property and they wouldn’t have to pay any taxes on it until they actually trigger gains, they sell the property, and they pay the gains on it.

However, the new law would say, if I passed away, and that property transfers over, it actually would trigger gains whether or not they sold it or not, which creates a lot of problems, because there may not be liquidity to pay for it.

We’ll talk about ways to help navigate that, but these are five big topics. If any one of them becomes law, it’s going to be a big issue to navigate. So, Laura, as you can see with all these kinds of changes out there in the works, it’s a lot to navigate and going to have a lot of impact across the board.

Laura Combs: Absolutely. Thanks for walking through that for us today, Jeremiah, and you hit on a lot of the questions that I’m already seeing coming into the Q&A, a lot of questions around what you talked about for step-up cost basis, and the elimination of it. There are several questions in the chat on that.

One clarifying question, Jeremiah, there are probably three or four people that have asked about that $400,000 threshold, and I think you mentioned… Can you clarify, is this a single filing, is this joint filing? We had a couple questions around adjusted growth income versus taxable. I think I heard you answer that. Please, can you just clarify that for the listeners today on that $400,000 threshold level?

Jeremiah Barlow: I can, but unfortunately the clarity is that we don’t have clarity yet. We don’t know where that $400,000 is basically being…the line in the sand on it, is it married filing jointly, is it single, we don’t know yet.

But we are hoping, from what tax does it apply to, would be your adjusted gross income, is hopefully what it will land on.

Laura Combs: Thanks again for walking through that. If you have questions today on these topics during our open-ended Q&A, we invite you to ask those questions as well.

Before we transition to hearing from Don and talking about markets, we do have another poll question for you. We’ll put up the second poll question, which is, “Are you concerned about market valuations?”

Don’s going to be sharing an outlook on the capital markets, where we are year-to-date and throughout the rest of 2021, but go ahead and select the answer here. Wow, this is really running away with “Yes”. Many of you are concerned about market valuations, so the overwhelming majority are answering “Yes”. So, Don, I think this will give you some good content to talk about.

We’re still right up close to 80% are answering “Yes”. Don, let’s think about shifting from taxes to talking about capital markets and the impact that we might expect from these proposals.

Where are we year-to-date? What should we expect through the second half of the year?

Don Calcagni: Thank you, Laura, I appreciate that. I think the first thing to acknowledge is that the market is trading very close to all-time highs. In fact, you have to go back to the end of the dot-com bubble in early 2000 to find market valuations that rival where we’re at today.

So, I think our listeners are justified in being concerned about market valuations. As chief investment officer, I’m always worried about what we’re paying for assets, and I think that comes with the territory.

If we look at where the S&P is today, it’s trading at 21.5 times earnings. That’s pretty rich. I think the way to really contextualize any market at any given point in time is that there’s a series of tailwinds that are trying to push markets higher, and then there’s a series of headwinds that are trying to push markets lower.

Markets are ultimately massive voting mechanisms where investors can vote on what we think the future looks like as manifested in stock prices. So, if we step out for a moment, Laura, and we look at some of those tailwinds that are pushing the market higher, which by the way, the market’s up 13.7% year-to-date as of yesterday’s close of business.

This is a phenomenal return coming on the heels of an 18.4% positive return for the S&P 500 during 2020, which in and of itself is just absolutely exceptional given everything that we’ve lived through.

So, what are some of those tailwinds that are pushing markets higher? I think the most powerful tailwind right now is what we call the Great Reopening trade. COVID appears to be coming to an end, certainly, depending on who you talk to. There’s a bit of a debate around that.

Vaccinations are up significantly. Depending on which statistic you want to believe, we’re somewhere between 50% to just under 70% of Americans that are fully vaccinated or having received at least one shot of the vaccination.

So, you have all of that pent-up demand now that’s coming into the market. I joke with my wife that after a year of COVID, I am not cooking for at least six months. We are going to eat out at a nice restaurant every weekend for the next six months.

So, you have all of that pent-up demand coming into the market. Combined with that, we’ve had significant, really unprecedented, fiscal stimulus. Fiscal stimulus is spending authorized by Congress. We had very generous unemployment benefits.

I just saw a news flash a few moments ago before we begin the broadcast that the Biden administration appears to have struck an infrastructure deal for about $1 trillion working with the Republicans in the Senate. So, we have massive tailwinds coming in the form of fiscal stimulus, government spending.

If we take it a step further, we also have what we call massive monetary stimulus. The U.S. Central Bank, the U.S. Federal Reserve, interest rates are near zero, and every month the U.S. Federal Reserve pumps $120 billion, that’s every month, that’s $1.44 trillion a year right now, that the U.S. Central Bank pumps into U.S. financial markets when they purchase U.S. Treasury and other types of bonds. That is helping to keep interest rates exceptionally low, lower than they otherwise would be.

I think the final tailwind that is pushing markets higher is, we are seeing really unprecedented earnings growth for US companies. Right now, we’re projecting earnings growth for 2021 to be about 61%. That’s coming on the heels, however, of big reductions in corporate earnings last year, of course, during the earliest phases of COVID.

So those are the tailwinds trying to push the market higher, but certainly no discussion of market valuations is complete without looking at the other side of the equation. What’s going wrong? What’s the negative news?

I think the most negative headline is inflation. Inflation currently running at about 5% year over year, that is significant. We have not seen inflation that high in well over a decade, and so that in and of itself is a cause for at least some market participants to be ringing the alarm bell saying, “Hey, this is a problem.”

In fact, just last week, the FOMC, which is board of the Federal Reserve Board that actually sets interest rates, indicated that it is projecting two interest rate hikes in 2023, and there are also whispers now that the board may begin to cut back on that $120 billion in stimulus that they pump into financial markets every month.

So that’s a headwind. The market seems to have shrugged that off at the moment, but I think anyone who’s really paying attention knows that that is a serious headwind. It probably won’t dent market momentum in the near future, say the next six months, but certainly as we get closer to 2023, as we get closer to the Fed tapering bond purchases, this could be a pretty significant headwind for U.S. markets.

I think another big head wind is what we are talking about here today on the webcast, and that is the extreme uncertainty associated with tax policy right now.

If we actually look at the data, if we look at the proposed tax increases, the reality is that’s going to hurt the market in some way, shape, or form. What the market’s trying to get some insight into is, what’s it really going to look like once it goes through Congress? What will the law finally look like?

So those are the big headwinds I think are really pushing against markets at the moment, but right now the momentum, the tailwinds, have the momentum.

Laura Combs: Don, I appreciate you walking us through that and sharing your insights on both, not only the tailwinds, but also what we could expect as headwinds and what might put a dent in the market.

You alluded to that a little bit, and I want to catch what you just said on the end. You talked about what we should be anticipating from maybe a dent or a headwind and some of the impacts to the markets from these proposed tax changes. Can you talk to listeners today about what you’re thinking, how these proposed tax changes might impact the market specifically? What should we be thinking about?

Don Calcagni: Yeah, absolutely. If we just look at the corporate income tax proposals at the moment, they sound relatively benign, raising the corporate income tax rate from its current level of 21% to a proposed rate of 28%, and on its surface, that might not sound like a significant increase.

But if we actually do the arithmetic on that, that means that stock prices, all things equal, should fall about 10% just by virtue of that increase in corporate taxes.

In fact, there’s a very good argument to be made that we could see stock prices fall anywhere from 10% to perhaps as high as 25% as the market readjusts.

Remember, stock prices, in fact, this is true, I would argue, for all assets, whether it’s real estate, bonds, or stocks, everything is a function of the future expected after-tax cash flows. So, if Uncle Sam is going to take a bigger piece of the pie, that’s less pie left over for the investors in those companies or in those assets.

So, if the after-tax cash flow goes down, then naturally stock prices are going to go down. We’re predicting, or estimating I should say, somewhere between a 10% to perhaps as steep as 25% sell-off.

Laura Combs: Great, thanks for sharing on the impact, and again a lot of these are still proposed changes, so, to what we’ve all been talking about, there’s a lot of uncertainty. But again, having that awareness, I think, is really beneficial going into the second half of the year.

Don, in thinking about clients that I’ve been working with, individuals, families, many of them are in retirement, and I know a lot of listeners today may no longer be working and earning income, and they’re thinking about living off of their retirement portfolios, their assets.

What can an investor do in the low-rate environments that we are in? What can investors do for yield in this low-rate environment that you mentioned earlier?

Don Calcagni: It’s a great question, Laura. I know that retirees across the country are struggling with that same exact question. What I would say is, my first point, is that there’s certainly no free lunch. There are certainly higher yielding assets out there in the marketplace, and I’ll mention a few in a moment, but I will disclose that they do come with greater risk. There is no free lunch.

So, what else could investors perhaps do to earn higher income on their investments? I think the first thing I would highlight would be something like private credit. These are private assets, private placements, they’re typically open exclusively to accredited investors or what we call qualified purchasers.

The SEC has certain regulatory requirements in terms of net worth and income that investors must meet before they’re permitted to invest in these types of vehicles, but you can earn yields anywhere from 7% to as high as 10% or 11% right now in private markets through private credit funds that are investing, making loans directly to smaller what, we call lower- or middle-market companies.

These are private companies that are profitable. They have a need for capital, and there are vehicles that will lend them capital at higher interest rates than what these companies can typically borrow through traditional banks.

Other opportunities out there include things like a high quality, high dividend stock portfolio. You could build a portfolio today of relatively high quality, high yield dividend stocks. Naturally, anyone could do this, you don’t have to be an accredited investor or a qualified purchaser, and you can get yields somewhere in the mid-3% to mid-4% range depending on the relative diversification of the portfolio.

But these things are not on par with investment-grade bonds or U.S. Treasurys or anything like that. There’s certainly more risk associated with those asset classes, but there are opportunities to earn higher yields.

Laura Combs: Great, I think that’s helpful for our listeners today to think about maybe additional ways to generate income that they might need in their portfolio.

Don, before we bring Jeremiah back on, you recently wrote an article on the economic impact of the Biden tax proposals. Can you share with the audience today a few of your top findings from that article you wrote?

Don Calcagni: Yeah, absolutely. The article was focused on answering the question who will be impacted by these proposed tax increases. There’s a sound bite that floats around that only the top 1% or even fewer of U.S. taxpayers would be impacted by these proposed tax increases.

When we back up and we actually look at the data, we find that that is not the case, that actually many, many millions of U.S. households would be adversely impacted by these proposed tax increases.

I’ll give you a case in point. Just a moment ago, we were talking about how an increase in corporate income taxes impact market valuations? Well, 55% of U.S. households own stock, either through an IRA or a 401(k) or some other type of investment account.

So that’s certainly not just the top 1%. That’s going to impact many households. That’s going to impact university endowments. That’s going to impact nonprofits and foundations. That’s going to impact corporate pension plans as well as state pension plans for public sector unions. So, the reality is, these changes will impact many, many more Americans than we realize.

Just when we look at the income tax rates for a moment, there’s this sense that the top 1% of taxpayers is a static number, that it’s the same households every year. That’s not true. We actually see massive migration in and out of that top 1%, 5%, and 10% of households every year.

In fact, some academic research from faculty from Cornell and Washington University in St Louis had identified that, at any one point in time, 12% of Americans over their working careers will find themselves in the top 1%.

So, think about that. You have pretty high turnover in those top tax brackets, so it’s not a static number. It will definitely impact millions of U.S. households over time, and I think my message, the conclusion that the paper drew, was that now isn’t the time to play chicken with tax rates.

If there is important tax planning that you should be doing, now is the time that you should be doing that, and certainly not waiting.

Laura Combs: Absolutely, and I love what you shared. I guess thinking about it, 55% of Americans own stock. That statistic was new to me. I think, as you said, the proposed changes will almost certainly impact the majority of households in America if we see those stock prices go down as you alluded to.

So, before we start diving deeper into your questions, I want to pause for a moment for all of you listening today, and I want to invite you to just zoom out a bit.

We are at a unique time where we find ourselves at the intersection of not one, not two, but four key disciplines. We heard from Jeremiah on estate planning and tax planning. We heard from Don on the areas of impact for financial planning and investment planning.

In looking at these four key areas, really what we’re trying to solve, we’re not solving for just one of these areas without understanding how other areas could impact your portfolio.

So, we want to invite you to, again, zoom out, think about, for you, if you’re really focused on tax planning, how does these potential changes impact your investment portfolio or your long-term financial plan, or your estate plan? Because I would argue they’re all interwoven, all related.

We’re going to be talking more about some recommendations, and I’m loving the questions coming into the Q&A. A lot of specific questions about strategies to avoid capital gains or reduce estates today. But, again, I want to just encourage you to think about how these changes might impact your family, and take a step back because, we might have a tendency to get into the weeds on one of these topics.

So, zoom out for a minute and think about how these might impact your entire wealth plan, your entire financial picture. I want to reaffirm for you how critical it is for you to plan, to strategize, so that you can move forward successfully through life’s events, through changes, no matter where we are today.

Thinking about what Josh mentioned at the beginning about reducing that financial stress, having a plan in all of these areas helps reduce that financial stress even in the midst of the uncertainty that we’re facing today.

Like many of you, I am feeling a mix of emotions around a lot of these proposed changes. One of the best ways to regain confidence in your financial plan and help reduce stress is to have that integrated wealth plan, looking at all of these different components.

I invite you to put those questions in. We have so many to go through, which is great today. But before we jump to our Q&A section, we have another poll question for you.

This one, I just talked about family for a minute there. So, thinking about your own family or your own life, would you gift assets to a loved one today if the gift and estate tax exemption is reduced in 2022 next year?

Again, think about your family. Would you be willing to gift assets today to a loved one or someone else to avoid maybe taxes in the future, again, if that gift and tax exemption is reduced next year?

It’s interesting, we’ll see how these results are coming in. We’re still pretty split. Some of you want to give assets away, some people might want to keep them, which is all right. We really are 50/50 on the nose here. This is great, because I think it’ll lead into a lot of the conversations that we’re going to have.

Don, Jeremiah, let’s take a deeper dive onto the tax side. We talked a lot about markets, but I want to double click on the Biden tax proposal. Jeremiah, you mentioned that there are no new laws as of today. Nothing has been passed, everything is in proposal phase. So, Jeremiah, what how should people be thinking about planning for these proposed tax law changes?

Jeremiah Barlow: I think the important thing to know is, as you said, it’s proposal stage, but the good news is, at some point we will have certainty. It sounds like we may have a little bit more certainty on the corporate side with the infrastructure, so we do expect to have more certainty probably somewhere in the September-October range, hopefully, from what we’re hearing.

But in the interim, obviously it’s important to do some planning if you can. I think the most important thing about that is flexibility. Anything we do, you want to have the most flexibility to be able to adjust accordingly based on what the changes might be, and of course when they might go into effect.

I’d say today, the best thing to do is make sure you have your house in order. What I mean by that is, make sure you have a clear balance sheet, make sure you understand where your assets sit, how they’re titled, and talking proactively with your advisors about what you want to do.

Are you willing to give away $10 million today if the estate tax exemption is cut by 75%? Do you have a business that is going to be sold, and maybe the plan was to sell it in February, but you want to accelerate that for some reason into this year if we get more clarity, then do you have the flexibility to do that?

Because what I will say is, if you wait until we have certainty before starting this process, you’re going to run out of time. The good news is there are some things you can implement today that will help to…that you can take advantage of now and even still have that flexibility. So, again, good foundation, house in order first, is the most important piece of the puzzle.

However, if you want more concrete pieces, if taxes are increased…or the top marginal rate is increased to 39.6% or we have this new social security tax applying at $400,000 of ordinary income, and then the new capital gain rate of almost double, strategically planning today is key.

You might think, well, should we trigger gains today? I would say that could be beneficial. But doing that strategically, because it’s almost certain that there’s going to be higher taxes in the future. Don just talked about it. All this spending, things that are being approved, trillions of dollars of spending going on. We have to pay for that somehow. The natural result would be increasing taxes.

So, we could be in the lowest tax environment we’ve ever seen right now, so realizing those today… A couple examples might be diversifying your balance sheet to create more tax-free income such as a Roth conversion, moving your assets from tax-deferred or taxable over to tax-free is a sound strategy.

Obviously, you need to do that with a scalpel. That kind of goes with my second point of getting your plan in order. That also includes tax projections. We’ve had two of the craziest tax years I have seen on record for me in my profession, so consistently working with your tax professionals to update your projections to see where you’re at so you know where your thresholds are.

If you’re exceeding the $1,000,000 threshold, and we expect there to be a new capital gains rate at that rate, if we do, then you’re going to want to manage to that. Maybe you want to realize those games today, move them into that tax-free bucket so you can pull money out of your Roth in the future even if tax rates are much, much higher.

Laura Combs: I think that’s great. I think on the Roth conversion piece, I probably had more Roth conversion conversations with clients in the last six months than I have in my entire career, so it’s definitely a strategy that is being looked at and being implemented to, move assets into a tax-free environment for the future.

Anything else, Jeremiah, before we hear from Don on the investment side?

Jeremiah Barlow: I would say the opposite to that, too, instead of triggering gains, maybe capturing losses. I know the market is at all-time highs as Don showed, but we never want losses in one’s portfolio, but they inevitably happen. There are ups and downs in the market every single day.

Strategically capturing those right now is going to be key so that you can use those to offset either strategically realized gains like with a Roth conversion, using those together, or if there are higher taxes in the future, using those to offset those gains that you’re inevitably going to have to realize in order to take care of your day-to-day needs.

That is also a key piece to think about as well. So, things you can do today that they’re going to move the needle in a positive way regardless of where the taxes are falling.

Laura Combs: Great. Jeremiah, thank you for that. And Don, a lot of the questions are coming into the Q&A specifically around the investment portfolio. What would you suggest investors do to go about preparing their portfolios for the prospect of higher taxes? What should people be doing today to plan?

Don Calcagni: That’s a great question, Laura. Too many investors unfortunately don’t really appreciate or understand what it is they need their portfolio to do. So that would be the first order of business, is get crystal clear on what you need your portfolio to do for you and your family.

I think for the vast majority of us, it’s to support some sort of lifestyle after we’re finished working for income. That’d be the first order of business, get really, really clear on what it is you need your portfolio to do, what is the expected withdrawal rate, what does your tax situation look like?

Once you’re really crystal clear on what it is you need your portfolio to do for you and for your family, then from there you can actually build, solve, for an optimal portfolio design, an asset allocation.

Once you have that, once you know what your portfolio needs to look like to do the job that you need it to do, then you should evaluate that target portfolio relative to where you are today.

Inevitably, for most investors, there’s a disconnect. They’re either overweight technology or whatever, or they don’t have enough global diversification. The degree to which there’s a disconnect between where they are today and where they need to be, investors should be making those changes now. That’s what to do right now to prepare for higher future tax rates.

Here’s the message: You don’t want to be making those changes in a higher tax environment. You’ll want to make them today when those frictions are relatively less. So that’s how investors should be looking at their portfolios. If you have concentrated stock, if your portfolio has not been rebalanced, if you don’t have proper global asset class diversification, now’s the time to do that, certainly not when taxes are substantially higher than they are today.

Laura Combs: Absolutely, and I think to highlight, just make sure that you are doing something or thinking about it. Jeremiah…questions again coming in… you alluded to the sale of a business or a big episodic event, an IPO or stock options or maybe some of the listeners today that are still in those working and high earning years and maybe want to sell a business.

What should clients be doing today if they’ve got one of these events coming up in the near future?

Jeremiah Barlow: We see this all the time. It goes to Don’t point earlier about, the top 1% is always fluxing in and out because of these once-in-a-lifetime wealth creation events that are highly concentrated in one year.

The lead into that is concentrated positions. You may have a concentrated position in maybe the business that you own, or the stock options you have in the business you helped start. If you have a liquidity event coming, how you structure it is going to be critically important as you kind of manage towards these possible capital gains.

Remember, again, these proposals have high increases in things like long-term capital gains, which would be impacted by an IPO or certain types of stock options. So how you structure it is important. Things like, can you structure it as an installment sale?

This kind of goes to the flexibility I mentioned earlier. Spread that income out, installment sale structure it, and if the law does not become retroactive such as for capital gains, you can elect out of the installment sale, realize the gains now, and trigger them in the given year as opposed to just continuing to spread them out. You can have that flexibility if you plan ahead.

It all comes down to planning ahead, and this is why we’re focusing on that. Not a lot you can do if it all happens ahead of you, and you try to plan going backwards.

That’s one good example. On the concentrated position side of things, low basis stocks, that’s also an area where you can definitely benefit in offsetting possible realization of gains, seeing a lot of our clients utilizing things like charitable remainder trusts right now in order to take a tax deduction today, but also effectively to create kind of an installment sale result.

With a charitable trust, you can actually put a low basis highly concentrated position into, for example, a charitable remainder trust and get a tax deduction in the year you make that contribution. But then liquidate that stock, don’t realize any gains inside that charitable trust because it’s not taxable as that kind of charitable entity, and then it spreads out the income because it now distributes it out to you over maybe your lifetime or a term of years.

So, it’s kind of a win-win-win. You get a tax deduction now. Even if you don’t use the whole tax deduction, you can spread that out for as long as five years. We have a client who did this with a very successful stock, publicly traded, had about $8 million in it. The client wanted to diversify, thinking that capital gains are the lowest they’re going to be now… Well, even if taxes are the lowest they’re going to be, the client still did not want to realize $8 million of gains right now, because who knows what’s going to happen?

So, the client put it in that charitable trust, to spread out the income. To Don’s point, solving for their long-term income needs was the end result that we achieved. Both of those are great ways to think about that.

Laura Combs: We’ve touched on a couple of different things, on the concentrated positions, on the low basis stock. What I’m hearing is, really, there’s no one magic answer. It’s a combination of your personal unique situation and what control you’re willing to give up it in what could be a trade-off, as you said. In that scenario, a win-win-win, where you may implement a number of different strategies.

What I’m seeing in the Q&A, and I’m loving the questions coming in, so thank you all for putting those in, is the theme around the capital gains and the elimination of the step-up cost basis.

This is, when we think about reducing some of this income, a lot of what we’re talking about right now, gifting, being able to do that today really might impact what we’re thinking about.

You touched on the charitable remainder trust. Donor advised funds are what I might use a lot with clients as well, which is, where you can offset some of those gains, donate to a charity, and be able to do good while paying less in taxes, which to me is that win-win.

So, shifting maybe from investments and taxes maybe over to the estate and gift tax outlook, if we think about… Jeremiah, I’ll continue on with you, but want to think about, Biden really campaigned on lowering the estate tax exemption amount.

A lot of questions in the chat: What should we be expecting when we think about the estate tax exemption amount, which you mentioned is currently at that $11.7 million per person?

Jeremiah Barlow: The unfortunate thing is, yes, it actually has resulted in a bill in Congress, farther along than some of these others that we’ve talked about thus far. There’s a bill in the Senate right now that does look to decrease the estate tax exemption amount down to about $3.5 million.

That’s the estate tax, but then they also want to, in that same bill, split the estate tax from the gift tax, so if you give assets away during life, they would lower that threshold down to $1,000,000. Again, harkening back to the mid-2000s when there where this was the law that had a separation between the two.

So, the answer is yes, it’s got some legs, it’s moving forward, and the same goes for that elimination of the step-up in basis. If you think about the elimination of the step-up in basis, that’s the counterbalance to all these income tax and capital gains changes.

If people are saying, “I don’t want to realize the gains now, I’m just going to give them away,” or “I’m going to hold on to them and not realize any of those gains until I die and have those transfer over,” right now the law says that you get a step-up in basis to the date-of-death value so your heirs will reap the benefit.

So, what basically the administration is trying to do is cut it both ways. They’re trying to say you’re either going to realize gains today, but if you hold onto it, you’re not going to get a tax benefit for your heirs.

Now, do I think that the step-up in basis will be eliminated? Not necessarily, but my crystal ball is always a little foggy with these things. At the end of the day, that step-up in basis is something that’s been on the chopping block for a decade. It never gets eliminated because, quite frankly, it’s an administrative ease, in the sense that there are a lot of assets out there where determining basis is next to impossible.

Unfortunately, if you can’t determine a basis, the IRS assumes zero, which is never a good thing. So, step-up in basis creates certainty. We know what the date-of-death value is, or at least we can determine it much easier than an asset that was bought in 1950.

For both of those, if I was hedging my bets, estate tax probably has the higher likelihood of being reduced, and planning ahead for that will be critical as a result, if that does occur.

Laura Combs: So, Don, Jeremiah, to close out our Q&A time, I’ll ask another question, because this has popped up in the Q&A quite a bit by a number of listeners today, and that’s the timing of everything that we’re talking about.

Is this going to be retroactive? Is this going to be happening in 2022? Don, on the tax side, or Jeremiah, on the estate side, what should listeners be thinking about today? When should we expect those changes?

Don Calcagni: My personal view is, it’s really hard to determine what the details will look like. Congress is a giant sausage-making machine, so things obviously could change quite significantly.

What I would do, Laura, is do what you suggested a little bit ago and step back, zoom out, and just look at the direction of tax policy.

Let’s remind ourselves that our country is over $30 trillion in debt. That is unprecedented. We have to pay that back in some way, shape, or form, or we’re going to inflate it away through printing of dollars.

If we look at the federal budget right now for 2021, we are spending $2 for every $1 that we collect in tax policy. So, if we ever wanted to get back to a balanced budget based on the spending levels that we have today, tax rates actually need to double. And that’s not an opinion, that’s just simple math. Tax rates would have to double.

So, my personal view is, when we look at where we are demographically, there’s a lot of stress on the health care system. We want to invest in infrastructure, we want to invest in education. The list goes on and on. That’s either going to come in the form of increased debt or new taxes. In truth, it’ll probably be a combination of the two.

So, back to my earlier comment, I would not play chicken with tax policy at this point. Now’s the time to do the planning that you need to do.

Laura Combs: Thank you. Jeremiah, estate tax, what are you thinking?

Jeremiah Barlow: I would say all signs thus far point to the estate tax changing, if it does, in 2022, but I will say, (got to love Congress), there are two mirror bills, one in the Senate, one in the House. The one in the House says retroactive to January 1st this year, one says effective 2022.

I do think it’s probably more likely that it does trigger next year, but there are a lot of great options from a strategy perspective where you can give today and un-trigger it a lot easier than triggering capital gains and such, which is a little harder.

Laura Combs: Great. Thank you both for your time and your insights on both tax changes, market, estate plan, updates. I think this has been really impactful for listeners. I would just remind people, if you do feel like there’s something you need to do, reach out to your wealth advisor, reach out to our team, we’d be happy to talk with you.

I’m going to ask Josh to share some important information with you all. So, Josh, I’ll hand things back over to you.

Josh DeForest: Thanks, Laura. I think that was an amazing discussion, hopefully very insightful for people who are listening today. Of course, we couldn’t get to every single question, and so we will have an opportunity to follow up with you.

I just wanted to remind us of where we started. Going back to those questions that we began with at the very beginning of our conversation, hopefully you have been able to identify some of those areas that you can take control of.

Hopefully you also can see the role that a trusted advisor would play in your financial life. So really there are two groups of people who are probably listening today. If you’re not currently a Mercer Advisors client, we would love to have a conversation with you about how we might be able to help you in your situation.

If you submitted a question that didn’t get answered, we’d love to dialogue with you about that, and our colleague Andrew Thompson will be following up with an email. You can also give us a phone call with the number that’s on the screen here: 720.617.6717. We want to have a conversation with you, we want to discuss these things and share maybe a little bit more specific information for your exact situation.

If you are a Mercer Advisors client, we want to hear from you, too. We want to have a conversation with you. We encourage you to reach out to your wealth manager, have a discussion, understand how these things can affect you, knowing that you’ll get that advice that’s tailored specifically to your situation. So please reach out, have a conversation, schedule a meeting with your advisor. We want to hear from you.

Also, I do want to put a plug. In late Summer, we are going to have another estate planning strategy conversation with Jeremiah, so please stay tuned and watch your emails for that.

We just want to thank you again. We appreciate your time; we appreciate your all your questions and for listening. We hope that you will have a good afternoon, and we look forward to speaking with you soon. Take care.


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39.6% – 39.6% top tax rate
$400,000 – Expand SS tax to include income over $400,000
39.6% – New Capital Gains rate of 39.6% for income over $1 million
$3.5 MM – Reduce Estate Tax Exemption to $3.5 million
Gains – Eliminate the Step-up in Basis / Create Deemed Gains on Transfers

Source: 99.5% Act; STEP Act; American Families Plan -©2021 Mercer Global Advisors Inc. All rights reserved.

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Source: FactSet, Compustat, Federal Reserve, Standard & Poor’s, J.P. Morgan Asset Management.
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Investment News 40 Under 40 2021, Nominees for our eighth annual 40 Under 40 project should exhibit qualities of leadership within the financial advice field, such as the drive to succeed, along with prospects for a bright future. He or she must be under the age of 40 on June 7, 2021. Nominees will be considered by Investment News editors based on key points: Accomplishments, Contribution, Leadership: Promise.

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Investment News 40 Under 40 2021
Nominees for our eighth annual 40 Under 40 project should exhibit qualities of leadership within the financial advice field, such as the drive to succeed, along with prospects for a bright future. He or she must be under the age of 40 on June 7, 2021, which is the date our 40 Under 40 honorees will be announced in the print issue of InvestmentNews and online. Nominees will be considered by InvestmentNews editors based on the following key points:

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A panel of independent judges determined the 2019 Industry Award winners. Criteria included demonstrable impact on their firm, the industry, and wealth management in general. The Thrive Awards recognizes advisors who are on the way up—those who have proven themselves skilled and ambitious by virtue of three solid years of revenue growth. To qualify for the 2019 Thrive list of fastest-growing advisors, applicants had to be based in the U.S., offer financial services to individual clients, and be free of regulatory actions. Applications were accepted from individuals, teams and companies of all types and sizes—including solo advisors, ensembles, practices, family offices, RIAs and IBD reps.

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