2020 Election Preview: Family Offices

With the election approaching, RSM is looking at the economic stakes and the key issues for various industries and sectors. This is one in our series of election previews.

Other family office issues:

Both candidates have been quiet on the future of estate and gift taxes. However, in considering a Biden presidency, relevant proposals under the Obama administration offer clues as to what Biden might be thinking.

Three items from President Obama’s proposed budget plans in the mid-2010s are worth noting:

1. Grantor retained annuity trusts (GRATs) would be required to have a minimum trust term of 10 years and require gift tax to be paid at the time the trust is created.
2. Dynasty trusts would be subject to tax after the trust has been extant for 90 years.
3. Grantor trusts would be subject to gift tax for any distributions made out of the trust; any value in the trust would be included in the estate upon the grantor’s death.

Moreover, family offices come in all shapes and sizes, so not everyone follows the same playbook. In a post-Lender Management world, family offices have looked toward a C corporation structure due to deductibility of expenses, a lower tax rate than a flow-through entity and other eligible tax benefits. The Biden proposals have called for higher taxes for C corporations but still considerably less than flow-through tax rates, and that might push more families to think about restructuring their organization. Family offices that hold profits interest will need to reevaluate their current structure sooner rather than later due to the possibility of higher long-term capital gain tax policies.

The Trump administration’s effect on the industry:

The administration over the last 3½ years has loosened regulations, reformed the tax code and opened opportunities for investment. The policies put forth by this administration have resulted in stronger corporate profits, which pushed the equity markets to all-time highs before the pandemic.

Specifically, family offices are now officially defined under the accredited investor rules, per the SEC: That provides them regulatory cover when they invest.

Also, the increase in the exclusion amount for estate and gift tax was the largest in the last two decades, which has fueled wealth transfer activities.

By the numbers: $30 trillion

Millennials are set to inherit about $30 trillion from their parents in the coming decades, according to Bloomberg. And that estimate is on the low end; others range up to $68 trillion. The stakes in this election are significant as family offices look for ways to transfer wealth between generations while being mindful of current estate and gift policies. Given what we know three weeks before the election, a change in administration could result in a decrease in the amount of wealth a family office can transfer to the next generation.

In preparation for the outcome, family offices and the families they serve should consider:

The following five action items:

1. Perform a comprehensive review of all estate and gift plans overseen by the family office.
2. Determine how much lifetime estate and gift exclusion members of the family have utilized and whether the exclusions should be utilized this year.
3. Ask whether family members are maximizing the annual gifting exclusions.
4. Review their investment portfolio to determine if a GRAT strategy makes sense.
5. Educate the next generation about wealth preservation and responsibility, as a number of wealth advisors have indicated the next generation has some anxiety regarding acquiring such great wealth.