Stacey Delich-Gould:

Good morning or good afternoon, everyone, depending on where you're located, and thank you so much for joining us. My name is Stacey Delich-Gould. I'm part of the team here at Capital Group. And today, I have the pleasure of moderating a panel we have brought together from across Capital to discuss the tax law changes that are expected to take place sometime around the end of next year. Now, it may seem like a lifetime ago to many of us, but back in 2017, then-President Trump signed the Tax Cuts and Jobs Act, or TCJA, into law. The TCJA made significant changes to many provisions of the tax code that affect many of us who are on this call today. For example, the TCJA lowered individual income tax rates across most brackets and nearly doubled the standard deduction while eliminating personal exemptions.

 The TCJA also capped the deduction for state and local taxes, commonly referred to as the SALT deduction, at $10,000. It increased the AMT exemption amounts, which reduced the number of taxpayers that are subject to AMT. Finally, it doubled the estate and gift tax exemption amount, allowing individuals to pass up to $10 million each, indexed for inflation, to family members and loved ones without attracting estate and gift tax. When you factor in that inflation adjustment, this means that married couples can pass just over $27 million to their loved ones' estate and gift tax-free. Now, in some ways, this sounds like it was too good to last. And in fact, that may very well be case. The Tax Cuts and Jobs Act is scheduled to sunset on January 1st, 2026. And if that happens, most of its provisions, including the ones I just described, will revert to what was in place before the law was passed.

But as we all know, we have a big election coming up next month. We also have a legislative body in Congress that, shall we say, is not particularly nimble or timely when it comes to dealing with these types of things. So will this sunset actually happen? What will come to pass over the next 12 to 18 months? And how are we, all of us on this call, supposed to plan in the face of what feels like uncertainty? Don't fear, because as I mentioned when we opened, to help navigate this change we brought together a panel. Kellin Clark is Capital Group's vice president of global government and regulatory affairs based in our DC office, and Kellin spends most of his days in rooms and in conversations with legislators and their staffs getting a feel for the pulse of what's happening on Capitol Hill and in DC in general.

He's going to give us an insider scoop on the situation. We're also joined by Anne Gifford Ewing and Jeffay Chang, senior trust and estate specialists with PCS, who, combined, have over 50 years of experience advising high-net-worth individuals with respect to tax law changes and financial and estate planning opportunities. But Kellin, let's start with you. What's the tenor in DC right now? Can you help us understand, and the answer might be no, how might this situation play out over the next 18 months? What's going on?

Kellin Clark:

Well, thanks Stacey. It's great to be here with everybody. I'm going to focus the majority of my comments on the tax side and walk through it. But I do want to spend 60 seconds sort of upfront talking about the election because, as Stacey mentioned, it's an important frame of reference for this entire discussion. In some ways, I think it's fair to say here in DC this has been the longest year ever in politics. It feels like it's taken forever. And then in some ways it's flown by. This is not a normal election year. We've seen everything you could possibly imagine. I think no one started this year here in DC. No member of Congress has started this year, no senator. No House member thought this year was going to look like it is. I think, obviously, the unimaginable has happened.

We've had assassination attempts, as in plural, candidate changes, you've got polling all over the place. You've just seen so many things that no one could have possibly predicted, and there's probably inevitably going to be an October surprise, which always happens. But it's an intense time in DC, one that largely reflects an electorate that feels the same way. And I think voters are paying clear attention to taxes, to economic status, to immigration. I think three months ago Republicans walked out of their convention feeling united, impenetrable. Democrats looked anemic, old, disillusioned with their own party. And overnight that just changed. What does this mean for Capital Group? What does it mean for other financial institutions? Why do we spend so much time playing all of this out? Which I think a lot of folks get frustrated and turn it off. It's my job to live through that and play through this.

But it matters because it helps us determine the legislative, the regulatory landscape. It shows us as a firm and others and our clients what we expect the government to prioritize in terms of policy, which affect obviously investment decisions, tax decisions, and most importantly, as Stacey mentioned, the tax outcome, which matters to so many of you and so many of our other clients. I think we feel very confident that, no matter what happens, it's not going to look the same as it does right now in DC. But no matter what happens, it's still going to be really messy. November's not going to come and go here in a month and we're suddenly going to be healed as a nation, as a Congress, as an administration. This nation is big, it's boisterous, it's divided. Divisions exist among religious beliefs, family values, economic status, tax status. These things all play into the role in how politicians are going to tackle big issues like tax reform.

Now, in Washington, I think when things get accomplished, they usually fall into one of three buckets. They fall into the have to be dealt with because it would be so catastrophic bucket, it gets done because it's bipartisan and everyone feels the same tune about it. I'll throw maybe AI and China into that bucket right now. And then there's the partisan bucket, which we've seen so many things in the last, we'll call it 10 years, have to slip by at the last minute based on highly partisan votes in both chambers, in both parties. And that's the has enough votes to get done, but barely category. So when we think about taxes next year, we put this into the has to be dealt with category, but still kind of lives in the unknown of whether or not this is going to be a partisan exercise or not.

The outcome of taxes is going to be highly dependent on whether or not Democrats control everything, Republicans control everything, or most likely, probably, is a divided government. And when we think about these scenarios, you've got a long-term extension possibility, which happens most likely under GOP reconciliation, which allows the bill to be passed in the Senate with 50 votes. Or it comes together sort of in a divided government scenario, which makes it a bipartisan. Maybe a more likely scenario, though, and that's something I know Stacey and Anne and Jeffay will talk about more, is a short-term extension. It's going to be far cheaper and easier to cut a deal in a divided government, in a bipartisan scenario, under a short-term scenario. There's so much cost. There's so much long-term anxiety, there's so much partisanship that when the rubber meets the road, that may be the easiest outcome of all this. We've seen this before under President Obama with some of the Bush tax cuts for a period of time. So it's not like we haven't seen that playbook here in DC before.

And you've got option three, which is sort of a two-pronged option, which is a full extension or a full expiration. A full extension now we know costs anywhere between four and $6 trillion. Thus, we don't view a full extension as a likely outcome in our view. But high level, we know here in DC, as we talk to both parties, that neither party really wants this bill to fully expire. They want changes, they want tweaks in aspects, but nobody wants to see this go away entirely. Nobody wants to be pegged for taxes being raised on every individual in this country. That is not a politically-winning argument we know, historically, and it's not one we expect to happen. We also expect both parties' outcomes to increase the deficit to some degree, to some point. We're going to be talking, Stacey mentioned a couple of things. Things ranging from the estate tax to Medicare investment taxes to individual income levels, SALT, private foundation, donor-advised funds. All of these things are going to be on the table as we walk into this discussion in the coming year in 2025.

There's a couple possible outcomes. I mentioned you've got Democratic control. High level, that looks like extending tax cuts for those under 400,000. That's a number we've heard Democrats talk about for a decade now while allowing others to expire. Expanding credits for kids in low-income families is going to be a huge priority. Raising SALT minimally, minimally, and I know we're going to talk a lot more about that, so I won't get too far into that, with an effort to raise taxes on corporations' cap gains and high-income earners to sell that message to their base. Republican control looks like extending as many of the 2017 cuts as possible, and then likely paying for it by eliminating clean energy climate-related provisions that have come out of Build Back Better, which ultimately turned into the Inflation Reduction Act, or the Bipartisan Infrastructure Package, which did pass on a bipartisan, bicameral basis with the potential for some credits for here and there on the kids side.

Divided government, you've got two options. You've got a Trump divided government where he's president extending many of the cuts as possible with concessions to Democrats, likely probably on the child side. Harris looks like exchanging certain business credits for other democratic priorities such as, again, child tax credits or housing tax credits, which they've made a huge priority, and letting some of the tax breaks expire for the wealthiest Americans. We also know as we talk to folks, both candidates, both parties are going to be looking for revenue to help offset the deficit that wherever, how long, how big this looks like. In the investment-retirement space, this is something we spend a lot of time on here in DC. We're looking out for proposals that would be considered to generate revenue, such as increasing taxes on cap gains, dividends, financial transactions taxes, estate and trust modifications, potential changes to accounting rules, and anything that would upend what we know as the private retirement system, known as Rothification, across the board.

At this time, really I think we view anything that raises revenue is going to be at least on the table for a minute. And as it relates to the corporate rate, I know that's a question a lot of folks have, each percentage point, that's $150 billion. That's enough to sort of offset things here. So we view it there's going to be trade-offs. We know this. The other thing that I think is really important to remember as you're thinking through this with your conversations is that presidential candidates matter in their discussions, but neither candidate's going to have an outsized impact on the legislative text. Congress is the one who's going to write this bill. They're going to be in the room with the administration, but Congress is the one who gets the say in this. And there's going to be a narrowly-divided majority, either with full control or divided government, but it's going to be very small.

Compromise is going to be required. Even if there's full Democratic or full Republican control, as we've seen already in the last few years, parties are not on the same page. So there's going to be need to be compromise within themselves too. And neither candidate, either Trump or Harris, we would expect to veto a bill that makes its way through Congress. We think, at the end of the day, if you can get something through Congress, either president is going to sign that law. Nobody's going to want to be seen as pushing that away or sending that back. We think it's going to be a long ways through next year. Tax reform is going to be messy. Legislative maneuvering, which is, we mentioned reconciliation, questions about the filibuster, those are all going to be on the table. And it's going to be challenging and it's going to take time.

There's a question too of SALT, which is going to be top-of-mind for Democrats, garners a lot of questions from Republicans in California and New York. That'll be a question on the table. And keep in mind too, as we move into next year, it's going to be the first thing on everyone's mind. But as we talk to members and as we walk through things here in DC, we're going to have to raise the debt ceiling first in the first quarter of 2025. That's, at this point, still going to take 60 votes in the Senate. So that's going to dominate the first few months of Congress. There's going to be so much jockeying and trading that goes on for that. And depending on how the government gets funded here, we just funded it through December, we're going to have to have another question in December 20th of how long we're going to extend that.

That may fall into that first quarter of 2025, so we may have to do the debt ceiling and we may have to do government funding. So taxes could fall all the way to mid-2025 before we really have any sort of clarity on what that looks like. I should also note for now in process terms, Republicans have started a road show. They're asking for submissions. They're out on the road. Their submissions are due in October to their committees. Democrats are more leaving it to their committee chairs. We've talked to a lot of members of Congress, a lot of Democrats. They're waiting to see how the election turns out before they share their stance.

We expect to see a lot more bills as the end of this year falls forward, and we expect to see a lot of bills and proposals put forward in the first few months of 2025 in the new Congress. It's just people laying out their thoughts and ideas and dreams and hopes, but it doesn't necessarily mean that's where we're headed. So don't get too panicked when you see so-and-so introduced this bill. There's going to be a lot of them. One other quick point before I stop talking here too is there's going to be a lot of questions.

Before I stop talking here too is ... There's going to be a lot of questions and a lot of comments about the national debt as we move into this next six to eight months. I'm going to put this in the category of a lot of talk and not a lot of walk. I don't think anyone should expect tax reform to address the fiscal debt and deficit. More than 2/3 of the federal government's revenue in annual ... Or spending, excuse me, is spent on Social Security, and Medicare, and VA benefits. There's not a ton of movement in this space.

Given global entanglements to that we're either directly or not involved in we don't expect a lot of people here to press for significant cuts on the defense side so Democrats are going to be playing a game of creating parity. But we do not view tax reform as a end-all-be-all to solving the national debt and deficit. It is not a day-to-day problem for constituents. And until it becomes one it's really nothing more than a talking point for elections and politicians. It's not going to be used as the end-all be-all to the national debt and deficit. With that, I will give it back to Stacey.

Stacey Delich-Gould:

Okay. Well, I'm really glad we let Kellen go first because he has laid out a lot for us to unpack there. Turning Ann and Jeffay now to you guys to help with that unpacking. Help us navigate the technicalities of some of the points that Kellen just raised. What is actually at stake here, for those of us on this call? What exactly could change that could affect clients in PCS? Ann, I'll go to you first.

Anne Gifford Ewing:

Thank you. I'm happy to start. I'm going to start with one of the points that both you and Kellen mentioned in your opening comments and that is the lifetime exemption amount. Just to review for our listeners, that refers to the dollar amount that each individual may give away. And this does not include gifts to charity or to your spouse, those are both exempt, but to anyone else, children, grandchildren, other loved ones. The total dollar amount that each individual may give away before they start paying gift tax or estate tax on any amounts they're giving away over that exempt amount. And to remind our listeners, it's gift tax if the gift is made while the donor is alive, and it's estate tax if the gift is made after the donor's death as a function of their estate plan. And the tax law regards this amount sometimes called the lifetime exemption amount, sometimes called the unified credit amount because it's unifying those lifetime and post-death gifts into one total dollar amount.

The current dollar amount in 2024 that each individual may give away is 13.61 million. So if you double that for a married couple that's where we get to the number you mentioned earlier Stacey of 27 million plus for a married couple. That is an all-time historic high of what Americans may give away before paying transfer tax, gift, or estate tax. The way we get to that number is ... Tax Cuts and Jobs Act doubled the underlying base exemption amount from what it had been at five million, doubled it overnight to 10 million, and then said we're going to adjust it up from 10 million for inflation, every year we'll adjust it. So that's how we get to that 13.61 million number this year. It's scheduled to go up with inflation which we've been having, you may know.

It's scheduled to go up next year, 2025, to around 14 million per person. And then in the absence of any new legislation being passed, as Kellen was just walking us through, we think that the default thing that would happen, if there's a sunset of tax cuts and jobs with no new legislation to take its place, is that in 2026 we would fall back to the prior regime of the $5 million base amount, adjusted for inflation, bringing us to somewhere around seven, maybe 7.5 Million per person starting in 2026.

Stacey Delich-Gould:

Okay. Jeffay?

Jeffay Chang:

Yes.

Stacey Delich-Gould:

You guys are in the trenches every day, you're working with our clients, we've ... Most of them have done great planning. How might all of this have a ... Affect clients who've done some planning, and partially use their exemption? Can you talk us through that and how those folks are thinking through the issues?

Jeffay Chang:

Absolutely. Thanks, Stacy. So yes, many of our clients have already done planning. One of the challenges that we have seen is that the client says, "Well, we've done some planning. We set up a trust years ago, we don't have to really focus on the estate tax or a gift tax exemption." What we are saying to clients is that this is a use-it-or-lose-it moment. There's a potential chance that the exemption will go away, or at least be dramatically reduced. And so if you ignore the fact that hey, $13.61 million is an all-time high ... I would say most of our clients have not used their entire exemption they've used part of it. So this is a real opportunity for clients to true up some of those gifts that they've already done.

So if they had set up a trust back in, let's say, 2012 ... We probably all remember back then. 2012 was when we were all scrambling because the exemption was going to go away. We thought the $5 million exemption was going to be dramatically reduced and so everyone set up these dynasty trusts. Well, if they didn't do anything since 2012 they have a lot of exemption left over. And so for those clients it's an opportunity to really look at their gifting and see if it makes sense to give additional assets away and take full advantage of what the current exemption is. And so it's a use it or lose it type of moment for the next two years.

Stacey Delich-Gould:

Excellent. Okay. I actually want to go back to something Kellen that you said earlier. You alluded to, basically, in some ways we've seen this movie before, we've seen this play out before. Some people may have it in their heads that it's very black and white, we're going to have sunset or no sunset. But in reality we might have something that is in the middle. Many folks on this call may remember back in 2001 the second President Bush signed into law a round of tax cuts that ... It was a similar package to the TCJA in some ways. And that package was scheduled to sunset on January 1, 2010, at which point the estate tax was going to be repealed. Instead of the estate tax we were going to have a system where the assets of someone who died were going to take carryover basis with them instead of a step-up.

No one thought this was ever going to happen. All anyone said was "Congress will fix this before it happens. They're never going to repeal the estate tax." Lo and behold we got to January 1, 2010 and the estate tax was repealed. And it stayed that way until December of that year at which point Congress passed the Tax Relief Act of 2010. And we got the $5 million index exemption and the flat 35% estate and gift tax rate which was actually the law that was in place before TCJA was passed.

Now you may be thinking to yourself, that's a really long time from January until December. What happened in the interim? Didn't people die while they were waiting for Congress to act? And in fact, they did die. One example, a very famous, very wealthy person died. George Steinbrenner, the owner of the New York Yankees, passed away in July of 2010. So what did estates like Steinbrenner's do? They were given a choice. You can opt into the new regime, you can pay a state tax and get a step-up in basis, or you can stay under the old regime and take a carryover basis. This led to estate planners like us doing tons of calculations. Is it better to pay a capital gains tax? Is it better to pay estate tax? Fun fact, the Steinbrenner estate actually elected to take carryover basis which means that George's heirs now have the same basis in the New York Yankees as George had. He bought the team in 1973 for $10 million. So I'm curious one day to see that capital gains tax bill.

My point in all of this is that no one thought this would happen, no one prepared for this, and then lo and behold it did. Do we think this could happen again? Kellen, you mentioned it before. How likely do you think we are to have a repeat of what happened in 2010?

Kellin Clark:

Yeah. I think sometimes people, I say this in the nicest way, overestimate the thoughtful process that is Congress which is not that thoughtful sometimes. You have to remember, on such a tension issue like taxes, which is highly bipartisan in some instances and highly not bipartisan in some instances depending on sort of how you view the world ... I think anything is possible really. We are looking at the possibility and the commentary around the possibility of Republicans raising the corporate tax rate. I can't believe that's a comment that we're actually talking about. When you sort of go into political science 101 that is not something that you have a discussion about. I think the reality is we should go into next year with the belief that anything is possible, frankly. A long-term extension that is bipartisan is possible. I think a short-term extension that is highly partisan is possible. I think reverting back on some of these things is possible.

When you go into a situation like tax reform, at some point ... I like to use the Hamilton reference, "Somebody's going to be in the room where it happens." And when that happens it's usually at the end. And one of the key things that's going to be happening in the room, when it happens, is a question about costs as the overall package costs and the number of revenue that is raised by tweaking or changing things. And that's all to get back to my first point which is, when you get to that point, when you get to the room where it happens and you are negotiating over the cost or the tweaks here and there, what changes, how much you get out of that, or how much you don't get out of that, those discussions, they start to happen really quickly, and really rapidly, and they're not always the most thoughtful. And they're not full of rooms with thoughtful analysts and things like that they're just rooms where it happens where people need to make decisions quickly. That's the sort of long answer of saying, I think anything's possible really at this point.

I do think the intended plan is to go into this and make some long-term thing but who knows what happens in that room at the end of the day, and who's in that room, and how willing they are to compromise or not compromise. It's certainly, I think, very possible. I think it's probably unlikely. But it's also possible that, as you mentioned, we get past 2025, we get past that December 31, 2025 date and we're still not there and we're going to have to make some things retroactive potentially. And I think that's a possible scenario. Probably less likely but certainly possible.

Stacey Delich-Gould:

Kellen, would you put it at greater than 50/ 50 that happens?

Kellin Clark:

I don't think I would probably put it greater than 50/50 but I'm not sure I wouldn't put it at 60/40.

Stacey Delich-Gould:

Wow. Okay. Ann, Jeffay, we all lived through 2010. Do you have any reactions to that or thoughts?

Anne Gifford Ewing:

Well, I can start off. Our clients know we've really been beating the drum for the last year or more than year about please ... Let's think about this together early and have a game plan even if we don't wind up pulling the trigger. It can be too late to put together a game plan for gifting and get it done if you're starting sort of last minute under pressure. I'll maybe address the SALT issue a little bit that was raised, Stacey. And this is one of the very common questions that we get from clients. In addition to the lifetime exemption amount, are the SALT caps going to change? And as a quick review for our listeners of where we're at with this, prior to tax cuts and jobs being passed into law you could deduct essentially an unlimited amount of the state and local income taxes that you paid, and that included property tax. So for those taxpayers, particularly in coastal states who pay a lot of property tax and/or high state income tax, this was a big part of the determination of the tax that they owed.

The Tax Cuts and Jobs Act capped the amount that you could deduct of the SALT that you paid at $10,000. Which for high taxpayers was a really significant change. And if we have a straight sunset of tax cuts and jobs, that cap on SALT deductions is just going to go away and we would go back to what we had previously where those high taxpayers could deduct quite a lot more than they can today. So that might be very appealing on an individual level to those high taxpayers but it also represents a potential big decrease in tax revenue. As we heard from Kellen, it's going to be a big topic.

Stacey Delich-Gould:

Okay. So let's go right to the revenue question. Now, for the folks in the audience, you have four panelists here, all of whom live in very high tax states: Maryland, New York, and California. We get very excited when we talk about the SALT deduction. But Kellen, can you sort of be real with us? And we got a lot of Californians, New Yorkers, Marylanders on this call as well. Is there any chance that we are getting our SALT deduction unlimited back?

Kellin Clark:

No. That's the short answer. I'll give you a more thoughtful answer though. I put this into the category of how well is tax reform going overall.

How well is tax reform going overall in terms of the bipartisan, bicameral nature of the whole packet? SALT is one of those interesting things because you have so many different various angles coming at this. You have a number of, we'll call them very liberal members of Congress, who think it is just a sort of giveaway to the wealthier Americans, some of which actually even come and live and represent people in those states. You've got a couple of New York Democrats who think it is just a giveaway to those who are more well-off. Then you have a number of, we'll call them center-of-the-country Republicans, who think it's just to giveaway to more liberal states and see no reason to support their grandiose endeavors.

But then, you've got Harris and Trump sort of both suggesting that there might be some compromise here. And so, again, this is at some point, I think the SALT's a big question because this is one of those big-ticket dollar items. This is a big-revenue item. We talk a lot about revenue or spending, but a full extension of... or we'll call it a full expiration of the current law, which would allow for unlimited SALT deductions, would cost over a trillion dollars.

Now, I know there's a perception in Washington that we spend money like it's Monopoly money, which may be the case, and both parties have sort of shown that in the last couple decades. But the number T, that gets people's attention here in Washington. The trillion dollar number is actually a number that gets people's attention. And so, when you talk about a full repeal of the current policy, it would be about $1.2, $1.3 trillion depending on the estimates. But I think the last Wharton estimate I saw was over a trillion. That's a big number. That's an unpalatable number. But if you talk about maybe doubling it from 10,000 to 20,000, you're looking at about 150 billion. So, maybe there's some room for a little bit of compromise here, but I think it's our view at that trillion plus number, it's just not that palatable.

Stacey Delich-Gould:

Wow, a trillion. That is a significant chunk of change. You're right, it does get people's attention. Well, thank you for bursting all of our bubbles, Kellen, but we do appreciate you putting it on the line and taking a position. Jeffay, another topic that could get affected next year that could affect a lot of people on this call is AMT. Can you talk to us a little bit about the alternative minimum tax and how this could play out and how it could affect us?

Jeffay Chang:

Yes. Thanks, Stacey. So, I get to talk about alternative minimum tax is the dreaded word that we all hated back before the Tax Cuts and Jobs Act. I think a lot of people recognize or remember when AMT was a major issue for a lot of taxpayers. I think before the Tax Cuts and Jobs Act, I think the number was over 7 million taxpayers were subject to AMT. AMT, as a reminder, is a separate tax regime that the IRS concocted to basically eliminate some of these deductions that we've been talking about, eliminating the benefit of some of these deductions like real estate taxes and so forth. And what it did was basically it forced taxpayers to calculate a separate tax calculation to determine your taxable income, taking away some of these deductions, and then multiplying it against a lower tax rate, anywhere from 26% to 28%.

If your tax liability was greater than your regular tax liability calculated under the ordinary income tax regime, you would pay the higher of the two. So, that was alternative minimum tax. The Tax Cuts and Jobs Act essentially eliminated AMT as an issue for most taxpayers. In fact, I think the latest calculation was there's no more than 300,000 or 400,000 taxpayers subject to AMT. And the way they did that was they increased the exemption amount for AMT tax. So, basically, the amount that you can deduct was increased significantly from before. They also increased the income needed to basically phase out that exemption amount. So, the income that you need to earn was much higher now in order to phase that out.

So, AMT has been dramatically reduced as an issue for taxpayers. If they do nothing and it goes back to the old rule, then yes, I can see a big number of clients becoming impacted by AMT all over again. Although, if they don't renew SALT, who knows? Maybe it might not be as big as we think. But right now I think the numbers are suggesting that if AMT comes back with a lower exemption and the lower phase-out amounts, it could be, again, 6, 7 million people subject to AMT. So, be prepared. Get ready.

Stacey Delich-Gould:

Oh, boy. Okay, so we've established we're not going to get our SALT deduction back, we might have to deal with AMT again, and we're going to have to try and plan in the unknown for people. What are we telling clients? What are clients doing and what are some strategies that could be implemented in light of this uncertainty? Anne, do you want to go first?

Anne Gifford Ewing:

Sure. And Stacey, we're trying to think about this question in three buckets. What are we seeing clients and what are we talking about with clients doing now, in the near term and in the longer term? So, maybe I'll talk about now first. We help clients understand which of two buckets do they fall in? And thinking back about should I be rushing to gift while the estate and gift exemption amounts are high? If we're kind of focused on that question, clients tend to fall into one of two buckets. Either those who can clearly afford to make some gifts in the next year, let's call it either maxing out their exemption amount or at least making a significant gift, or those who frankly are not quite there. It's great to have a higher exemption amount, but if you don't have the wealth or the surplus assets for a big gift to make sense for you, it doesn't really matter. You're not going to go give away $13 million tomorrow.

So, on a very broad basis, helping clients understand where on that spectrum do they fall, again, sometimes it's obvious at a glance, sometimes it's not. And we do some modeling to help everyone understand where they are. Part of that modeling that we do for all of our clients, and I would encourage all of our listeners to think about their planning and their assets in this way, is what we like to call the wealth pyramid. It basically divides a client's assets into three categories that we call base, core, and legacy.

Base simply, will encourage a client to keep... First of all, understand what is their annual spend to support their lifestyle, really digging into all of their expenses to get to that number. And then, in that base portfolio hold roughly two years, it varies by client, could be one, could be three years, but let's call it roughly two years of liquid assets in cash or short-term instruments for those annual living expenses, so that the client has the liquidity there to pay their bills if the market takes a turn, and then they're not feeling pressure to sell securities, to raise cash to pay their living expenses in a falling market. Just compounding that problem. We find it really helps people commit to a long-term investment strategy and stick to it.

The second category of assets that we encourage our clients to think about is what we call the core. And using, again, that annual spending number, figuring out what does it take to endow, let's call it 30 years, but different people have different life expectancies, but in a very conservative way, assuming you're going to live to be 105 and spend at the top of your annual spending range, what does it take to endow and invest to make sure that you have those lifestyle expenses met, adjusted for inflation?

And essentially, the third bucket of assets is, do you have anything left over after you've funded those first two buckets? And if you do, guess what? You can afford to gift. And we call that your surplus or your legacy bucket. And it's from that third surplus legacy bucket that we encourage clients to think about drawing from to make charitable gifts to today's conversation, to use exemption, to make gifts to loved ones or other things they might be interested in doing, speculative investments, et cetera. But that's sort of how we encourage clients to think about it. And only after we've done that analysis would we encourage them to then, "Let's engage with your lawyer, your other advisors, and really think about what kind of gifting might you want to be doing."

Stacey Delich-Gould:

Before we jump to Jeffay, we've been getting a lot of messages, a lot of clients have been emailing their private wealth advisors. We know there are some buffering and connectivity issues. We just want to assure everyone that our IT team is working on it. And we are recording this session and we will be circulating the recorded version to everyone who's logged on. So, apologies for the continued IT issues. Jeffay, over to you. Planning and uncertainty.

Jeffay Chang:

Yes. Thanks, Stacey. So, building on what Anne said about really what clients are doing now or should be doing now, one of the things that we have been seeing is that when we have these conversations with clients about understanding their base, core and legacy assets, one of the key things that they actually should revisit is their core planning. I can't tell you how many times we've had conversation with clients and they said, "Oh, yes. I have an estate plan." "Great. When is the last time you looked at the estate plan?" "Oh, maybe 10 years ago, maybe even 12 years ago." And so, from a financial as well as a family perspective, their situation has changed dramatically. And so the core estate plan needs to be looked at before you can do any type of sophisticated gifting in anticipation of changes.

And so, we focus very, very closely on their core estate plan, making sure that the structure is correct, making sure that all the beneficiaries are accounted for. I can't tell you how many times beneficiaries are forgotten in an old estate plan, making sure that the trustees are the right trustees. Maybe there's an opportunity to make changes in the trustees because people have changed, people have moved, people have died. That's really important.

Ownership, titling. I can't tell you how many times I've seen a very, very sophisticated estate plan, but the simple titling of assets make that estate plan move. You have everything owned jointly, but yet nothing goes through the will or the revocable trust. So, again, what should clients be thinking about right now is preparation, making sure that your foundation, your core estate plan is set up the way you want it to be set up in order to anticipate future gifting or future lifetime gifting strategies. And so, that's what we're asking clients to focus on now, and we're really engaging with them closely on.

Anne Gifford Ewing:

Agreed-

Jeffay Chang:

Back to you, Stacey. Or back to you, Anne.

Anne Gifford Ewing:

Sure. I was just going to say totally agree. And if we shift to the second category of if that's the now, what about the near-term? What about the next year, year and a half, as we're all thinking about what changes may come, what are we seeing clients do to prepare? So, obviously, a lot of clients are indeed making gifts. One of the common questions that comes up is, "Well, I don't know that I want to give away a full 13.61 million right now tomorrow. I kind of want to think about it. I want to see what happens with the election," et cetera. "What if I don't use my full exemption? What happens? How do I think about that?"

So, couple quick points to throw out for clients to consider, listeners to consider. Number one, as has been mentioned earlier, the lifetime exemption is a sort of use it or lose it. So, if you imagine someone who's made no gifts and in 2024 they have their full 13.61 million of exemption available and they say, "You know what? I think I'm going to give away 7 million right now to my kids. That's the number I feel comfortable parting with." Great, they can do that. In this year, they've used 7 million of their 13.61. What happens if in 2026 the exemption amount falls to $7 million? Well, that person now has zero exemption left because they've already used seven. So, you're almost using it off the bottom first, if that makes sense. That doesn't mean you should rush to gift more than you can comfortably afford to gift, of course. But it's important to understand that.

Also, for married couples, there's a strategic decision to be made if they decide to gift a certain dollar amount. The traditional way to set up gifts for married couples is to do what's called gift splitting, where each spouse gives an equal one half of the gifted amount and each spouse is using the same amount of their personal exemption. That makes sense for a lot of reasons and for many clients it may still be the right way to go. But we are seeing some people choosing to load up all the gifting on one spouse first. The idea being, well, let's have one spouse use his or her full 13.61 million and have the other spouse use zero. And then, if the exemption goes down, if they each use seven, they'll each have zero left, but if we do it this way, one of them will have seven left.

There are other risks to doing it that way. If they divorce or someone dies at unexpected time, you could get an unexpected result, but it is a strategic decision that has to be considered for married couples who are planning gifts.

Jeffay Chang:

So as a building on Anne's point about making gifts, the other sort of hurdle for clients is the control aspect. Once you understand that you have the capacity to give, a lot of our clients still are reluctant to actually make the gift because of control, whether it's financial control or whether it's loss of access. Even though they know that they can give it away, a lot of times our clients are reluctant because they still might want to have access. And so there are a number of things that clients are considering or our clients are considering. And so we wanted to raise those sort of strategies to you. The first is the structuring. So oftentimes these gifts are put into structures like trusts. They're not given outright to children or grandchildren, but they're putting into trust structures. And one of the more common trust structures is called a spousal lead access trust.

That structure, the reason why it's so unique is because the spouse is actually a beneficiary. Now, the reason why it's so popular is because people view it as, "Well, I have indirect access to the funds because if I ever do need it, the spouse is a beneficiary and can potentially get access to those funds." Having said that, we don't encourage people to set up these slats if they think they need regular access to those funds. It's really designed to be sort of an emergency safety valve. And in fact in some states, slats are not as you routinely use because of community property issues and other things.

And so that's an example of a control structure that people are considering. Other things that they are considering is limited liability companies, setting structures around the assets so that you can retain some financial control. People are utilizing that to address control concerns. And so when you think about making a gift, there are a lot of different strategies out there to potentially retain a little bit of control in order to alleviate that sense of loss of control for clients. And so that's what some people are considering. So back to you, Anne.

Anne Gifford Ewing:

Yeah, in the interest of time, I'm going to be brief, but one other decision that confronts almost every client that's choosing to fund a trust with gifted assets is whether or not to make that trust what's called a grantor trust. With grantor trusts, which again, are optional for the most part, the grantor, so the person making the gift, chooses to remain personally responsible for paying the income tax associated with that trust even though they no longer own or control or benefit from the assets in that trust.

And this can be a very clever way of essentially continuing to gift to that trust every year by virtue of making tax payments on its behalf. It also gives that grantor the ability to substitute in and out of that trust assets of equal value at any point during their lifetime if they want to. And sometimes, that's a very useful tool to manage the basis of different assets. If some assets have appreciated more than others, might make sense to pull certain assets back into that donor's taxable estate to get a step-up in basis at their death.

So that's another very common discussion. I think maybe it's time to shift very briefly to a discussion of the long term. We talked about the now and the near term, and Jeffay, I think we can basically say we're keeping an eye on all the different proposals out there that Kellen touched on earlier that we'll see more of, as well as what's known as the green book. Did you want to touch on that briefly?

Jeffay Chang:

Yeah, so thanks, Anne. So the green book is basically the budget proposal that outlines all the wish lists that the current administration would like to focus on. And as Kellen mentioned, a lot of these tax reform issues are not, I mean, they're not done for revenue purposes, they're really just done for strategic purposes. And so whether they actually come into play or not is open for question. But some of the proposals in that green book surround the grantor trust strategy that you just mentioned, Anne. The grantor trust strategy, as a reminder, is a strategy where you set up a trust where the grantor or the creator is the one paying the income tax. Now, one of the proposals is they don't like that idea. They want the grantor to actually, when they pay that income tax, they want to make it potentially a gift event.

Right now, it's not a gift tax event. It is considered an obligation of the grantor. So that's one of the proposals that's in the green book. Another proposal that they're focusing on is focused on a trust called a grantor retained annuity trust. A GRAT. Many of you may have heard this term, it's a very popular strategy, essentially allows you to basically pass out future appreciation of an asset without paying any gift tax. And that's a quick summary of what the GRAT structure is.

What they're doing, at least in the proposal is potentially making sure that there is a gift tax component to that GRAT. You can't set up a GRAT without having some gift tax component. So a lot of things that they're focusing on when it comes to some of these strategies. But again, these are ideas, these are wish lists. They're in the green book. And so maybe Anne, I don't know if you want to highlight any others, but there's tons that we can probably highlight.

Anne Gifford Ewing:

Yeah, I think those are maybe some highlights. There's discussion about whether to change step-ups at death and a number of other things that think probably fall into the category that Kellen highlighted of these are hopes and dreams, may or may not ever come to pass, but if they did, they would be really significant changes. So we do keep our eyes on them. Stacey?

Stacey Delich-Gould:

Thank you Anne and Jeffay. Kellen, I was going to go to you. Can you tell us a little bit about our friends at the IRS? We've heard a lot about funding needs and increased funding and then there wasn't increased funding and maybe there will be increased audits of high net worth individuals. Any feel for what's going on over in that building on Constitution Avenue?

Kellin Clark:

That description is quintessential. Washington may, may not. Could, might. That's Washington. So you nailed that. Yeah, so I mean, I think a lot of folks may recall the IRS has, sort of this commentary has been the IRS has been chronically underfunded for years now, that it was a conversation when I started on Capitol Hill in 2010. In the Inflation Reduction Act, the president was able to secure $80 billion for the IRS. That was two years ago. Republicans have made the IRS funding a popular political talking point and have actually successfully sort of chipped away at that $80 billion. At first, it was just a minimal amount. They secured about $275 million in reduction to cutting annual funding for fiscal year 2023. And then we reached a debt limit deal last June, which was premised on a handshake agreement of pulling back $1.4 billion, but in the end, actually clawed back about $10 billion for 2024 and 2025.

And Republicans have since secured in this most recent government funding bill another $20 billion in fiscal, money that's been pulled back. So that has been an effort that they've been pulling back and back and back for a while now. And one we continue to see for the likely future here. It's a pay for, there's still 60-some billion dollars that was spent in the Inflation Reduction Act, and it's one that we expect will be up as a option to try to claw back some of that money to pay for other things. So certainly something that we're keeping an eye on and something that is likely still on the table for the near future.

Stacey Delich-Gould:

Okay, thanks. That was super helpful. Not necessarily encouraging, but super helpful to understand. Okay, so we have a little over four minutes left. For the audience, I didn't prepare them for this and so I'm sort of going off script here. We're going to do a lightning round of final questions for each of the three of you. I'm going to start with Anne, because you're first on my screen. If you had a crystal ball, where do you think we'll be in two years from now with respect to gift estate tax planning loss? Where do you think we are?

Anne Gifford Ewing:

I think that we're going to have a short-term weird year, a-la 2010, in 2026. That's my prediction. Whether it's weird because it's a sort of short-term extension of tax cuts and jobs or tax cuts and jobs is allowed to sunset while they continue to hash out what they're going to do. I'm a little torn. I'm going to go with the latter, that we have a temporary sunset while they continue to figure it out. I'll predict that.

Stacey Delich-Gould:

Okay, I'm writing this down. Jeffay, what do you think? Where are we in two years from now?

Jeffay Chang:

Wow. Well, I think after the dust settles, after they've done all their negotiation, I think they're going to go back to the old $5 million exemption index for inflation. That's my guess is that they're going to basically realize that they need all the money they can get, so why not go back to the old exemption and sock it to them?

Stacey Delich-Gould:

Do you agree? Anne and Jeffay, do you agree with Kellen? We never get our salt back?

Anne Gifford Ewing:

I'm going to defer to Kellen on this. It just seems a little too good to be true, but maybe we get that compromise. I could see that.

Jeffay Chang:

I've given up on that. Living in New York, I've given up on that.

Stacey Delich-Gould:

Okay. Kellen, you are the one on the ground in DC. In our final two minutes, where do you think we'll be in two years and how do you think this plays out? Just your best guess.

Kellin Clark:

I hate this question.

Stacey Delich-Gould:

I know.

Kellin Clark:

I actually think we're probably, on the estate tax and gift tax, I think we're probably pretty similar to where we are now. I think maybe a little reduced, maybe back down to 10 to try and peg it to inflation to help pay for a little bit. But when I look at the numbers, the estate tax cost is about a hundred and sixty-ish billion dollars. That's not nothing, but in Washington world, it's not that much. And I do think there is a very strong contingent of folks both on the left and the right who have been convinced particularly by farmers and ranchers. So if you know any farmers and ranchers or you happen to be a farmer or rancher, I would advise you to go lobby Congress because they have done a fantastic job of scaring members of Congress, of both sides of the aisle, that farmers and ranchers are going to be hit by the estate tax. And that has resonated with a lot of people on both sides of the aisle.

So I think at the end of the day when you're looking for numbers, you're either A, looking for numbers, or B, you're looking for a really solid political win. And I think yes, the estate tax starts to get you there, but there are other things that I think are more shiny, like we'll call it a billionaires tax or unrealized gains on people who are billionaires and things like that, that are maybe more easily sold as only affecting those very specific wealthiest individuals in the country that gets a little less outside of the 400,000-ish family farms and ranches space. So I think if you're trying to score a big political victory, particularly if you're Democrats, that's a better place to do it than probably the estate tax. And again, I think the cost is somewhat there, but it's not that trillion dollar salt number, and it's harder to sell a little bit. So I think in the end, we're probably actually similar-ish to where we're at.

Stacey Delich-Gould:

Wow. So this could all be much ado about nothing. Well, thank you.

Kellin Clark:

Like most of Washington.

Stacey Delich-Gould:

I feel like most of everything that happens in DC. Again, apologies to everyone for the technical issues, we will be circulating a recording. Kellen, Jeffay, Anne, thank you so much. This was so fantastic. And for everyone who joined us, thank you so much and we'll see you all soon.