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Death, Taxes and Chapelle

Updated: Jul 20, 2023

I just want to take a moment to thank the federal government for all the uncertainty they’ve been kind enough to heap upon investors this year. The only thing this Congress has clarified all year is that the citizenry will get to finish 2021 pondering a world of future tax pain. Sure, now that more people than ever are invested (and dependent upon) the stock market, let’s increase the long-term capital gains rate to 25% from 20%. Brilliant. Oh, and it’s part of a separate proposal, but Janet Yellen wants to see what’s in your $600 checking account because…?


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It’s what we have been inundated with since Sept. 13th; that’s the day when Democrats in the House of Representatives released their 880 page tax plan.


Thank God that that the $3.5 trillion spending and tax increase proposal has been increasingly contested by certain Democratic lawmakers whose support is needed if it’s to become law. While it’s extremely likely that some items, both on the spending and tax increase sides, will be pared back or scrapped, nobody knows precisely which ones, and as we draw closer to year end, there have been more questions than answers as the new proposals continue to evolve.


Along with increasing the cap gains rate, Dems have proposed moving the top individual income tax rate to 39.6% from 37% along with a 3% surcharge for individuals with modified adjusted gross income over $5 million. They’ve proposed doing away with backdoor Roth conversions, and they want to curb the 20% 199A deduction for small business owners.


Even with all of that, there are two particular proposals concerning estate planning that concern wealthy investors the most: One proposal would effectively kill off the GRAT (grantor retained annuity trust), and the other would slice in half the income levels at which the 40% estate tax would kick in.


  • With a GRAT, the grantor puts assets into the trust in exchange for annual annuity payments while the assets continue to grow tax deferred and then go to heirs free of estate and gift taxes. By making the annuity payments tiny, investors can shift massive amounts of wealth out of their estate without the impact of transfer taxes. Dems want them gone by January 1st.


  • Currently, estate taxes apply once an individual has $11.7 million in assets ($23.4 million for married couples). The Democrats’ tax proposal would slice those exemptions in half, so around $6 million and $11 million, starting January 1st.


In other words, if you want to set up a GRAT to reduce estate taxes, the window of opportunity is limited. Like, it’s now.

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In our May 15th Insights, we recommended value-oriented cyclical stocks, especially in financials and energy. Since that time, the U.S. equity markets have been driven almost entirely by cyclicals, but that hasn’t translated into broad market gains. Energy and Financials, far and away the two best-performing market sectors over the past five months, account for just over 13% of the S&P 500, which hasn’t been enough to overcome the combined 40% allocation to two of the worst-performing sectors-- tech and healthcare.


I still think energy and financials have room to run, but we added big box retailers to our list of faves last week here in Insights and really like them, too. Then again, Chapelle’s on Netflix this week, which my mom thought would be impossible after his last SNL appearance, so I suppose we may as well just call for the end of the planet.


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