Preparing Your Post-Pandemic Financial Playbook

3 months ago

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Many, if not all, of us were surprised by the dramatic impact of COVID-19 on our everyday lives. The impact was felt across the social and economic spectrum and spurred some unprecedented governmental aid and spending. This aid came in the form of stimulus packages for individuals and small businesses that could amplify the country’s deficit and need to be addressed in the very near future. 

Here are some tips for developing a post-pandemic financial playbook in light of looming tax legislation.

1.Review Your Basis in Appreciated Capital Assets

If you own real estate, stocks, or other capital assets, you should review your current basis in these assets because current legislative proposals include substantial hikes in capital gains tax rates, including treating long term capital gains at ordinary income tax rates for those earning more than $400,000 per year.  The considerable tax hike may lead some investors to sell highly appreciated capital assets in 2021 prior to potential tax law changes.  It may also lead some investors with traditional IRAs to convert their IRAs to Roth IRAs and pay the taxes now under a historically favorable tax environment as opposed to deferring the taxes to a future date.  

2. Review Your Real Estate Holdings

If you own real estate investments, you should review your short- and long-term horizon for these investments because current legislative proposals include the elimination of the “1031 exchange”.  A 1031 exchange is a tax planning vehicle that allows a real estate investor to defer capital gains taxes on the sale of real estate provided the investor reinvests the proceeds of the sale into another real estate investment in accordance with the specific rules set forth under Section 1031 of the Internal Revenue Code.  The loss of this tax deferral vehicle could have a significant impact on an investor’s liquidity and return on these investments.  It could also lead to many real estate investors holding their real estate for longer periods and reducing the available supply of real estate for sale.

3. Review Your Estate Plan

The area that we think will likely see the biggest overhaul are laws impacting estate and gift taxes. The following are some of the major changes that have been proposed:

  • Reducing the current unified estate and gift tax exemption amount from $11.7 million per person to $3-3.5 million per person. This would dramatically increase the number of individuals whose estates would be subject to substantial taxes upon their death.
  • Increasing the highest estate and gift tax rate to 45%. 
  • Eliminating the step-up in basis at death. The Internal Revenue Code currently provides that whenever someone receives an asset at the death of another, the recipient gets a step-up in basis to the market value of the asset on the date of the transferring party’s death. It can eliminate entirely or markedly reduce the capital gains taxes paid by the recipient upon the sale of the inherited asset. Without the valuable step-up in basis at death, individuals may look to sell or donate highly appreciated capital assets during life. If not, the beneficiary will likely face a large tax bill upon the sale of the asset.
  • Eliminating or reducing the valuable discounts for transfers of interests in entities, like family limited partnerships, that are not conducting an active trade or business. Currently, individuals can form certain entities for family wealth transfers that allow the underlying taxable estate to be reduced as much as 20-40%.  If these discounts are eliminated, the number of taxable estates and the taxes on taxable estates would rise considerably.
  • Capping annual gifting at $20-30,000 per donor. Under current law, a donor can give up to $15,000 per recipient to as many recipients as the donor would like. The current proposals include implementing a cap on the donor.  This would eliminate another tax planning opportunity that is used to reduce the size of a taxable estate without the need to use an individual’s lifetime gift and estate tax exemption.

While we cannot predict the end of the pandemic, it appears that several tax law changes may be on the way soon because of it. It looks most likely that these changes will not take effect until 2022. Now is a good time to review your current assets and estate plan and consult with your advisors to ensure you take advantage of any tax and wealth preservation planning opportunities available now, before it is too late.

Disclaimers

February 23, 2021

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

The COVID-19 health epidemic has had substantial global economic impact on financial markets. As of March of 2020, restrictions to travel and business spanning the economy for activities not deemed essential have been imposed throughout the United States. These restrictions have caused unprecedented volatility and uncertainty in capital markets and have negatively impacted the economy. It is unknown how severe the impact to the economy and capital markets will be if the epidemic persists for an extended period of time. The epidemic may have a material adverse impact on Cabana’s investment advisory business including, but not limited to, the performance of our portfolio strategies.  

For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/.