Now that U.S. election results are in, what is your next move?
Clients are asking us about the potential impact on their planning and investments. Here’s what we’re saying.
The U.S. elections are over, offering long-desired clarity on the composition of the U.S. government come January 20, 2021. Even though the Trump campaign and its allies are challenging results in a number of states, Joseph R. Biden is expected to be sworn in as the next president. Democrats will retain control of the House of Representatives. And as special elections generally favor Republicans, they will likely eke out a small majority in the Senate (after two Georgia runoff races in early January).
Net result: The United States seems headed for more political gridlock, which will greatly diminish chances of sweeping policy changes (e.g., a tax code overhaul). Legislation will require bipartisan consensus in a politically polarized environment. However, presidential executive orders and trade policy will be in Joe Biden’s control.
So what might the coming Biden administration mean for your wealth planning and investments? Clients are already posing excellent questions. Here are their most frequently asked—and our answers:
Is there anything urgent I need to do before year-end?
Only the standard year-end items need your immediate attention. This is the time, for example, for you to:
- Make “use-it-or-lose-it” annual exclusion gifts up to the $15,000 ($30,000 for married couples) limit
- Donate to charity using, if possible, appreciated publicly traded stock held more than one year
- Harvest gains and losses so that at year-end you don’t have an unwanted mismatch between realized gains and unrealized losses, or vice versa
One thing you don’t have to worry about this year: taking any required minimum distributions (RMDs) from IRAs (not even inherited IRAs). That’s because the CARES Act, passed this spring, waived the requirement to take RMDs in 2020. In 2020 only, the CARES Act also allows you to deduct 100% of your cash donations to public charities (excluding donor-advised funds) from your adjusted gross income.
To see our full year-end checklist, click here.
How might the election outcome shape the U.S. recovery from the pandemic?
A divided government would mean we likely won’t have:
- Revolutionary policies with the potential to generate broad market headwinds (tax hikes or material changes to labor policy, for example)
- Enough near-term fiscal stimulus to accelerate economic growth meaningfully or increase inflation
As a result, we think the economic recovery will continue—but at a somewhat slower pace than it has been going so far. That’s not to say that conditions are bad for investors; we think the backdrop looks supportive for risk assets. Given the high unemployment rate and current absence of inflationary pressure, the Federal Reserve is likely to remain accommodative for the foreseeable future. The corporate earnings landscape is improving, and medical advancements in the fight against COVID-19 are bolstering investor sentiment.
Should I make any changes to my investment portfolio?
Major shifts in your strategic allocation likely do not make sense unless your goals or time horizon have changed materially. However, we see opportunities to make some tactical shifts in portfolios. And if you’re holding more cash than you need for operational and reserve purposes, we urge you to consider investing in strategies that have better prospects for providing yield and returns.
Areas of the market to consider:
- Upper-tier, high yield fixed income still offers attractive yields relative to risk-free rates
- We have a more constructive view on preferred securities as a means of generating income now that the Qualified Dividend Income tax preference is likely to remain intact
- We think equities offer more attractive return potential than fixed income and hybrid securities
- Within stocks, emerging markets look poised to benefit from an improving global growth outlook, exposure to technology and digital growth trends, a weaker U.S. dollar and relative success in containing COVID-19
- We also remain focused on market segments that offer exposure to secular growth trends, and we see them in megatrends such as digital transformation, healthcare innovation and sustainability—especially for investors with a multi-year time horizon.
How should I be thinking about the liability side of my balance sheet?
Interest rates are still in a range that’s as low as it’s ever been. We do not expect rates to reach levels that would generate above-inflation yields on cash anytime soon. However, we think it’s more likely that interest rates will drift higher than move lower in the coming years, given that the Fed is already holding policy rates at zero and economic conditions are improving.
It may thus be prudent to take advantage of today’s low borrowing costs to access additional liquidity or decrease debt burdens. Think about refinancing or taking out new mortgages on unencumbered properties—as an added kicker, you may be able to deduct all of the interest if the loan is structured appropriately. You may also consider using interest rate swaps to fix floating-rate liabilities.
Should I be doing any tax planning right now?
Gridlock in D.C. likely means no material changes will be made to U.S. income tax rates. Moreover, the current environment and tax regime offer opportunities when it comes to estate taxes.
Many clients are not thinking about this, but certain estate planning techniques work best in a low interest rate environment to transfer money tax efficiently to beneficiaries. So now is definitely a good time to consider whether it makes sense for you to make use of a GRAT (grantor retained annuity trust), CLAT (charitable lead annuity trust), sale to an irrevocable grantor trust and/or an intra-family loan.
At the same time, many clients have expressed concerns that a new Democratic administration would reduce U.S. gift and estate tax exclusion amounts. We think that outcome is highly unlikely, given a divided Congress.
In fact, the exclusion amounts are scheduled to increase to $11.7 million on January 1, 2021, to adjust for inflation. So, if you haven’t yet used all of your exclusion amounts—or simply want to top off previous gifts with the $120,000 increase—we recommend considering now whether doing so makes sense for you and your family. These historically high amounts may not last. The current exemption amount is scheduled to sunset at the end of 2025 and return to levels that are roughly half as high as they are today.
To help you determine how much, if any, wealth transfer might suit you and your goals, speak with your J.P. Morgan team.
What might I expect with state taxes?
Many states are hurting for revenue and can expect a divided government to provide only minimal help in the next stimulus package, if and when one is finally adopted.
They will be caught between a rock and a hard place: To compensate for significant decreases in revenue and increased expenses related to the pandemic, they need to raise money and therefore, in theory, boost tax rates. But the states know that if they raise taxes too much, they may chase away significant portions of their tax bases, who have learned, thanks to the pandemic, that they can work remotely (often in lower-tax jurisdictions).
So we expect states to view the issue of raising taxes cautiously. But we also anticipate that they will increase oversight and enforcement of their tax regimes for existing taxpayers—especially those who claim to have left the state during the pandemic.
The election results may generate short-term market volatility, and have certainly created a number of interesting opportunities for you to explore with your J.P. Morgan team.
At the same time, it does not mean major changes to some important fundamentals: The U.S. economy is recovering—so it’s important to stay invested. The U.S. government will probably remain divided—so major changes to federal taxes are unlikely and no overhaul of your planning should be needed. Speak with your J.P. Morgan team to make sure your portfolio and planning are well positioned to support your goals.