Policy snapshot: Family offices


Authored by RSM US LLP

Joe Biden is the projected winner of the presidential election; control of the Senate will be won by a slim margin following runoff elections for Georgia’s two seats in January. What does a divided government mean for the middle market? RSM is looking at the policy implications and key issues for various industries. This is one in our series of industry-focused outlooks for a Biden administration.

According to Joe Biden’s plan:

During Biden’s campaign, he publicized little about amending laws governing estate and gift planning. However, the 2020 Democratic Party platform states: “Estate taxes should also be raised back to the historical norm.” But now that Democrats’ best-case scenario in the Senate is a 50-50 split, it is safe to expect significant challenges to tax policy changes that would advance the party’s stance. Biden also has proposed taxing long-term capital gains at 39.6%, up from the current 20%, for taxpayers with incomes over $1 million. He also aims to repeal the step-up in basis at death, which means that heirs may incur a capital gains tax on pre-death value appreciation. Overall, this would amount to an increased tax burden on high-net-worth individuals and families.

What a closely divided Senate means for family offices:

Biden has proposed a $5.4 trillion spending plan over the next 10 years, according to an analysis by the University of Pennsylvania’s Wharton School of Business Budget Model. While he has proposed tax increases on corporations and wealthy individuals to help fund his plan, a closely divided Senate creates substantial uncertainty about which parts of the Biden plan will be enacted. Sweeping tax policy changes appear unlikely in the short term, but that may change, as 34 Senate seats (13 held by Democrats, 21 held by Republicans) are up for election in 2022.

It also remains unknown how aggressively Biden will pursue each rate hike in light of the pandemic and corresponding economic downturn.

Over the course of the Trump administration, family offices have benefited from relaxed regulations, higher equity markets and the largest-ever increase in the exclusion amount for estate and gift tax. A closely divided Senate means that the reversal of Trump administration policies will be difficult to enact during the first two years of Biden’s term. This allows family offices a chance to reflect on their current state and reposition for the future. 

What room for growth or evolution exists in family offices?

During the pandemic, family offices continued a recent trend of taking greater interest in reviewing or creating various wealth succession plans. In a 2020 Campden Wealth survey, 46% of family succession plans were put into place within the last five years. These multifaceted plans designate who would handle the office if key members of the office were no longer able; they also establish an estate planning strategy for families who have amassed considerable wealth from selling their founding business and are now seeking ways to leave more of their earned wealth to the next and succeeding generations.

A transfer of wealth may lead to a new vision or purpose for any family office. Depending on which generation is acquiring the wealth, a number of factors, including investment strategy, philanthropy, ESG, human capital development and economic conditions, are on the table.

Beyond the ramifications of potential tax policy changes, family offices must not lose sight of the big picture. Initiatives such as integrating technology solutions, digital transformation, managed services and cybersecurity are as critical to a family office’s success as navigating tax policy.

Questions that frame the path forward:

  • How hard will the Biden administration push to lower the estate, gift and GST tax exemptions?
  • Will the Biden administration reintroduce any of the non-enacted items from President Obama’s proposed budget plans in the mid-2010s, namely:
  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 in existence for 90 years; and
  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.
  • For businesses owned by family offices, will factors such as current economic conditions, uncertainty about fiscal aid and President-elect Biden’s plan for higher tax rates encourage a rush to sell and transfer the business by year-end?
  • For private equity and hedge fund managers, is it the right time to reconsider closing their funds to outside investors and establish a family office to avoid any additional regulatory requirements?
  • How quickly will the next generation accelerate adoption of emerging technologies and streamline operations to move away from the traditional family office?
  • How are family offices educating the next generation about wealth preservation, responsibility and governance?