This content is from: Wealth Management

As Nation Gnashes Its Teeth, Advisors Breathe Sigh of Relief

“A Biden White House with a GOP Senate means that we would get all the sweets without the indigestion.”

While anxious voters wait in rapt suspense to learn who the next president is, several financial advisors contacted by RIA Intel are feeling more relaxed.          

As votes from a half dozen swings states are slowly counted, Democrat Joe Biden has a clear lead in the Electoral College count and appears poised to win the states needed to snatch the presidency from Donald Trump. But it doesn’t appear that if elected, a President Biden would have a Democratic-controlled Congress to support an agenda that includes raising individual and capital gains taxes on wealthy individuals, reversing corporate tax cuts passed in 2017, and lowering the level of personal assets exempt from estate taxes.  

Though the House remained solidly Democratic after Tuesday’s election, it appears unlikely at this point that the Senate will turn Democratic as part of an anticipated “Blue Wave” election. The Republicans currently have a 53-47 majority in the Senate and appear on course to retain control, with a loss thus far of just one seat to the Democrats.  

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“A Biden White House with a GOP Senate means that we would get all the sweets without the indigestion,” says Richard Saperstein, the chief investment officer of New York-based Treasury Partners, a group part of Hightower, a Chicago RIA that manages $61.6 billion. “We will get an economic-stimulus package early next year, yet we won’t get tax hikes.”

To be sure, Democrats do have a flicker of hope that they still may be able to regain control of the Senate in a Biden presidency. It appears that there will be two run-off Senate elections in Georgia in early January because no candidates have received a majority of the vote.

On the outside chance that the Democratic candidates win both Georgia races, the Democratic party could gain a 50-50 tie with the Republicans, creating an effective majority if paired with a Biden presidency. That’s because Kamala Harris, as vice president, would also serve in her Constitutional role as Senate president and act as the potential tie-breaker on any 50-50 vote. 

But winning two Senate races in Republican-leaning Georgia in January will be a tall order and the Democrats won’t have the help of a presidential candidate at the top of the ticket.   

The prospect of divided government and resulting gridlock is generally viewed as a tonic for investors because harm can’t be done in the form of tax increases and other government actions. That helps to explain why U.S. stocks rallied sharply in the two days following the election even though the presidential race remained unresolved.

“The markets were looking at the Senate races even more than even the presidential race,” says James Bruderman, the vice chairman of 1879 Advisors, a New York-based wealth advisory firm.

Financial advisors contacted for this story agreed that the chances of a number of proposed Democratic initiatives becoming law have greatly diminished.

One particularly controversial measure would eliminate a “step-up in basis,” which currently allows many Americans to pass capital gains to heirs with little to no tax. If such a proposal became law, it would negatively impact children and other inheritors of small businesses, family farms, modest stock and art portfolios, and other assets – not just the one-percent crowd.

Another proposal would overhaul the way long-term capital gains and dividends are treated so that those earning $1 million or more a year would be taxed as if the capital gains and dividends were ordinary income. That would effectively raise the tax rate from 23.8% to 39.6%.

Biden has also proposed raising the domestic corporate tax rate from 21% to 28% and increasing the top marginal income tax rate from 37% to 39.6%, reversing tax cuts enacted in 2017. He would also like to reduce the amount of money that individuals can give as gifts during their lifetime and to pass on upon death from $11.58 million to no more than half that amount.

Many of these tax proposals would even be distasteful to moderate Democrats in the Senate, providing added insurance against their likelihood of passage. “I can name a handful of Democratic that don’t want to raise taxes on corporations or individuals, especially at a time when we are coming out of a recession,’’ says Steven Skancke, the Washington-based chief economist at Keel Point, a Huntsville, Ala.-based wealth advisor that manages over $2.3 billion.

In addition, a Biden presidency without a Democratic-controlled Senate likely means that the size of the next round of federal economic-stimulus will be far smaller that would have been the case under a Blue Wave scenario.

“We won’t get a $3 trillion package, but instead we will probably get a scaled down $1.5 trillion package with [Senate Majority Leader] Mitch McConnell still in control of the Senate,” says Saperstein.

With concerns that a Blue Wave might crash over Washington, some advisors were urging  their clients in the weeks leading up to the election to take a number of investment and tax planning steps such as taking gains on bid-up stocks this year in the event Congress approve a tax-hike next year. Other advisors, however, cautioned against such moves, arguing that elections often don’t play out the way the pundits think they might.

The election results would appear to be a validation for the “wait and see” crowd.

“We were not advising investors to take capital gains because we didn’t know what the outcome was going to be,” says Saumen Chattopadhyay, the chief investment officer with Carson Group, a wealth advisory firm. “We didn’t know whether it would be a Blue Wave, a Red Wave, or something in between.”

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