How the midterms might make a mark on family-office finances 

Bob.Allen
Feb 15, 2023
3 months ago
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Capitol

By CHARLES PAIKERT 

How will a divided Congress affect family offices and wealthy families? With the Republicans projected to take narrow control of the House and the Senate still in the hands of the Democrats, here’s how that split will influence markets, taxes, regulation, policy and debt. 

Markets: Analysts and advisers downplay the long-term impact of midterm elections. “The market doesn’t much care about the election outcome,” said Mike Townsend, managing director of legislative and regulatory affairs for Charles Schwab. “The market cares about what actually gets done in Washington.”  

Agreeing with that assessment is Brad McMillan, chief investment officer of the Commonwealth Financial Network. “Over time, elections don’t matter,” McMillan told clients on Election Day. “If you zoom out on market performance and cover up the dates, you can’t tell which party was in the White House or controlled Congress.” 

Wall Street does, however, appear to view a divided government as a steadying influence on the markets. “Political gridlock is normally a favorable outcome, as new measures from the administration are thwarted by the opposing party,” said George Smith, a California-based portfolio analyst for LPL Financial. 

In any case, family-office wealth managers aren’t altering investment strategies in the wake of the midterms. “We are recommending no changes to portfolios,” said Andy Busser, president of Pitcairn, a family office in suburban Philadelphia. “The reality is that investors who stick to a strategy through market ups and downs, through election cycles and through all of the emotions of both, significantly outperform investors who react to external events.” 

HIGHLIGHTS

  • Wall Street views a divided government as a steadying influence on the markets. 
  • Take advantage of the current estate-tax exemptions soon, in case they expire.  
  • New ESG rules could increase costs for family offices. 
  • A default on the nation’s $31 trillion of debt would be catastrophic.  

Taxes: Family offices and their clients care deeply about the tax code, and the expiration of the Tax Cuts and Jobs Act in three years is very much on their radar. That legislation raised the gift- and estate-tax exemption to $12.6 million for individuals and double that for married couples, but those figures are set to be cut roughly in half on Jan. 1, 2026. 

Republicans would like to make the current exemptions permanent; Democrats are determined to make sure the lower threshold prevails. Thus, a fierce legislative battle is brewing. Wealth managers are advising clients to take advantage of the current estate-tax exemptions while they can. 

“Assuming there’s no legislative action, ultrahigh-net-worth clients have a window to protect their assets and need to be sitting down with their adviser to take a hard look at this issue,” said Gerald Goldberg, CEO of GYL Financial Synergies in West Hartford, Connecticut. 

GYL recommends that clients “consult with their legal counsel and consider estate-planning techniques that potentially reduce the size of their respective estates,” Goldberg said. 

One alternative that GYL suggests is making an irrevocable gift to a Spousal Lifetime Access Trust (SLAT), which allows spouses to give money to each other and take advantage of the current estate exemptions. 

Wescott Financial Advisory Group in Philadelphia is also advising clients to review their financial status in anticipation of higher tax rates. Clients may want to consider Roth IRA conversions and accelerating income now if they anticipate being in a higher tax bracket in the future, said Bob Waskiewicz, a Wescott adviser who is also a CPA and heads the firm’s Tax Alpha Group. 

“It’s wise to delay deductions until the years where your tax bracket is higher, where you receive the greatest benefit,” Waskiewicz said. 

Regulation: “The SEC is the real game in town,” said Michael Pinkerton, a Washington associate analyst for T. Rowe Price. Republicans have Securities and Exchange Commission Chairman Gary Gensler and his aggressive regulatory agenda in their crosshairs.  

Gensler is an experienced regulator and savvy political infighter whose job is secure for two more years. But the GOP can use oversight hearings and other delaying tactics to “slow him down to some extent,” Pinkerton said. 

The SEC is pushing for more transparency — and regulation — around environmental, social and governance issues, an initiative that is anathema to conservative lawmakers. Family offices and wealth managers would face additional costs and regulation if the proposed ESG rules are enacted. 

However, as Michael Delgass, managing director for Wealthspire Advisors in New York, points out, many clients do want to make sure that their investments comply with ESG standards. Although new regulations would mean spending more time and money reviewing ESG investments, increased transparency and data would also be welcome, Delgass said.  

Policy: Even if Republicans control both houses of Congress, albeit narrowly, new legislation still would require 60 votes in the Senate to overcome a presidential veto. Current administration policies are “not really going to change very much,” said Pat Soldano, a Washington veteran and president of Family Enterprise USA, which advocates for family businesses and family offices. 

Nonetheless, Soldano doesn’t rule out the possibility that issues affecting family businesses, such as income-tax rates, may be modified. She notes that Republicans are poised to take over the powerful House Ways and Means Committee, which writes tax laws, as well as the chamber’s Financial Services Committee. 

“Deals are made all the time in Washington,” Soldano said, “usually behind closed doors.” 

Debt: The most significant consequence of Republicans taking over the House would be the threat of hard-line conservatives not approving the debt ceiling in an attempt to curb President Biden’s policy agenda. 

“It’s critical that we’re prepared to use the leverage we have,” Republican Rep. Scott Perry, chairman of the House Freedom Caucus, told Reuters. 

A default on the nation’s $31 trillion of debt would be catastrophic, and even a protracted standoff is likely to downgrade U.S. credit and send financial markets reeling. 

T Rowe Price’s Pinkerton thinks the issue will be defused by Democrats extending the debt limit in the lame-duck session of Congress. Even if that doesn’t happen, Soldano is convinced that Democrats and Republicans will negotiate an agreement to avoid a political showdown and potential default. 

Said Soldano: “The consequences are too dire if they don’t.”