Money managers speaking at last week’s Bloomberg Invest New York conference echoed concerns about the impact of President Biden’s wealth and estate tax proposals on the $84 trillion in generational wealth that’s estimated to be passed down by U.S. families through 2045.
“Of the $84 trillion that's being transferred over the next 20 years, $36 trillion is coming from the top 1%,” said Clark Cheng, CEO and chief investment officer of the single-family office Merrimac. “Taxes are the most important part of that, because Biden is trying to do a 25% wealth tax.
"I don't know how he’s going to do it; they're trying to tax unrealized gains. How do you pay that tax if you’re illiquid and private? It doesn’t make sense.”
Biden’s proposal includes a 25% annual minimum tax on unrealized capital gains for individuals with incomes and assets exceeding $100 million. Cheng — whose family office invests in hedge funds, private equity, venture capital and real estate — spoke on a panel at Bloomberg Invest New York alongside Stephanie Birrell Luedke, head of private wealth at Neuberger Berman; and Aron Kershner, co-head of portfolio management quantitative equity solutions at Goldman Sachs.
“I think many of [Biden’s] potential taxes on the table are not implementable — like taxing on unrealized gains, that seems to me completely too far-fetched,” Luedke said. “But if we go to something like in the Biden proposals, ordinary income tax rates, which will also go up on capital gains, then the tax-loss harvesting strategies, the tax-efficient custom direct indexing strategies, those are just going to be more and more relevant.”
Former President Donald Trump’s 2017 Tax Cuts and Jobs Act is set to expire at the end of 2025. That means the current estate tax exemption of $13.6 million will be reduced to around $5 million, adjusted for inflation, in 2026, should the Democrats win reelection in November. Conversely, a Trump victory would likely result in the extension of the current estate tax exemption threshold.
“The most important thing, at least for the top 1% — and I think this should apply to everyone who has wealth — is to manage estate planning through trust structures,” said Cheng. “The two largest law firms for family offices are Withers and McDermott. They can help you with managing the different types of trusts, using PPI (payment protection insurance), PPA (purchase price allocation) type structures to basically minimize taxes.”