We are writing to share our thoughts on the closing year and the prospects for the upcoming one.
This letter comes later than usual to consider the impact of recent elections on our clients and their interests. In addition to the elections, global conflicts and advancements in healthcare and technology have made it challenging to understand the changing world's impact on our priorities. This year has often felt like a combination of a “slow walk” and an “all out sprint” – awaiting the next set of developments in the economy or an election cycle and then sprinting to make progress towards important objectives as those developments become apparent. Our goal is to address these dynamics in relation to our work with you and to listen carefully as you contemplate how these changes impact your plans for your family, your business, and your community.
In 2024, over 50% of the global population participated in democratic elections, including in India, the EU, the UK, and the US1. The results will significantly affect regional stability, economic development, and geopolitical relationships. While opinions on the incoming US administration's proposals vary, having an aligned President and Congress should make lawmaking easier. Although many of our clients may be primarily exposed through family to the economic and geographic terms of the US, we are conscious that the political and fiscal policies of other governments and other economies can add further crosswinds and complexity as families and individuals begin to digest the implications of this year’s events.
Economically, we have seen a decrease in interest rates and inflation, providing welcome financial relief. While this trend is positive, a higher interest rate environment than in past years seems to be the new normal, and despite a decrease in inflation, higher prices still affect households and businesses. The future of important policy decisions, interest rates, and inflation remains uncertain, underscoring the importance of planning. We believe it is crucial for families to come together to revisit and reaffirm their priorities.
Changes in Governmental Tax and Financial Policies
Based on the Trump campaign’s proposals, we expect tax policy to favor keeping taxes low, which will likely require finding alternative revenue sources, such as increased tariffs, to support government spending. With a unified government and a pledge to prioritize tax changes, we anticipate new tax legislation proposed by summer 2025. This will likely be part of the Budget Reconciliation process, allowing it to pass with simple majorities in both the Senate and the House, with trade-offs between tax reductions and revenue provisions. Therefore, the final tax bill may not be enacted until late summer or fall, creating some uncertainty about its exact contents.
Based on President-Elect Trump’s campaign communications, we expect to see reductions in corporate tax rates to 20 percent from 21 percent, or even to 15 percent in some cases. He also proposed to keep the individual tax rate cuts under the TCJA (Tax Cuts and Jobs Act), maintaining the top rate at 37 percent, with a higher standard deduction, increased child tax credit, and a 20 percent deduction for income from certain small businesses. Additional communications suggest we may also see further cuts, such as eliminating taxes on tips and Social Security benefits. For taxes on generational transfers, he has proposed an extension of the TCJA's increased exemptions for gift, estate, and generation-skipping transfer (GST) taxes, maintaining the $10 million exemption (adjusted for inflation) and eliminating the sunset at the end of 2025. The exemption is $13.61 million per individual in 2024, rising to $13.99 million ($27.98 million per couple) in 2025.
Altogether, President-Elect Trump’s tax proposals are projected to cost an estimated $7 trillion over 10 years, potentially increasing deficits and national debt. The debate will include a focus on offsetting these costs through tariffs, spending cuts, and economic growth, some of which might be implemented through non-legislative processes like Executive Orders.
Of course, governmental policy can influence, but not control, markets and the economy, and therefore assumptions about the likely outcomes of policy changes could be off-base. While the Federal Reserve has been cutting short-term interest rates, long-term rates — which affect many aspects of our clients' financial lives, including business costs, household expenses, and wealth transfer planning — will be shaped by the bond market's perception of long-term economic and financial trends. Moreover, inflation could remain higher for longer, as some economists believe proposed Trump policies, like increased tariffs, could be inflationary.
The Trump campaign advocated that its proposed policies, seen as pro-business and pro-growth, will stimulate economic growth and vibrant equity markets. Conversely, some economists and investors view markets as fully valued and anticipate more muted equity returns. Clients should prepare for both scenarios.
Implications for Clients’ Personal Wealth and Business Plans
Whether planning for business or personal finances, the market advancements in 2024 and the changes with a new administration present an opportunity to revisit plans for raising cash, making new investments, and engaging in forward-looking planning. In this regard, it’s likely that factors driving future financial decisions will differ in certain respects from those present in the first Trump administration, which was characterized by a unique combination of low interest rates, minimal inflation, strong equity markets and lower taxes.
Business owners may find macro-level market forces less impactful to bottom line results and may spend more time on modifying processes to take advantage of rapid developments in artificial intelligence to enhance outcomes. The extension of the TCJA allows a focus on business fundamentals and leadership succession, considering the changing tax, regulatory, market, and trade environment. This could bring both positives like lower tax rates and deregulation, and negatives like higher interest rates and potential trade constraints.
This shifting environment is also a good time to address personal financial goals. Current market conditions provide an opportunity to reduce risk, revisit financial plans, and engage with family missions. For example, using appreciated securities for charitable gifts might be prudent. Clients should also consider adjusting cash reserves, preparing for opportunistic investments, and rebalancing portfolios.
Policy Impacts on Income Tax and Estate Tax Planning
The U.S. election results indicate current income tax rules will likely remain unchanged until at least the end of 2025. Beyond 2026, these rules might become even more favorable for taxpayers. Thus, clients should maintain their current near-term income tax planning strategies.
In terms of wealth transfer planning, the situation is more unpredictable, especially over the longer term. If equity market returns stay subdued and interest rates high, strategies that thrived under low rates and high returns, like intra-family loans and Grantor Retained Annuity Trusts, may see limited success. Previously, when the "Applicable Federal Rate" was below 1% and equity markets were rising, success was almost guaranteed. Now, with higher AFRs and lower return expectations, clients must be more strategic in their planning and asset choices.
Until now, clients with taxable estates have been creating tax-efficient estate plans, anticipating the December 31, 2025, sunset of the increased estate and gift tax exemptions. With the Trump administration focusing on low tax rates, some clients might delay their plans, awaiting more legislative details. While this can be prudent, procrastination could result in missed tax-saving opportunities. Clients focused on wealth transfer and long-term legacy goals should continue their planning, adjusting timing for transfers based on future tax policies and other inputs bespoke to each family’s planning process.
Clients able to fully use their transfer tax exemptions without affecting their financial well-being should proceed with these strategies, provided they align with their values. A tougher decision faces "middle wealthy" clients who were primarily tax-motivated. We advise them to prepare now for potential gifts in late 2025 by setting up trusts, funding LLCs, and transferring assets between spouses, as waiting until Fall 2025 might be too late. If the sunset is extended, they can adjust plans accordingly.
Planning in the Face of Uncertainty
While the U.S. elections might have provided short-term clarity, long-term uncertainty remains. Therefore, we focus on a planning process that helps families make prudent short- and long-term decisions. Looking ahead to 2025, we encourage business owners and families to revisit their cash flow, expenses, and investment plans, with current inflation, interest rates, and projected returns in mind. A conservative approach can help avoid negative surprises.
While the environment and inputs for sound planning decisions are ever changing, our job is to help our clients think of these issues in a clear and balanced way. Interest rates are higher than in recent years but still modest from a historical perspective, and despite persistent inflation, the U.S. economy boasts an expanding GDP, strong equity markets, and low unemployment.
Our familiar advice emphasizes being prepared, flexible, diversified, and focused on long-term results. This repetition underscores the enduring relevance of these principles. With the likely extension of the current tax regime, our clients gain the benefit of time—time to consider next steps and focus on crucial non-tax issues like family mission, philanthropy, next-gen education, and risk management. Clients will be best positioned with a long-term plan, faithfully executed and adaptable to changing circumstances, including legislative policies.
We look forward to discussing these matters and any other important topics with you in the weeks ahead.
1A ‘super year’ for elections. (n.d.). UNDP. https://www.undp.org/super-year-elections
The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance, and you may not get back the amount invested.
Any accounting, business or tax discussion contained in this communication is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Brown Advisory does not render legal or tax advice. Prior to making an investment decision, a prospective investor should consult with their own legal, tax, accounting, and other advisors to determine the potential benefits, burdens, and other consequences of such investment.