Wealth Planning Commentary – February 24, 2025

Market Jitters

Recent economic indicators suggest the economy may be cooling, including a decline in the US Purchasing Managers Index for Services and a weaker-than-expected Michigan Consumer Sentiment Survey. This could lead to market volatility and increased uncertainty.

A brief review of your plan may reassure those concerned about market fluctuations. Modeling a scenario with a short-term market decline or flat markets within the broader context of a long-term strategy can help put temporary volatility into perspective.

Maintaining liquidity is critical to mitigating the impact of a downturn. One approach is dedicating funds to an interest-earning, cash-like account that covers at least a year’s expenses. This allows for flexibility without needing to withdraw investments at an inopportune time. Another option is securing a line of credit or margin loan, though current interest rates should be carefully considered before pursuing this strategy.

Washington Update

Discussions on tax legislation have been relatively quiet for the past couple of months until recently. Last week, House Republicans introduced a bill proposing $4.5 trillion in tax cuts, primarily by extending the 2017 Tax Cuts and Jobs Act (TCJA) provisions. To offset these cuts, the bill includes $2 trillion in spending reductions, with $880 billion coming from Medicaid.

Despite initial indications that former President Trump preferred to protect key social programs, he has supported the House bill. However, balancing lower deficits, lower taxes, and strong economic growth presents a significant challenge. One possible compromise is implementing shorter-term tax cuts – such as extending TCJA provisions for four years rather than ten – before allowing tax rates to rise again.

It remains likely that the TCJA will be extended, preserving current income and estate tax rates in the near term. However, expectations should be tempered regarding any increase or elimination of the state and local tax (SALT) deduction cap, as substantial changes appear unlikely.

Deferred Sales Trusts (DSTs)

Deferred Sales Trusts (DSTs) have been in the news recently. These differ from Delaware Statutory Trusts, which are commonly used in 1031 exchanges.

A Deferred Sales Trust is an intermediary in selling a business or real estate asset. The seller transfers the asset to the trust in exchange for an installment note, allowing capital gains taxes to be spread over time. The buyer then purchases the asset from the trust, paying in full, while the proceeds remain within the trust and are distributed to the seller according to the terms of the installment note.

This strategy is most effective when a seller secures a favorable price for an asset and seeks the tax benefits of an installment sale but has concerns about the buyer’s ability to pay in full upfront. While DSTs offer potential tax advantages, they introduce additional complexity and costs, and careful consideration is necessary before implementation. One of the biggest risks is that the installment note is non-recourse, meaning that sellers cannot repossess the asset in the event that the investments fail to cover the note.

Please reach out to your Wealth Manager with questions.