December 1992
Vol 16 No 4
TWO CHICKENS IN EVERY POT, TWO CARS IN EVERY GARAGE . . .
America is still looking for the cavalry to ride over the hill to save it! In this election year Clinton in the reluctant choice of 43% of the voters in one of the best election turnouts in recent memory. 57% of the voters preferred someone else. This may be the key to the next four years. Where Reagan and Bush practiced 'voodoo' economics which boiled down to borrowing our way out of economic troubles, Clinton will practice 'who do' economics which amounts to keeping the public guessing on who's really going to pay the tax bill when it comes due.
Will it be those 'rich scum'? If so, who are they? At first they were those earning in excess of $200,000 per year. This figure has been lowered by various members of the Clinton entourage to as low as $50,000 annual income. Is that NET or GROSS income? Landlords easily collect far more than $200,000 per year gross rents out of which they'll customarily pay out at least 50% in operating expenses exclusive of interest. Once their payments are factored in, it's not unusual to find that there's nothing left in the till at the end of the year out of which to pay taxes. In many instances, the same could be said of many small businesses once modest withdrawals have been made by their owners to support a modest life style. It seems that Clinton's supporters may have to settle for less than their promised two chickens and two cars once the new administration takes office.
Let's do a little arithmetic. Taxing the 'rich scum' at confiscatory rates will only operate the government for a few weeks. Taxing 'big business' might double that time. Even with 100% tax 75% of the annual budget will still have to be paid for by wage earners and small businesses. I don't think Clinton supporters understand that fact! Just to test this theory, you should engage a Clinton democrat in a discussion of just how he can 'put people to work' while increasing taxes on employers. Or how he can cure the problem with the homeless by increasing the numbers of Haitians in Miami, which is already short 100,000 homes courtesy of Hurricane Andrew. Or how he can get consumer confidence increased to promote more consumption while at the same time get Americans to increase savings so they can be taxed like 'rich scum'. Clinton's going to find out the difference between hitting minor league pitchers in Arkansas and playing big league ball in Washington D.C.
Eisenhower was the last President to balance the budget, and even then, it was for only one short period during his administration. He got the economy moving with the massive highway program which employed millions of people and built our current system of interstate routes. Clinton has already indicated that he expects to spend lots of money restoring the infrastructure. When Eisenhower pulled his rabbit out of the hat, America was solvent with only about $285 Billion in debt. He was almost impeached for his $100 billion budget proposals. Now, our current deficit spending each year is more than the cost of World War II over 4 years. Where's Clinton going to get the money? He can't borrow much more at the low interest rates that currently prevail. He can't raise interest rates without prolonging and deepening the recession. Increasing taxes on small business will have the same effect as raising interest rates, increasing unemployment. If he prints the money to pay the bills, the foreign markets could easily withdraw from the dollar as the world's reserve currency unless they too were manufacturing currency themselves.
Clinton is going to find out pretty quickly that, with more dollars overseas than in all the institutions and private accounts in America, a run on the dollar can start at any time and there's nothing he can do about it. With Canada already 'waffling' on the North American Free Trade Agreement (NAFTA) and disruption in the GATT talks (General Agreement on Trade and Tariffs), maintaining our balance of payments is going to be harder than ever. The EEC has its own agenda regarding trade. If America doesn't export, we'll see a depression like none other in our history. On the other hand, if Americans stop buying imports, the entire world could join us in that depression. This is more or less what happened in the 1930's, but at that time, Americans weren't mired in debt with an insolvent Social Security System and a government, which has been bankrupt for a decade.
PREDATORS USUALLY ATTACK THE OLD, THE LAME AND THE YOUNG FIRST
Let's start with the premise that the economy today can't afford to keep the promises Clinton made to win his election. As seen, he can't raise the money by taxing producers alone, and the non-producers don't pay taxes. He won't be able to keep on borrowing as Bush and Reagan did because we're overextended and he's got to keep interest rates low if we're to have any recovery. Because most of our trading partners are also in economic trouble, he'll probably try a dose of inflation to 'get things started'.
Suppose he were to put $100 billion into the economy in the form of public sector jobs. This would put lots of people to work on the infrastructure in cities where the problems are the toughest; get lots of pork barrel projects underway all over the country to get Congress on his side; increase consumer confidence so people would feel comfortable in spending more and saving less; increase the flow of money through the credit system (volatility) thereby expanding the effective money supply; enable debtors with fixed loans to pay them off with cheap dollars (U.S. GOVERNMENT BONDS/BILLS/NOTES), give foreign dollar holders an incentive to buy American products, real estate, businesses. This would flood the economy with dollars at many levels. In the short run, everyone would like it. In the long run, it would eventually convert the land of the free and home of the brave into a nation of government dependents living off government largess. India is an example of this. It manages to share the poverty, not the wealth by employing 60% of the work force in jobs offered by the government. The non-producers have taken over there. It could happen here.
Who'd really be paying the bill for the inflationary solution that could be the only way out for Clinton? The elderly on fixed incomes. The sick who wouldn't be able to afford good health care at inflated prices. The young, who'd see their future being stolen away by galloping price rises which would place education and opportunity out of reach. Once upon a time, there was some political risk in this type of program, but Congress has tested the water in the last two elections and discovered that, while the voters gripe and complain about politicians, they still re-elect them time after time. Inflation today carries relatively low risk for incumbents so long as their constituent voters benefit somehow.
Who would benefit from inflation? Look back at the Carter years a dozen years ago. Then we had fixed rate loans. Inflation benefited the borrowers and penalized the lenders. Today, lenders are more sophisticated. They've loaned billions on variable rate loans. As interest rates inflate, they'll- keep pace at the expense of those who've signed these loans. On the other hand, those people who've carried back fixed rate loans on sale of their property, or who have bought these loans in the market (all you 'paper' buyers) will see the value of those fixed income streams being discounted at the combined inflation and TAX rates. They'll be losers. What about landlords?
Tangible assets benefit in inflationary times. Precious metal stocks and real estate created fortunes for their owners during the Carter years. It's doubtful that a Clinton inflation will have the same effect as the Carter inflation because of underlying economic fundamental differences, but prices and market activity will certainly go up for a time until the real costs of inflation make themselves felt. Except in rent controlled or stabilized areas, rents will parallel inflation. Long term lea sees who've rented their property without indexing them to sales or to the inflation rate directly will see their values drop. Short term landlords will be able to pace inflation with rents generally.
Leverage will be respectable again so long as the loans are fixed. Currently, real interest rates are quite low because inflation is low. In the Carter years, 17.5% mortgages in a market where prices were going up at 20% effectively created NEGATIVE REAL INTEREST RATES. The difference will lie in the way Clinton taxes profits and allows losses to be deducted. He recently stated that, while he didn't intend to raise taxes on the middle class wage earners, he would deny some deductions they've been allowed to take. (Be fair. He never said 'read my lips'.) That's why this inflation round will be different from the Carter round. There are several plots afoot which are going to affect young and old.
WHEN YOU CAN'T ROB THE PRESENT, ROB THE FUTURE . . .
Liberals have been eyeing the way that wealth is transferred between generations for most of this century. Now, they've got a chance to pull off one of the great robberies of all times. They'll steal from the transfers of wealth between parent and child. They've got two main thrusts to this strategy. First, they'll reduce the Unified Credit Equivalent from the $600,000 per parent that Reagan got passed to $200,000. A bill to do this has been introduced for the past 3 years, but been ignored by the Republicans. Now, it could easily be passed during the euphoric first 100 days, and made retroactive to January 1, 1993. If you have an estate (or if you hope to be the heir to an estate) of up to $1-200,000 you need to IMMEDIATELY contact an estate attorney and make arrangements to GIFT assets into a TRUST or other estate planning device PRIOR TO THE END OF 1992 to be safe. Look into a GRIT too! Prior attendees at the Advanced Trust strategies and CYA courses should review your books.
Let's talk about plan #2. The values of assets in estates have for years been 'stepped up' to market value upon the death of the donor. Thus the donee(s) could either sell them without any capital gains tax or use them and depreciate them from the adjusted basis to generate tax shelter advantages. There's serious talk among incoming Clinton staffers of terminating this step up in basis and letting assets retain their adjusted cost basis in the hands of the heirs. The results of these two changes will be to increase the taxable estate (and the federal rate of 55% maximum is added to state inheritance tax rates and legal fees to bring the total up to 75% in some instances). Once the estate assets are sold to pay the taxes, a capital gains tax will be imposed on the remainder. Voila – the liberals will have achieved their goals of wiping out transfers of wealth between generations.
The problem with having to work fast and think fast to avoid these catastrophic changes – if they indeed are implemented – is that those in the generation with wealth in many instances must rely upon professionals for advice and counsel, and estate attorneys are overloaded now as a result of the election. At the oppositee end of the spectrum are those who fully expect to have a major estate, but who are 25 – 45 years away from either having the assets to disburse or who need the liquidity now to build their estate assets for the future. We've been trying to solve that problem, and here are some 'creative' approaches which you should run by your own estate advisor prior to implementing.
First, let's deal with the $600,000 one-time lifetime tax-free gift. Suppose you have real estate assets, but can't afford to sell them because of transfer costs and capital gains. Create a promissory note with full recourse against yourself and secure it with a blanket mortgage or deed of trust against all your real estate. Create an IRREVOCABLE trust and name your adult offspring, a trusted friend, or an institution as trustee. Spell out in the trust that the note given will accrue interest at market rates which will be adjustable from the original issue rate of 10%. Each spouse can create an identical trust, but with individual notes secured by individual properties. Or community property spouses can contribute a single $1.2 million together into one or more trusts. The beneficiaries of the trusts will be selected according to your wishes, and distributions of the trust can be timed after your (untimely) demise, or both of your deaths, or upon any other situation which you can place within the discretion of the trustee INCLUDING YOUR OWN NEEDS. Thus, if things go wrong and you need your money back, you can get it.
Let's look at what's been accomplished. Assets inside the trust can't be taken by your creditors because they belong to the trust for the benefit of your heirs. The Note won't require payments, but it will be transferring 10% of the equity in property to the trust through the accruing interest. When you sell property, the buyer can take over the note and make payments to the trust or the trustee may allow you to substitute collateral and release the property being sold. You'll have transferred up to $1.2mm tax free, but this will be increased each year by the compounding and accruing interest rates. You'll have to do your own calculations as to how long this will accumulate prior to your death (or that of the parent, guardian, aunt, uncle, grand parent who is leaving something to you or your kids). Let's take another look at the step up in basis problem.
It's too late to do anything prior to Clinton's inauguration as President, but you can make a start. If you were to make a gift of $1.2mm or less to an elderly person who is related to you, and that person were to live for 1 year and 1 day, you could receive the asset by bequest from that person with a step up in basis to market value under current tax regulations. If that person were to be an UNRELATED party, it wouldn't matter how long the property were in his/her hands prior to death. A cooperative elderly family member and or friend might establish an irrevocable living trust into which you might gift property, notes, cash, etc. Upon his/her death, that property would revert to you under the terms of the trust. They'd be trustee during their life, and you'd be both successor trustee and beneficiary. Something to think about. Something to do if you feel vulnerable.
The last stop on the merry-go-round is a 'last to die' survivorship life insurance policy. Again, if you're young, this is an inexpensive way to provide for your children if you haven't created enough assets yet. You could contribute a note and make annual payments on the note which would provide sufficient funds to pay the insurance premiums. You can contact Dean Crump at (509) 233-8062 for information regarding a last-to-die policy. He's been my insurance advisor for almost 30 years. Please don't waste his time though. One of the more creative approaches is for a parent and child to make payments on a last-to die policy. Actually, the payments would be quite low. The child's age/health would make it possible for an elderly/sickly parent to qualify for insurance which might pay off 25 years later, thereby funding an estate which would be both income and inheritance tax free.
(888) 282-1882 