America’s debt problem: why wealthy families should be looking beyond the midterms

Résumé détaillé

The lesson is not where to invest but when to plan.

America’s issues with its public finances will outlast the political theatre of any midterm election. The midterms will change the balance of power in Washington, but they will not remove the fiscal pressures facing the country.

For wealthy families, the underlying issue is straightforward, namely that a government carrying historic levels of debt, with rising costs of servicing it, will eventually have to confront the question of how to raise more revenue.

Any administration operating with limited room for additional borrowing and spending will have to consider its options, and private wealth, or taxing the income or private wealth of the rich as it will likely be put, will inevitably be part of that conversation.

Taxation is the obvious starting point. Federal decisions on income, capital gains, estate and gift taxes have a direct bearing on how wealth is held, invested and transferred between generations. The current federal estate and gift tax exemptions of $15m per individual, or $30m for married couples, provide considerable scope for planning. But assuming those thresholds, or the wider tax framework, will remain unchanged indefinitely would be a mistake.

For high-net-worth families, the real vulnerability is not simply whether a tax rate increases but whether the structures they have spent years putting in place will continue to work if the rules change. The time to examine those arrangements is before a legislative change makes the decision urgent.

Nor does diversifying wealth necessarily provide protection against these pressures. Many families spread capital across public equities, private equity, real estate, venture capital and international business interests. Whatever the investment merits of that approach, it does not create immunity from government policy. Different asset classes carry different tax treatments, reporting requirements and regulatory exposures.

In other words, diversification can spread investment risk without necessarily spreading tax…

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