INSIGHT: Joe Biden’s Inadvertent Contribution to Keeping Partners at Elite Firms Hungry

Firms prosper when their most-capable partners are engaged energetically in building their practices. But success, and the wealth it brings, can take the edge off their motivation. Enter the prospect of a Biden administration: Biden’s economic plan lays out changes that would make it compelling for successful partners at elite firms to give away much of their wealth before year end. It’s a win-win for such partners and their firms: partners secure (literally) millions of post-tax dollars for their families; their firms get newly re-energized partners.

The opportunity for successful partners

Under President Trump’s 2017 Tax Cuts and Jobs Act (TCJA), an individual’s exclusion from federal estate and gift taxes (the IRS has a unified system that looks at gifts during one’s lifetime and from one’s estate in aggregate) was doubled to over $11 million and linked to inflation. As a result, federal estate and gift tax is paid today by individuals only if their combined gross assets at death and prior taxable gifts exceed $11.58 million, or $23.16 million for a married couple. This is an historic low in estate taxation.

Under the TCJA the lowering of estate and gift taxes was set to expire in 2025, with the $11 million exclusion then returning to its pre-TCJA level of $5 million (inflation adjusted). However, under a Biden administration, the expiration date could be brought forward—indeed, Biden’s economic plain states “Estate taxes should also be raised back to the historical norm.”

But there’s a work around for wealthy partners. A November 2018 IRS ruling grandfathers in gifts made under the current low-tax regime. Thus, if a successful partner gives away assets in advance of a Biden administration change, she can avail of today’s historically high exclusions and correspondingly low taxes. There are multiple ways for her to do this: outright gifts to responsible adult children, gifts in trust to children, and even passing along the family home (and vacation home) through a personal residence trust.

The savings can be significant. Let’s say our partner and her spouse have combined assets of $15 million. Under today’s regulations, they can give that full amount away and pay no federal estate and gift tax. If the exclusion returned to $5 million for an individual, $10 million for a couple, then $5 million of their assets would be subject to estate tax. The marginal federal estate tax rate is 40%; if they act now, they would increase their family’s post-tax wealth by $2 million.

The action implication for managing partners

To avoid these taxes, the partner and her spouse have to release substantial control of the assets gifted. They are likely to feel considerably less wealthy having done so, and will be inclined to rebuild their asset base in preparation for the comfortable retirement they thought they had already secured. This cannot but reinvigorate interest in building their personal wealth, with concomitant effects on the trajectory of individual partners’ practices and, in aggregate, the vitality of a firm.

The suggestion then is that managing partners bring the dynamics around estate taxation to the attention of their partners and sensitively encourage them to attend to the issue. For example, it may make sense for managing partners to arrange in-house seminars on dynamics in the estate tax world. Compelling co-hosts would be an inhouse estates lawyer and an inhouse investment-savvy corporate partner.

A second-order suggestion: if firms have young lawyers with insufficient demands on their time, consider training them up on estates work. Who knows, there could be a staggering spike in demand from the presidential election through to year end.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

(Michael Bloomberg also sought the Democratic presidential nomination. He endorsed Biden on March 4. Bloomberg Tax is operated by entities controlled by Bloomberg.)

Author Information

Dr. Hugh A. Simons is formerly a senior partner and executive committee member at The Boston Consulting Group and chief operating officer and policy committee member at Ropes & Gray. He now researches and writes about the business side of law firms and does some consulting for old friends. He encourages reader reactions at hasimons@gmail.com.