Bob’s Journal for 7/4

What You Should Learn from Warren Buffett’s Latest Estate Plan

Warren Buffett, chairman and chief executive of Berkshire Hathaway and billionaire, recently told us about updates to his estate plan.

Buffett has been open about the plans for his wealth for many decades. But those plans changed a lot over time.

Initially, he was going to hang on to the wealth for life and in his will give most of it to charities devoted to population control and a few other issues. He planned to limit the amount his children received, saying there should be enough left that they could do whatever they want but not so much that they don’t have to do anything.

But he was persuaded to begin substantial lifetime gifts beginning around 2006, many of them to the Gates Foundation. He even joined the board of the Gates Foundation.

Buffett has also been donating some of his Berkshire stock to foundations that each of his children and his late wife set up.

In addition, Buffett said he learned from others that there were more important issues than population control and that Bill Gates and others were well-equipped to determine how the charitable contributions should be dispersed.

In an interview last week with The Wall Street Journal, Buffett said he recently updated his will and estate plan.

During his lifetime, he plans to continue making annual gifts to the Gates Foundation and charities associated with his family.

Buffett resigned from the Gates Foundation board in 2021 and said in the interview that, in a change from previous plans, the foundation will not receive any contributions after his death.

Instead, all the wealth Buffett holds at his death will be bequeathed to a new charitable trust overseen by his three children. They will decide how the money is distributed over time and must act unanimously.

Buffett has changed his mind about a number of things over time and revised his estate plan accordingly. As mentioned, he used to favor waiting to give until death. But since 2006, he has transferred ownership of about half his Berkshire shares to charities.

He concluded that a broad range of charitable causes are worthy. He told the Journal, “There are a lot of ways to help people.”

Buffett also became more comfortable giving wealth to his children, both for their use and for them to decide how to donate. He told the Journal he’s seen the children mature over the years. “I feel very, very good about the values of my children,” he said.

Buffett reviews his estate plan regularly and looks at more than changes in the tax law. Buffett considers how his goals and values change and how his family has changed. He revises his will and estate plan accordingly.

Buffett also thinks long term when making revisions, even now at age 93. He talks about the importance of leaving flexibility in the plan so that his children can make decisions as circumstances change. Buffett no longer is trying to dictate now how the money should be dispensed in five, 10 or 20 years.

The Outlook for Tax Armageddon

Many provisions of the Tax Cuts and Jobs Act of 2017 are set to expire after 2025, and many in Congress now refer to that as Tax Armageddon.

If Congress allows the provisions to expire, individual income tax collections would increase 11% in 2026 and 10% in 2027, according to the Congressional Budget Office (CBO).

Those are greater increases than CBO projected four months ago. Without expiration of the law, individual income tax collections would rise 4% each year.

In addition, estate tax collections are estimated to rise 40% in 2027, if the 2017 law expires.

Few members of Congress want the 2017 law to expire in full, so they are preparing for a big debate over taxes after the 2024 election.

Republicans, of course, generally favor continuing most or all of the provisions set to expire.

Democrats expect to present a menu of options for the next tax law. They don’t want a wholesale expiration of the 2017 tax provisions and don’t favor across-the-board income taxes increases on Americans.

Leading Democrats have said they plan to follow the pledge not to increase income taxes on those with incomes below $400,000. But they want to see higher taxes on taxpayers above that income level, as well as on corporations and other businesses.

So, they’re looking at preserving the current income tax brackets for all but those paying the highest rate. It’s also likely they’ll favor extending the increase in the standard deduction and some other provisions.

But the Democrats are likely to propose increasing the corporate income tax rate (probably to 21%) and a range of other tax increases on large companies. They also want to limit deductions for salaries paid to highly compensated employees.

Reducing the estate tax exemption and perhaps taxing capital gains at death also could be on the table. An increase in the capital gains tax rate for some taxpayers and other taxes on investment income are likely to be proposed.

Proposals that were advocated in 2021 to change or eliminate a number of estate and gift tax reduction strategies are likely to resurface.

The results of the tax debate are likely to hinge on how the 2024 elections turn out. The victor in the presidential race will be important. But at least as important will be which party controls each house of Congress and which individuals win key races.

Individuals and businesses need to add some flexibility to their retirement and estate plans and be prepared to make some changes in 2025 to adapt to a changing tax code.

Will Optimism Kill the Bull Market?

One factor that has been consistent through the bull market is the persistence of pessimism among most individuals and market professionals.

Multiple surveys consistently revealed deep levels of pessimism among the public, even as both stocks and the economy performed well. Some studies detailed the wide differences between economic data and what people believe about the economy.

For a number of investors, the pessimism has been a bullish contrarian signal, as it has been described by Ed Clissold of Ned Davis Research.

Contrarians don’t become pessimistic until most people are optimistic or bullish.

When most people are bullish, that means it’s likely most investors are holding their maximum allocations to stocks. More money isn’t likely to flow into the markets, and prices are more likely to fall than continue rising.

Clissold points out that he’s still bullish, but he’s noted a few trends that bear watching.

Professional economists recently became less pessimistic than they have been, according to surveys.

Also, the Consumer Confidence Index data from The Conference Board often found that consumers felt much better about the present situation than about the future, indicating a level of pessimism. That’s started to change with consumers being less negative about the future. That change could be negative for both the economy and markets.

The Consumer Sentiment Index from the University of Michigan reported a similar pattern and the beginnings of a change.

These and other data indicate that pessimism isn’t as prevalent as it was when stocks were climbing to a series of record highs. Investors and households aren’t full-throated optimists yet, but the proverbial wall of worry that bull markets climb isn’t as high as it was a few months ago.

The Data

The Personal Consumption Expenditure (PCE) Price Index was unchanged in May after rising 0.3% in April. Over 12 months, the PCE Price Index rose 2.6% through May and 2.7% through April.

The core PCE Price Index, which excludes food and energy prices and is the Fed’s preferred measure of inflation, increased 0.1% in May following a 0.3% rise in April. Over 12 months, this index was up 2.6% through May and 2.8% through April.

The 12-month increase in the core PCE Price Index through May was the lowest since March 2021. Personal income increased 0.5% in May, up from 0.3% in April. Employee compensation rose 0.6% in May (0.2% in April), and income from assets increased 0.4% in both May and April.

Personal spending rose 0.2% in May after rising 0.1% in April. After adjusting for inflation, real personal spending increased 0.3% in May.

The final reading for June of the Consumer Sentiment Index from the University of Michigan was 68.2, above the 65.6 reported at mid-month, but less than 69.1 at the end of May.

Assessments of current conditions and expectations both were more positive during the last half of the month.

The Consumer Sentiment Index was 64.2 in June 2023.

The ISM Services Index plummeted to 48.8 in June from 53.8 in May. That’s the largest downward move in this index since April 2020.

It is the first reading below 50, indicating a contraction since December 2022, and only the second since June 2020.

The ISM Manufacturing Index dropped to 48.5 in June from 48.7 in May. That’s the third consecutive month the index declined from the previous month.

The index was above 50, which indicates expansion, only one month in the last 12 (March 2024).

The PMI Manufacturing Index, by contrast, increased to 51.6 in June from 51.3 in May. The index has been 50 or above every month in 2024.

The PMI Services Index rose to 54.8 in June from 54.5 in May.

The PMI Composite Index for the economy came in at 54.8 in June, up from 54.5 in May.

Durable goods orders increased 0.1% in May following a 0.2% increase in April.

But after eliminating defense and transportation orders, which is considered a good measure of business investment, durable goods orders declined 0.6% in May after rising 0.3% in April.

Factory orders declined 0.5% in May after rising 0.4% in April. It is the fifth negative change in orders in the last 12 months but the first since January. Excluding the volatile transportation sector, orders fell 0.7% in May, following a 0.5% rise in April.

Pending home sales fell 2.1% in May, after declining 7.7% in April. Over 12 months, pending home sales were down 6.6% through May and 7.4% through April.

The Kansas City Fed Manufacturing Index declined to negative 11 in June from negative 1 in May. Almost all subsets of the index fell from May to June. The index has been positive in only two of the last 12 months.

The private sector created 150,000 new jobs in June, the lowest amount in five months, according to the ADP Employment Report. In May 157,000 new jobs were created.

The number of job openings increased in May by 221,000 to 8.140 million, according to the JOLTS (Job Openings and Labor Turnover Survey) report. In addition, April’s number of openings was revised lower and remains the smallest number of job openings since February 2021.

The percentage of workers quitting jobs remained at around 2.2%, where it has been for seven months.

The second estimate of first-quarter gross domestic product (GDP) found that GDP grew at an annualized rate of 1.4%, up from 1.3% in the initial estimate. It is the lowest growth rate since GDP declined in the first and second quarters of 2022.

New unemployment claims decreased by 6,000 to 233,000 in the latest week. Initial claims hit a 10-month high of 243,000 two weeks earlier.

Continuing claims, which lag a week behind new claims, increased to 1.839 million from 1.821 million.

The Markets

The S&P 500 rose 0.77% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.58%. The Russell 2000 increased 0.66%. The All-Country World Index (excluding U.S. stocks) added 0.15%. Emerging market equities advanced 0.59%.

Long-term treasuries lost 3.81% for the week. Investment-grade bonds fell 0.94%. Treasury Inflation-Protected Securities (TIPS) declined 0.63%. High-yield bonds dropped 0.10%.

In the currency arena, the U.S. dollar rose 0.24%.

Energy-based commodities increased 1.72%. Broader-based commodities rose 0.27%. Gold advanced 0.48%.

Bob’s News & Updates

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