Biden targets two richest guns at 0.1% to avoid taxes (1)

A nasty surprise for wealthy Americans lurked halfway through a 114-page document released by the US Treasury late last month.

The technical provisions of the proposal – not mentioned when President Joe Biden laid out his plans to raise taxes on the rich in April – could disrupt or dismantle some of the most popular ways for very rich people to legally avoid taxes. for decades.

One of the targets is dynasty trusts, vehicles that wealthy families can use for the benefit of generations of descendants. Another is an even more common tool among the top 0.1% – trusts that can transfer millions, and sometimes billions, of dollars to heirs tax-free.

“This is what is really going to make the difference,” said Joe Maier, director of wealth strategy at Johnson Financial Group. “It is going to make a difference in the anxiety that rich people and their advisers have, and would really make a difference in the revenue the government collects.”

Biden’s so-called “Green Book,” the Treasury document outlining these details, specifically targets dynasty trusts – vehicles that can exist for generations without incurring gift, inheritance, or generation transfer taxes. The proposal would require trusts to pay capital gains taxes on appreciated assets every 90 years, but it is drafted to impose taxes as of December 31, 2030.

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The change would make planners think twice about strategy, said James F. Hogan, general manager of Andersen Tax LLC who previously worked for the Internal Revenue Service. “Do you really want to start a dynasty trust when you know you’re going to have income tax anyway?” “

Biden’s plans to charge heirs more, equalize rates between investors and workers, and raise taxes on corporations and the wealthy by raising rates are part of a global revival of initiatives to target the wealthy – a movement which has grown ever since Covid-19 has carved massive budget holes in government budgets around the world. From Buenos Aires to Stockholm to Washington, authorities have proposed or implemented new taxes on capital gains, inheritance and wealth to raise funds for social services and infrastructure programs.

“Big blow”

The plan proposed by Biden would also impose a capital gains tax when assets are transferred or distributed from certain types of trusts. A Treasury official said this aspect of the plan specifically targets tools such as the intentionally flawed transferor trust – a common, albeit complicated, technique that can allow the wealthy to withdraw money from their taxable estates for the benefit of the poor. heirs.

“It’s a big blow to take this out of our arsenal,” said Ronald D. Aucutt, senior fiduciary advisor at Bessemer Trust.

The measures are designed to fill potential loopholes in Biden’s plans to raise capital gains taxes on the rich to ordinary income rates, and to tax gifts and large unrealized gains on death. The president also proposed to increase corporate levies and increase the IRS’s operating budget.

The more wealthy advisers scrutinize Biden’s proposals, the more they realize how important the changes could be.

“What they’re doing is creating a whole new tax system,” said Richard Greenberg, attorney at Greenberg & Schulman based in Woodbridge, New Jersey. “We’re going to have to revisit a lot of techniques,” he said, which means not only reconsidering future planning, but also looking at “what we’ve done in the past” for clients.

So far, the White House has not mentioned changes to the U.S. inheritance and gift tax, a levy of up to 40% that only affects very large fortunes created over the years ago. a century to shatter dynastic wealth. But, by targeting the powerful tools that allow the wealthy to avoid inheritance tax entirely, the Biden administration may end up causing an even greater headache for the wealthy.

Tax planning techniques

Advisers interpreting the Green Paper cannot know exactly how the provisions will work in practice. The final language of any tax bill will be up to Congress and, assuming the legislation is finally enacted, some details may not even be worked out until the IRS issues regulations.

Either way, the proposal to tax property transfers in and out of trusts “would significantly alter several current planning techniques,” said Karl Swaidan, partner at Hahn & Hahn, adding that he was concerned about the unintended consequences. . “The rule seems vague and may be another example of legislation casting too wide a net when addressing specific techniques.”

As the wealthy and their advisers wait for the details of Biden’s tax program to become clear, there’s little they can do except worry about how the provisions might affect them.

“The underlying sentiment at the client level is uncertainty and fear due to the lack of predictability of what is in tax laws,” said Megan Jones, tax lawyer at Pillsbury Winthrop Shaw Pittman LLP. “I used the technical term ‘panic’,” she joked. “Customers have a lot more questions and a lot more concerns. “

(Add details on global tax initiatives in seventh paragraph.)

To contact the authors of this story:
Allyson versprille in Arlington at [email protected]

Ben Steverman in New York at [email protected]

To contact the editor responsible for this story:
Pratish Narayanan to [email protected]

Peter Paulden

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