Democrats Consider Wealth Tax Reform for $ 3.5 Trillion Budget Plan

Democrats Consider Wealth Tax Reform for $ 3.5 Trillion Budget Plan

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Democrats could remove a strategy the wealthy use to fund heirs with little or no tax, as part of a larger plan to raise funds to extend America’s safety net.

In particular, the party is considering rejecting some of the complex fiduciary planning techniques used by wealthy Americans to avoid inheritance taxes, according to a discussion list on possible tax reforms obtained by CNBC.

According to the list, Congressional Democrats could ask the Treasury Department to update the rules to “prevent abuse of the non-economic valuation exemption.” This concept applies, for example, to entrepreneurs who give their children a minority stake in their business at a reduced rate.

Wealth tax experts say the reforms primarily target multimillionaires or billionaires, who use strategies to extract wealth from their assets and transfer it to tax-exempt heirs.

According to Robert Lord, advocate for progressive Americans for Tax Fairness, “Basically you have this basket of loopholes that can be used collectively to beat inheritance taxes at all levels, even billionaires. “

The list, seen as a draft of legislators assembled before formally presenting them to the House or Senate, does not have many details. It identifies “grantor retained annuity trusts” and “willfully defective grantor trusts” as the trusts in question.

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Interestingly, Democrats don’t seem to be weighing the inheritance tax reforms itself, such as higher tax rates or lower estate limits that would subject more estates to a federal levy.

A 40% federal tax rate currently applies to estates and gifts worth over $ 11.7 million for individuals and $ 23.4 million for married couples.

Due to the sunset provisions of the 2017 Tax Cuts and Jobs Act, Democrats are not touching it, even though the asset limit will drop after 2025. (About $ 6 million and $ 12 million dollars, respectively, would be tax-exempt – half the time – present value.)

higher taxes

Bernie Sanders, I-VT, and Senate Majority Leader Chuck Schumer, D-NY, on Capitol Hill on August 9, 2021.

Brendan Smialowski | AFP | Getty Images

The proposed inheritance tax reforms are part of a broader theme by Democrats to raise taxes for the rich to help with climate, paid vacations, child care and education that could cost up to $ 3.5 trillion.

President Joe Biden said households earning less than $ 400,000 a year would not see a higher tax bill.

Some potential inheritance tax reforms share elements of recent Democratic proposals, such as the “99.5% for the law” co-sponsored by several lawmakers such as Sen. Bernie Sanders, I-Vt.

Critics argue that the burden of some property tax reforms would affect not only the rich but also others, such as family farmers.

Glenn Thompson, R-Penn, a leading member of the House Agriculture Committee, said: “A lot of Democrats like to talk about taxing the richest of the rich, but in reality their proposals target a lot more Main Street than Wall Street. will hurt. Among the various recent property tax proposals.

Maintenance annuity trust

Let’s take a look at annuity trusts kept by grantors, a technique as an example of how individuals sometimes use trusts to save money on taxes.

These trusts – also known as FREEs – have been operated by many millionaires and billionaires, including the Trump family, Facebook CEO Mark Zuckerberg, the Walton family (of Wal-Mart) and the former chairman of Goldman Sachs. Lloyd Blankfein. Are included. Casino mogul Sheldon Adelson, who died earlier this year, is said to have used the trusts to save billions of dollars in taxes.

According to Charlie Douglas, a certified financial planner who runs a family office in Atlanta, individuals often use trusts to transfer assets that are expected to increase in value significantly.

Typically, heirs benefit from a tax-exempt capital gain and the owner deducts or avoids federal inheritance or gift taxes. (The concept is the same as for the transferor trusts and the aforementioned intentionally flawed valuation exemptions, said Douglas.)

Let’s say someone puts $ 1 million worth of shares into FREE with a two-year term. The stock grows 50%, or $ 500,000, during this period. The trust has a twofold advantage: the heirs receive a tax-free increase of $ 500,000 and the capital gain is withdrawn from the owner’s estate, limiting or perhaps eliminating estate tax on the owner’s death. This becomes the equivalent of a tax-exempt donation. (The owner will get back $ 1 million in principal plus a small amount of interest.)

Tax experts say there can also be games, where owners intentionally undermine the value of assets held in trusts (like real estate). As a result, the heirs will receive more tax-free wealth.

The For the 99.5% Act, a guide to how Democrats view the new rules, would ban these trusts as money transfer tools.

The law would increase the length of time assets must remain in the trust for at least 10 years – a potential deterrent as the tax benefit is lost if the owner dies before the term expires. For example, real estate capital gains will also no longer be 100% tax exempt.

However, these policies may not end up in the final Democratic bill or be significantly changed if they do.

“If someone says they know what’s going to happen, they’re crazy,” said Douglas.

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