An unpleasant surprise for wealthy Americans lurked halfway through a 114-page document released by the US Treasury Department late last month.
Technical provisions in the proposal – which weren’t mentioned when President Joe Biden unveiled his plans to raise taxes for the rich in April – could disrupt or dismantle some of the most popular ways the super-rich have legally avoided taxes for decades.
One goal is dynasty trusts, vehicles that wealthy families can use to benefit generations of offspring. Another is an even more common instrument among the top 0.1% trusts that can transfer millions and sometimes billions of dollars to heirs tax-free.
“This is the stuff that will really make a difference,” said Joe Maier, director of wealth strategy at Johnson Financial Group. “It will make a difference in the fear wealthy people and their advisors have and would really make a difference in government revenues.”
Biden’s so-called “Green Book,” the Treasury Department’s document that sets out these details, is specifically aimed at dynasty trusts – vehicles that can exist for generations without incurring gift, inheritance or intergenerational transfer taxes. The proposal would force trusts to pay capital gains taxes on estimated assets every 90 years, but it is worded so that taxes will be collected as early as December 31, 2030.
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The change would cause planners to think twice about strategy, said James F. Hogan, a director at Andersen Tax LLC who previously worked for the Internal Revenue Service. “Do you really want to do a dynasty trust knowing that you will have an income tax anyway?”
Biden’s plans to make heirs pay more, equalize interest rates between investors and workers, and raise taxes on businesses and the rich through tax hikes are part of a global revival of initiatives targeting the rich – a movement that has been going on since the outbreak gaining momentum from Covid-19 has created massive fiscal holes in national budgets worldwide. From Buenos Aires to Stockholm to Washington, authorities have proposed or introduced new taxes on capital gains, inheritance and wealth to raise money for social services and infrastructure programs.
‘Big Hit’
The plan proposed by Biden would also impose a capital gains tax when assets are transferred to or distributed by certain types of trusts. A Treasury official said one aspect of the plan specifically targets instruments like the deliberately flawed Grantor Trust – a common, albeit complicated, technique that can allow the wealthy to remove money from their taxable estate in favor of heirs.
“This is a tough blow to take from our arsenal,” said Ronald D. Aucutt, senior fiduciary advisor at Bessemer Trust.
The measures are intended to close potential loopholes in Biden’s plans to raise capital gains taxes for the rich to normal income rates and to tax gifts and large unrealized gains in the event of death. The president has also proposed increasing levies on businesses and increasing the IRS’s enforcement budget.
The more Wealthy Biden advisors examine proposals, the more they realize how significant the changes could be.
“You’re creating a whole new tax system,” said Richard Greenberg, an attorney at Greenberg & Schulman based in Woodbridge, New Jersey. “We’re going to have to re-examine a lot of techniques,” he said, and that means not only rethinking future planning, but also looking at “what we’ve done in the past” for customers.
The White House has not yet mentioned any changes to U.S. inheritance and gift tax, a levy of up to 40% on very large fortunes created more than a century ago to smash dynastic wealth. But by targeting the powerful tools that enable the rich to evade inheritance tax entirely, the Biden government could be an even bigger headache for the rich.
Tax planning techniques
Advisers interpreting the Green Paper cannot be sure how the provisions will work in practice. The final language in any tax law is left to Congress, and when a law is passed some details may not even be settled until the IRS issues regulations.
In any event, the proposal to tax property transfers in and out of trusts “would significantly change several current planning techniques,” said Karl Swaidan, partner at Hahn & Hahn, adding that he was concerned about unintended consequences. “The rule seems vague and could be another example of the legislature casting too wide a net in dealing with certain techniques.”
While the rich and their advisors wait for the details of Biden’s tax package to solidify, there is little they can do other than worry about how the regulations might affect them.
“The underlying feeling at the client level is uncertainty and fear as tax laws are unpredictable,” said Megan Jones, tax attorney at Pillsbury Winthrop Shaw Pittman LLP. “I used the technical term ‘freaking out’,” she joked. “Customers have a lot more questions and a lot more worries.”
(Adds details on global tax initiatives in the seventh paragraph.)
To contact the authors of this story:
Allyson Versprille in Arlington at aversprille1@bloomberg.net
Ben Steverman in New York at bsteverman@bloomberg.net
To contact the editor responsible for this story:
Pratish Narayanan at pnarayanan9@bloomberg.net
Pierre Paulden
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