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Democrats can scuttle the tactics used by the wealthy to pass wealth on to their heirs with little or no tax, as part of a larger plan to raise money for an expansion of America’s safety net.
Specifically, the party is considering banning certain complex fiduciary planning techniques used by wealthy Americans to avoid inheritance tax, according to a discussion list on potential tax reforms obtained by CNBC.
Congressional Democrats can also ask the Treasury Department to update regulations to “prevent the abuse of uneconomic valuation discounts,” according to the list. This concept applies, for example, to entrepreneurs who give a minority stake in their business to their children at a reduced rate.
The reforms largely target multimillionaires or billionaires who use strategies to withdraw wealth from their estates and transfer it to tax-free heirs, according to estate tax experts.
“Basically you have this basket of loopholes that can be used collectively to defeat inheritance tax at all levels, even billionaires,” said Robert Lord, lawyer for Americans for Tax Fairness, a progressive group.
The list, a draft of ideas that lawmakers put together before formally presenting them to the House or Senate, doesn’t contain much detail. It identifies “Grantor Retained Annuity Trusts” and “Intentionally 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, like a higher tax rate or a lower asset threshold that would subject more estates to federal levies.
A 40% federal tax rate currently applies to estates and gifts valued at over $ 11.7 million for individuals and $ 23.4 million for married couples.
That asset threshold will drop after 2025 even if Democrats don’t touch it, due to the sunset provisions of the 2017 Tax Cuts and Jobs Act. (About $ 6 million and $ 12 million, respectively, would be exempt from tax – half of the current value – at that time.)
Senator Bernie Sanders, I-VT, and Senate Majority Leader Chuck Schumer, D-NY, on Capitol Hill on August 9, 2021.
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The proposed inheritance tax reforms are part of Democrats’ broader theme. raise taxes on the rich to help finance climate measures, paid holidays, child care and education, which can 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 of the potential inheritance tax reforms share elements of recent Democratic proposals, such as the “For the law at 99.5%“co-sponsored by several lawmakers like Senator Bernie Sanders, I-Vt.
Critics argue that the burden of some inheritance tax reforms would not only impact the wealthy, but spread to others like family farmers.
“A lot of Democrats love to talk about taxing the richest of the rich, but in reality their proposals would hurt Main Street far more than Wall Street,” said Rep. Glenn Thompson, R-Penn., And Senior Fellow of the House Agriculture Committee, noted various recent proposals for inheritance tax.
Consider annuity trusts kept by grantors, one of the techniques in question, as an example of how individuals sometimes use trusts to protect their wealth from tax.
These trusts, also known as Libres, were operated by numerous millionaires and billionaires, including the The Trump family, Facebook CEO Mark Zuckerberg, the Walton family (of Wal-Mart fame) and former Goldman Sachs chairman Lloyd Blankfein. Casino mogul Sheldon Adelson, who died earlier this year, would have used trusts to protect billions of dollars in taxes.
Individuals often use trusts to transfer assets that are expected to increase in value significantly, according to Charlie Douglas, a certified financial planner who runs a family office in Atlanta.
As a rule, heirs benefit from a tax-exempt capital gain and the owner reduces or avoids federal inheritance or gift tax. (The concept is similar for the grantor trusts and the aforementioned intentionally flawed valuation rebates, said Douglas.)
Let’s say an individual puts $ 1 million worth of shares into a two-year FREE. The stock grows 50%, or $ 500,000, during this period. The trust yields a double benefit: the heirs get the growth of $ 500,000 tax-free and the capital gain is withdrawn from the owner’s estate, thus limiting or perhaps even eliminating the tax the estate owes on the owner’s death. . This becomes the equivalent of a tax-free donation. (The owner would get back the principal of $ 1 million plus a small amount of interest.)
Tax experts say certain gambling can also occur, where owners intentionally reduce the value of an asset (like real estate) placed in the trust. The heirs would thus obtain more tax-free wealth.
The For the 99.5% Act, a guide to how Democrats can think of new rules, would limit these trusts as a tool for transferring wealth.
The legislation would increase the length of time assets must remain in the trust to a minimum of 10 years – a potential deterrent since tax benefits are lost if the owner dies before the end of the term. For example, asset appreciation would no longer be 100% tax exempt.
However, these policies may not end up in a final Democratic bill, or may be changed significantly if they do.
“If someone says they know what’s going to happen, they’re crazy,” said Douglas.