Democrats weigh wealth tax reforms on a $ 3.5 trillion budget plan

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Democrats can shake up the tactics used by the rich to pass on wealth to heirs with little or no taxes, part of a broader plan to raise money for an expansion of the U.S. security network.

In particular, the party plans to reject some comprehensive trust planning techniques used by wealthy Americans to avoid wealth tax, according to a discussion list of potential tax reforms obtained by CNBC.

Congress Democrats may also ask the Treasury Department to update the regulations to “prevent the abuse of non-economic valuation discounts,” according to the list. This concept applies, for example, to entrepreneurs who give a minority interest in their business to their children at a discounted rate.

The reforms are largely aimed at billionaires or billionaires who use strategies to drive wealth out of their wealth and transfer it to tax-exempt heirs, according to experts in wealth taxation.

“Basically, you have this basket of loopholes that collectively can be used to defeat wealth tax at all levels, even billionaires,” according to Robert Lord, advisor to the American Progressive Group on Tax Equity.

The list, a draft of ideas, lawmakers meet before formally launching it in the House or Senate, doesn’t contain many specifics. Identifies the “annuity trusts retained by the grantor” and the “intentionally defective grantor trusts” as the trusts in question.

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Interestingly, Democrats do not seem to be weighing reforms to the wealth tax itself, such as a higher tax rate or a reduced activity threshold that would subject more wealth to federal levies.

A 40% federal tax rate currently applies to assets and gifts valued at more than $ 11.7 million for individuals and $ 23.4 million for married couples.

That activity threshold will fall after 2025 even if Democrats don’t touch it, due to the sunset provisions in the Cuts and Employment Act 2017. (About $ 6 million and $ 12 million, respectively, would be exempt from tax – half the present value – at that time.)

Higher taxes

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


The proposed tax reforms are part of the broader theme of the Democrats raising taxes on the rich to help fund the climate, paid leave, childcare and education measures, the cost of which can reach up to $ 3.5 trillion.

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

Some of the potential tax reforms share elements of recent democratic proposals, such as the “For the Act 99.5%”co-sponsored by several lawmakers such as Senator Bernie Sanders, I-Vt.

Critics argue that the weight of certain wealth tax reforms would not only have an impact on the rich, but would extend to others as family farmers.

“Many Democrats love to talk about taxing the richest of the rich, but in reality, their proposals hurt Main Street much more than Wall Street,” said Glenn Thompson, R-Penn., A classified member of the Agriculture Committee. of the House, he said of the various recent tax proposals.

Income trusts retained by the grantor

Let’s look at annual income trusts, one of the techniques in question, as an example of how individuals sometimes use trusts to protect wealth from taxation.

These trusts – also known as GRATs – have been exploited by numerous millionaires and billionaires, including the Trump family, Facebook CEO Mark Zuckerberg, the Walton family (of Wal-Mart fame) and former Goldman Sachs president Lloyd Blankfein. Casino mogul Sheldon Adelson, who died earlier this year, he remembers it used the trusts to protect billions of dollars from the tax.

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

In general, heirs benefit from tax-free appraisal and the landlord reduces or avoids a federal tax or gift. (The concept is similar for intentionally defective concessionaires and the aforementioned appraisal discounts, Douglas said.)

Let’s say an individual puts $ 1 million of stock into a GRAT with a two-year term. The stock grew 50%, or $ 500,000, over that period. The trust makes a double benefit: The heirs get the $ 500,000 tax-free increase and the appraisal is removed from the owner’s estate, thus limiting or perhaps even eliminating the tax that the estate owes on the owner’s death. . It becomes the equivalent of a tax-free gift. (The owner would have to repay the $ 1 million principal plus a small interest.)

Tax experts say some games can also happen, so homeowners intentionally discard the value of an asset (such as real estate) placed in trust. As a result, heirs will get more tax-free wealth.

The “For the 99.5% Act,” a guide to how Democrats might think of new rules, would restrict these trusts as a tool for wealth transfer.

The legislation would increase the amount of time assets must remain in trust for a minimum of 10 years – a potential deterrent since tax benefits are lost if the owner dies before the end of the term. The appreciation of the business would not even be 100% tax-free, for example.

However, these policies may not end in a final Democratic project, or they can be significantly changed if they do.

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

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