Democrats Consider Estate Tax Reform for $ 3.5 Trillion Budget Plan

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Democrats can end the tactics used by the rich to pass wealth on to heirs with little or no tax. It’s part of a larger plan to raise funds to expand America’s safety net.

Specifically, according to a discussion list on potential tax reforms obtained by CNBC, the party has banned certain complex fiduciary planning techniques used by wealthy Americans to avoid inheritance taxes. I am considering it.

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

According to inheritance tax experts, the reforms primarily target millions or millionaires who use a strategy of removing wealth from their estate and transferring it to heirs tax-free.

“Basically, this basket of loopholes can be used together at virtually any level, and even millionaires, to beat inheritance tax,” said progressive group Americans for Tax Fairness. Said Robert Lord, a company adviser.

The list, which is a draft idea put together by lawmakers before they formally propose it to the House of Representatives or the Senate, doesn’t contain much detail. Identify the trusts in question as “settlor-owned retirement trusts” and “intentionally defective settlor trusts”.

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Interestingly, the Democratic Party doesn’t seem to be considering reforming inheritance tax itself, such as lowering tax rates and higher asset thresholds, which would impose federal taxes on more property. real estate.

Currently, a 40% federal tax rate applies to real estate and gifts worth over $ 11.7 million for individuals and $ 23.4 million for couples.

The asset threshold will drop after 2025, even if Democrats don’t touch it, due to the 2017 tax cuts and the abolition of the jobs law. (At this point, about $ 6 million and $ 12 million, respectively, are exempt from half of the current tax.)

Higher tax

Senator Bernie Sanders (I-VT) and Senator Chuck Schumer (D-NY) on Capitol Hill on August 9, 2021.

Brendan Smialowski | AFP | Getty Images

The proposed inheritance tax reform is part of the Democratic Party’s broader theme of raising taxes on the rich to finance climate, paid vacations, child care and education, at a cost of up to $ 3.5 trillion. of dollars. There is a possibility of becoming.

President Joe Biden says households with an annual income of less than $ 400,000 will not be subject to any additional taxes.

Some of the possibilities for inheritance tax reform share elements of recent Democratic proposals, such as “For 99.5% Law,” co-sponsored by Senator Bernie Sanders and several lawmakers like I-Vt. I am.

Critics argue that the burden of inheritance tax reform will not only affect the wealthy, but will also spread to others, such as family farmers.

“A lot of Democrats love to talk about taxing the richest people, but in reality their proposal will hurt Main Street a lot more than it will Wall Street,” Republican Glenn said. He spoke about Congressman Thompson, a prominent member of the House Agricultural Commission, and various recent estate tax proposals.

Retirement trust held by the transferor

As an example of how individuals use trusts to protect their assets from taxes, let’s look at one of the methods in question, a retirement trust owned by a settlor.

These trusts, also known as the Libres, have been operated by a number of millionaires and millionaires including the Trump family, Facebook CEO Mark Zuckerberg, the Walton family (Wal-Mart fame) and the former Chairman of Goldman Sachs, Lloyd Blankfein. I did. Casino mogul Sheldon Adelson, who died earlier this year, is said to have used a trust to protect billions of dollars in taxes.

According to Charlie Grass, 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.

In general, heirs benefit from a tax-exempt capital gain, and owners reduce or avoid federal property tax or gift tax. (The concept is the same for intentionally flawed grantor trusts and the appraisal rebates mentioned above, Douglas said.)

Suppose an individual invests $ 1 million in FREE over a two-year period. During this period, inventories will increase by 50%, or $ 500,000. Trusts provide a double benefit. The heirs get $ 500,000 in tax-free growth and the capital gain is removed from the owner’s property, limiting or even eliminating the tax on the property upon the owner’s death. Equivalent to a tax exemption gift. (The owner recovers $ 1 million in principal and a small amount of interest.)

Tax experts say there may be games where owners intentionally devalue assets (such as real estate) placed in trust. As a result, the heirs will get more tax-exempt wealth.

A guide to how Democrats view the new rules, “For the Law at 99.5%”, will limit such confidences as a tool for transferring wealth.

By law, the length of time an asset must remain in trust is extended to a minimum of 10 years. This is a potential deterrent as the tax incentives will be lost if the owner dies before the end of the period. For example, depreciation of assets is no longer 100% tax exempt.

However, these policies can be changed significantly if they are not reflected in the final Democratic bill or if they are ultimately changed.

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

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