Estate planners for the wealthiest Americans are combing through the Biden administration’s proposed tax increases, hunting for ways to sidestep the potential hit from higher taxes on investment income and new capital-gains taxes at death.
The result, so far, is early strategizing about making gifts this year before some changes would take effect. That approach is mixed with acceptance that Congress will pass some significant tax increases and tempered by hope that it won’t.
“Our clients are resigned to the fact that taxes will go up,” said Helena Jonassen, a partner at
wealth management unit.
President Biden has proposed raising the top capital-gains tax rate to 43.4% from 23.8% and taxing appreciated assets at death as if they had been sold. Under current law, appreciated assets held until death escape the income tax. Heirs pay capital-gains taxes only when they sell and only on gains since the prior owner’s death.
Tax lawyers are looking at two basic approaches—act now or wait it out.
Acting now entails using any room available to get assets to heirs and trusts this year without paying gift taxes. That lifetime exemption is now $11.7 million per person, and people who didn’t move assets after Mr. Biden’s election have incentives to do so now. Under the Biden proposal, making gifts of appreciated assets this year wouldn’t trigger capital-gains taxes, but doing so next year would yield taxation equivalent to a sale.
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Waiting means delaying decisions until it is clearer what this Congress will do—or until a future Congress reverses any tax increases. And if Congress starts to tax appreciated assets at death, there will be an instant and powerful lobby of people trying to get the law changed when power shifts. The waiting game is more palatable for younger entrepreneurs and investors and tougher for older people trying to cash out of their businesses or worrying that they won’t be able to live long enough to see any new rules get repealed.
All of this potential tax planning is preliminary because it takes place against an uncertain backdrop. With slim Democratic majorities in the House and Senate, Mr. Biden would need the votes of every Senate Democrat and almost every House Democrat to raise taxes on the top sliver of wealthy Americans.
Some Democrats have already expressed reservations about the proposal to raise the capital-gains tax. And any bill Congress does pass isn’t guaranteed to look exactly like the White House proposal, said Ani Hovanessian, a partner at Venable LLP.
Among wealthy individuals, “there’s a lot of anxiety and nervousness that’s being generated by all the proposals,” Ms. Hovanessian said.
The administration’s proposal features two interrelated parts to generate $322 billion over a decade. The first is the rate increase on income over $1 million. The second changes the way capital gains are treated at death.
The rate increase would take effect for sales of stock and businesses after the April 28 announcement of the plan. With some business sales already in process, that retroactive date has frozen some moves and could change what buyers are willing to pay.
“Deals are slowing down or waiting for clarity or being repriced,” said David Herzig, who advises wealthy families for Ernst & Young LLP.
Mr. Biden’s plan to impose capital-gains taxes on assets held at death and on gifts as if they had been sold includes a $1 million per-person exemption. It would retain the existing exemption for gains on principal residences and deferrals for family-owned businesses and farms. Unlike the rate increase, the changes would take effect in 2022, creating a tax-planning opportunity before then.
But it might not happen at all. Democrats representing rural areas, including Sen. Jon Tester (D., Mont.) and Rep. David Scott (D., Ga.), have objected to the change on gains at death, warning about its potential impact on farmers. In a recent letter, Mr. Scott said deferrals didn’t do enough for farm families and would lead to land consolidation.
Taxing appreciated assets at death is essential for Democrats’ plan to equalize tax rates on capital gains and ordinary income. Just raising the capital-gains rate to 43.4% would likely lower tax collections, because people would defer even more gains until death.
“The rule for gains was always: defer, defer, defer,” said Tara Popernik, director of research at AllianceBernstein Holding LP’s private wealth unit. Under the Biden proposal, she said, it may make sense for clients to take gains in smaller chunks while living—for instance, in a year when their income falls under the $1 million threshold where the 43.4% rate would start.
Deals where entrepreneurs sell their businesses to a public company for stock would likely have to be rethought, said Eric Sloan, a tax partner at Gibson Dunn & Crutcher LLP. That approach has long worked as a way to keep the founder’s low basis, or cost, transfer it so they have a low basis in the publicly traded stock and then hold that stock for as much as possible until death. But those deferral benefits of keeping a low basis would shrink under the Biden plan.
Estate planners had been relying on vague summaries until the Treasury Department released its detailed 114-page “green book” explaining the administration’s revenue proposals for the fiscal year May 28. That document isn’t the law, but it is already leading to questions about some of the finer points that will determine estate planning.
For example, one sentence in the green book says that a transfer of property into a partnership would be treated like a sale, a change that would rewrite cornerstones of partnership tax law if taken literally. That isn’t the intent, said a Treasury official.
Another section targets long-running trusts designed to keep assets out of the estate-tax base. Under the administration’s proposal, unsold assets held by trusts, partnerships and other noncorporate entities would be treated as sold every 90 years, starting Dec. 31, 2030. It is designed to be roughly a person’s lifetime, the Treasury official said.
The green book is mostly silent on estate-tax changes, however, leaving many questions about asset valuation and coordinated planning that Congress may or may not address.
The 2022 effective date would also create a big difference if someone with substantial appreciated assets dies this year as opposed to next year, said Andy Howlett of Miller & Chevalier in Washington.
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