Biden wants to dismantle two weapons the richest 0.1% use to avoid taxes

(Bloomberg) — An unpleasant surprise for wealthy Americans lurks halfway through a 114-page document released by the U.S. Treasury late last month.

Proposals in the fiscal document — not mentioned when President Joe Biden outlined his plans to raise taxes on the rich in April — could disrupt or even dismantle some of the most popular ways super-wealthy people have legally avoided taxes for decades.

One target is dynasty trusts, vehicles that wealthy families can use to benefit multiple generations of descendants. Another is an even more common tool among the top 0.1%: trusts that can move millions, and sometimes billions, of dollars to heirs tax-free.

“This is the stuff that’s really going to make a difference,” said Joe Maier, director of wealth strategy at Johnson Financial Group. “It’s going to make a difference in the anxiety that wealthy people and their advisors have, and would really make a difference in the revenue the government collects.”

Biden’s so-called “Green Book,” the Treasury document laying out these details, specifically takes aim at dynasty trusts — vehicles that can exist for generations without incurring gift, estate, or generation-skipping transfer taxes. The proposal would force trusts to pay capital gains tax on appreciated assets every 90 years, but it’s drafted in a way that would impose taxes as early as Dec. 31, 2030.

The change would cause planners to think twice about using the strategy, said James F. Hogan, a managing director at Andersen Tax who previously worked at the IRS. “Do you really want to do a dynasty trust when you know you’re going to have an income tax anyways?”

Biden’s plans to make heirs pay more, equalize rates between investors and workers and boost taxes on corporations and the wealthy are part of a global move to target the rich — an effort that has gained momentum since COVID-19 blew massive fiscal holes in government budgets around the world. From Buenos Aires to Stockholm to Washington, authorities have proposed or implemented new taxes on capital gains, inheritances and wealth to raise money for social services and infrastructure programs.

‘Big blow’
Biden’s proposed plan would also charge a capital gains levy when assets are transferred into, or distributed from, certain kinds of trusts. A Treasury official said that aspect of the plan specifically targets tools like the intentionally defective grantor trust — a common, if complicated, technique that allows the wealthy to move money out of their taxable estates to benefit heirs.

“That’s a big blow to take that out of our arsenal,” said Ronald D. Aucutt, senior fiduciary counsel at Bessemer Trust.

The measures are designed to plug potential loopholes in Biden’s plans to boost capital gains taxes on the wealthy to ordinary income rates, and to tax gifts and large unrealized gains at death. The president has also proposed raising levies on corporations and increasing the enforcement budget of the IRS.

The more that advisors to the wealthy examine Biden’s proposals, the more they’re realizing how significant the changes may be.

“What they’re doing is creating a whole new tax regime,” said Richard Greenberg, a lawyer at Greenberg & Schulman in Woodbridge, New Jersey. “We’re going to have to do a lot of re-examination of a lot of techniques,” he said, and that means not just reconsidering future planning but looking at “what we’ve done in the past” for clients.

Unmentioned by the White House so far are any changes to the U.S. estate and gift tax. That levy, now as much as 40%, was created more than a century ago to break up dynastic wealth and affects only very large fortunes. But in targeting the tools that allow the rich to avoid the estate tax entirely, the Biden administration may end up causing an even bigger headache for the wealthy.

Tax-planning techniques
Advisors interpreting the Green Book can’t be sure exactly how the provisions will actually work. The final language in any tax bill is up to Congress; if it approves the legislation, some details might not be even settled until the IRS issues regulations.

In any case, the proposal to tax property transfers into and out of trusts “would significantly change several current planning techniques,” said Karl Swaidan, a partner at Hahn & Hahn, adding he worries about unintended consequences. “The rule appears vague and may be another example of legislation casting too wide a net in addressing specific techniques.”

While the wealthy and their advisors wait for details of Biden’s tax package to firm up, there’s little they can do except worry how the provisions might affect them.

“The underlying feeling at the client level is uncertainty and fear because of the lack of predictability about what the tax laws hold,” said Megan Jones, a tax law attorney at Pillsbury Winthrop Shaw Pittman. “I’ve used the technical term ‘freaking out,’” she joked. “Clients have a lot more questions and a lot more concerns.”

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