An expensive surprise for the rich heirs lies inside the Democrats’ tax plan


The latest plan released by House Democrats has rolled back many of President Biden’s proposals to raise taxes on corporations and wealthy investors, as moderates and progressives grapple over how far they should go to tackle inequality. But they did include an item left by the White House.

The package presented by the Ways and Means Committee calls for a renewal of the US estate and gift tax, a tax on the nation’s largest fortunes that has been greatly weakened for decades. If House Democrats get what they want, wealthy Americans will soon scramble to find new and possibly more expensive ways to pass on wealth to heirs.

The 881-page legislative proposal eliminates a number of strategies that made it easier to avoid the tax if you hired the right advisers. That could change the way the top 0.1% manage their fortunes and whether they can move assets of millions, sometimes billions, of dollars off their lands tax-free.

“This is a huge change in our world,” said Brad Dillon, senior wealth analyst at UBS Group AG in New York. “It cancels out a very large majority of the transactions that we normally advise clients on.”

Starting next year, Democrats will tax more millionaires, by cutting half the lifetime exemption — now $23.4 million for a married couple — an amount that can be passed without activating the 40% estate or gift tax.

However, this change was due to happen at the end of 2025 anyway. More importantly, the proposal targets sales or gifts of popular vehicles, known as “intentionally defective donor funds,” which are used to transfer wealth without the estate tax.

The plan will attract donor trusts into the wealthy person’s taxable property when that person is the “transit owner” of the trust. The commission will also tax the sale of the grantor’s credit to its owner.

“They knock on and destroy donor trust rules,” Dillon said.

The commission will also restrict the use of deductions that reduce the value of wealthy families’ assets for the purposes of estate and gift taxes.

Currently, the wealthy can obtain an appraisal discount on an asset, including publicly traded stock, by placing it within an LLC or other entity and then splitting it among heirs or trusts that benefit them. Since none of these owners have complete control over the asset, they are currently allowed to reduce its overall value for tax exemption.

The new rule will no longer allow for cuts, at least for “passive” assets. Assets used in active business could still be deducted under the proposal – a reference to potential concerns that farms and family businesses could raise.

Tax experts and wealthy advisors still aren’t sure how all of this works in practice. For example, many did not know how or whether changes to donor funds would affect one of the most common planning techniques, the grantor retained the confidence of the annuity.
James F. Hogan, managing director at Andersen Tax LLC, said determining whether an asset is a passive asset or a business asset under the proposed restrictions on valuation deductions is also difficult, particularly in cases where the taxpayer is a combination of both. who previously worked for the Internal Revenue Service.

He said the IRS “will be tasked with a very large project to determine where you cross that line.”

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