EDITOR NOTE: The Biden administration unleashed yet another volley of taxation targeting the ultra-rich: dynasty trusts, a vehicle that the wealthiest of Americans use to transfer generational wealth tax-free to heirs, are now in the administration’s crosshairs. This makes President Biden look like something of a caped crusader fighting the corrupt rich to give the “common person” a leg up in an uneven playing field. The truth is that the ultra-wealthy have been benefiting from government and Fed policies for decades. Biden’s revocation of these benefits hasn’t really ceased, as monetary and fiscal policy remains advantageous to those positioned to benefit from them (namely, the ultra-rich). Biden’s tax does little to cancel the benefits the wealthiest Americans are still receiving. However, the injustice it’s doing to regular Americans--the inflation that’s wreaking havoc on the everyday person’s purchasing power and the reckless spending that’s claiming the future income of average Americans--is far more damaging than any punitive measure he can levy on the wealthiest segment of our population. The ultimate beneficiary is, of course, the government, who collects revenue from the entire range of the economic spectrum--the rich, middle class, and poor--so that it can continue to spend (and waste) your money with impunity.
An unpleasant surprise for wealthy Americans was lurking halfway through a 114-page document released by the U.S. Treasury late last month.
Technical provisions in the proposal—not mentioned when President Joe Biden presented his plans to raise taxes on the rich in April—could disrupt or 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 advisers 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 are able to 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 the strategy, said James F. Hogan, a managing director at Andersen Tax LLC who previously worked at the Internal Revenue Service. “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 by raising rates are part of a global revival of initiatives to target the rich—a movement 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.
Biden’s proposed plan would also charge a capital gains tax 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 can allow 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.
Originally posted on FA Financial Advisor