Campaigning for president, Biden was less specific about plans for the estate and gift tax. The 40% levy can be easily avoided with a variety of trust strategies. “They’ve made Swiss cheese out of that tax,” Marr said. Its reform has been a long priority of Democrats.
A bill proposed by Vermont Senator Sanders would eliminate most of these loopholes. For example, it would put a time limit on dynasty trusts, vehicles designed without an expiration date that are used to pass fortunes not just to children and grandchildren but future unborn generations as well.
Can Tax-Avoidance Methods Survive?
Even if Biden doesn’t endorse Sanders’ entire bill, advisers to the wealthy fear that lawmakers could slip some of these proposals into the final legislation. The effect would be to un-do or complicate decades of planning by the U.S.’s wealthiest families.
“A ‘revolution’ is not too powerful a word” for some of the ideas being discussed, said Edward Renn, a partner at Withers. “I don’t think it’s going to be possible for wealthy investors to escape these tax hikes unless they engage in sophisticated planning.”
Rich taxpayers could find themselves squeezed between paying higher income tax rates now or a stronger estate tax at the end of their lives. The best course of action may depend on unknowable factors, like what investment returns look like in the future, or whether tax laws change significantly again in several years.
The wealthy may also find themselves in many more battles with the Internal Revenue Service. Biden is expected to propose an $80 billion funding boost for the agency, which has been decimated by budget cuts over the last decade, in order to boost audits of rich individual individuals and large corporations. Last month, a study found more than a fifth of income from the top 1% isn’t being reported to the IRS.
The question is how many legal methods of avoiding taxes can survive Biden’s tax bill if it becomes law. Some strategies already being discussed by advisers, like those involving life insurance, could also be targeted in a final bill.
With big changes looming, rich Americans are trying to take advantage of current rules by moving money now. For example, advisers and clients are considering selling assets with big gains in 2021, in order to avoid a higher tax rate later.
The Rich Scramble
Also, at least for now, taxpayers can still use trust strategies, and they’re allowed to transfer an unprecedented amount of money, more than $23 million for married couples, to heirs without triggering an estate and gift tax.
“People are scrambling to get assets out of their estates now,” Mezzanotte said.
Some families are being rushed into quick decisions about transferring wealth, sometimes to very young children, said Josh Baron, a co-founder and partner at BanyanGlobal. “You have these estate-planning considerations that are very immediate,” he said. “But they also have these non-financial implications on family dynamics, on making sure the next generation doesn’t feel entitled.”
Making these investing and legal decisions more difficult is the uncertainty over what ends up in Biden’s final legislation—if it passes at all. Another open question is when new rules will be implemented. Most are assuming a tax law won’t be retroactive to the beginning of the year, but rules could take effect at any point in 2021, including the date legislation is proposed or the date it’s enacted. Or, lawmakers could make changes effective at the beginning of 2022.
“We might have all year to do this—and we might not,” said Beth Kaufman, a tax attorney at Caplin & Drysdale in Washington, D.C. With so much uncertainty and so many ideas swirling around, “it’s a little hard to know what direction to go in at the moment.”
—With assistance from Laura Davison.
This article was provided by Bloomberg News.