The latest plan released by House Democrats scales back many of President Biden’s proposals to hike taxes on corporations and rich investors, as moderates and progressives tussle over how far to go to address inequality. But they included an element the White House left out.
The package by the Ways and Means Committee calls for a revamp of the U.S. estate-and-gift tax, a levy on the country’s largest fortunes which has been greatly weakened over decades. If House Democrats have their way, rich Americans will soon be scrambling for new and probably more expensive ways to pass wealth onto heirs.
The 881-page legislative proposal cracks down on a number of strategies that have made the tax easy to avoid if you hire the right advisers. That could upend how the top 0.1% manages their fortunes and whether they can move millions, sometimes billions, of dollars’ worth of assets outside their estates tax-free.
“That’s a huge sea change in our world,” said Brad Dillon, a senior wealth strategist at UBS Group AG in New York. “It eliminates a very large majority of transactions that we would typically advise clients to do.”
Starting next year, Democrats would make more millionaires subject to the tax, by cutting in half the lifetime exemption—now $23.4 million for a married couple—which is the amount that can be passed on without triggering the 40% estate or gift levy.
That change, however, was scheduled to happen at the end of 2025 anyway. More significantly, the proposal takes aim at sales or gifts to popular vehicles, known as “intentionally defective grantor trusts,” that are used to transfer wealth free of estate tax.
The plan would pull grantor trusts into a wealthy person’s taxable estate when that person is the “deemed owner” of the trust. The committee would also tax a sale from a grantor trust to its owner.
“They are taking a hammer to the grantor trust rules and demolishing them,” Dillon said.
The committee would also restrict the use of discounts that reduce the value of wealthy families’ assets for estate and gift tax purposes.
Currently, the wealthy can take a valuation discount on an asset, including publicly traded stock, by placing it inside an LLC or another entity and then dividing it up among various heirs or trusts benefiting them. Because none of these owners has full control of the asset, they are currently allowed to reduce its total value for a tax break.
The new rule would no longer allow discounts, at least for “passive” assets. Assets used in active businesses can still be discounted under the proposa—a nod to potential concerns that could be raised by family farms and businesses.
Tax experts and advisers to the wealthy are still uncertain how all this would work in practice. For example, several didn’t know how or if the changes to grantor trusts would affect one of the most common planning techniques, the grantor retained annuity trust.
Determining whether an asset is a passive asset or business asset under the proposed restriction on valuation discounts is also likely to be difficult, especially in cases where a taxpayer has a mix of both, said James F. Hogan, a managing director at Andersen Tax LLC who formerly worked for the Internal Revenue Service.
The IRS “is going to be tasked with a very huge project in determining where you cross that line,” he said.