“Much of what gave alarm to high-net-worth individuals was already out” of the latest versions of the bill, said Bill Smith, managing director of CBIZ MHM’s national tax office. “Most of the concern had already withered.”
Advisers to the wealthy aren’t resting easy, however. Many, including BDO’s Winter, suspect Democrats might eventually reach a deal on a pared-back package. With so much uncertainty, he said, “it makes it literally impossible to take any pre-emptive steps” to avoid taxes and be sure they’ll work.
Still, rich Americans have been in a hurry to complete transactions before the end of the year, trying to lock in the current rates and enjoy loopholes while they still can. U.S. billionaires, for example, were selling stock at more than twice the rate as last year, ensuring those sales weren’t subject to the proposed surtax, a 5% levy on incomes over $10 million and an additional 3% tax on those above $25 million, slated to go into effect in 2022.
IRS Funding
Also threatened by Manchin’s announcement are plans for a significant funding increase for the Internal Revenue Service. The agency’s rate of auditing the wealthy has plunged due to budget cuts, a trend “that sends a message to people that they can do as they please with very little risk of consequences,” said Jay Soled, a Rutgers University professor and tax attorney.
Despite the latest roadblocks to the bill, advisers said many of their clients are still rushing to finish things off by the end of the year, just in case. And there may even be new opportunities to pass on wealth to heirs.
With the bill delayed until at least next year, Lathrop GPM partner Marya Robben said clients are “ready to move” on setting up grantor-retained annuity trusts, or GRATs. Such vehicles get around the estate and gift tax by letting heirs profit from the appreciation in assets they don’t own. Recent market declines and the prospect of higher interest rates make GRATs a more attractive strategy, she said.
Provisions to shut down the GRAT loophole weren’t included in the latest version of the bill.
No Rush
Manchin’s opposition is most significant for those who “were hesitant” or running late on taking steps to transfer wealth to heirs, said Laura Zwicker, chair of the private client services group at Los Angeles law firm Greenberg Glusker.
“Senator Manchin’s announcement makes it likely that clients will not want to rush into planning in 2021 and to take a bit more time to think about their transactions,” she said.
If Democrats can’t strike a deal soon, it could be several years before they have any chance of changing tax rules, said Rutgers’ Soled.
“Embedded in the code there are provisions where people are not paying their fair share,” he said. “These are systemic issues that are exacerbating inequality.”
This article was provided by Bloomberg News.