Stableford Capital Insights

Of all the expenses, taxes can sting the most and take the biggest bite of your returns.The good news is that keeping up with potential changes may minimize your tax burden and maximize your bottom line—whatever your goals may be.There are two reasons for this. One is that you lose the money you pay in taxes. The other is that you lose the growth the money could have generated if it were still invested.In that context let me take a pass, a first installment if you will at changes in both the tax code and estate exemption limits that are currently being considered.

Proposed Capital Gains Green Book Tax Increase

The Treasury Department released a 100+ page detailed list of Biden’s tax proposals in a document officially titled General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals – the subject colloquially known as the “Green Book” — that effectively serves as the revenue side of the new additional spending plans that are currently before Congress.

1st Retroactive Capital Gains Increase in U.S. History

Set forth on page 62 of the Green Book tax, is the proposal we have all heard about, the increase in the capital gains tax rate that will raise the top rate for households earning more than $1 million to 43.4% — a number that includes an existing 3.8% surtax to help pay for the Affordable Care Act — from the current 23.8%. Biden has proposed this change will be effective retroactive to late April, as the Green Book states, “This proposal would be effective for gains required to be recognized after the date of the announcement.”April 28th is the date the American Families Plan was released and is viewed by most tax experts as the date the Biden Administration is looking for. The Green Book’s proposed long-term capital gains increase would be the first retroactive capital gains increase in U.S. federal tax history and would have potentially far-reaching consequences.

Appreciated Property by Gift or on Death

In addition to the proposed Capital Gains tax rate increase, also on page 62, is a very unpleasant surprise for wealthy Americans. This proposal was not mentioned when Biden presented his plans to raise income taxes and capital gains taxes in late April. This additional proposal could disrupt or dismantle some of the most popular ways ultra-wealthy people have legally avoided taxes for decades.This proposal is titled “Treat Transfers of Appreciated Property by Gift or on Death as Realization Events”. There are 10 paragraphs following this title describing this proposal but in a nutshell, the Biden Administration is proposing to tax:

• The unrealized appreciation on donations or gifts
• Transfers of property containing unrealized gains (including at death)
• Gains on the unrealized appreciation in property held by a trust, partnership, or other non-corporate entity that is the owner of the property if that property has not otherwise been the subject of a recognition event within the prior 90 years, with a testing period beginning on January 1, 1940 (such that the first possible recognition event for any taxpayer would be December 31, 2030). *Transfers of property into, and distributions in kind from, an irrevocable trust, partnership, or other non-corporate entity would be recognition events.
• The tax on the capital gains triggered at death would be deductible for estate tax purposes, reducing the impact by 40% at current estate tax rates. (If this provision were enacted in this or a similar fashion, it would make charitable transfers of appreciated property even more attractive from a tax perspective).

Exclusions

The proposal would allow a $1 million per person exclusion from recognition of other unrealized capital gains on property transferred by gift or held at death. The per-person exclusion would be indexed for inflation after 2022 and would be portable to the decedent’s surviving spouse under the same rules that apply to portability for estate and gift tax purposes (making the exclusion effectively $2 million per married couple).

Dynasty & Grantor Trusts

Biden’s Green Book specifically takes aim at dynasty trusts — vehicles that can exist for generations without incurring gift, estate or generation-skipping transfer taxes. As stated above this 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.As stated, above 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.

Closing Loopholes

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 also proposed raising levies on corporations and increasing the enforcement budget of the IRS.These proposals would more than likely end the Buy, Borrow, Die strategy laid out in the article from the Wall Street Journal updated online, July 13th titled Buy, Borrow, Die: How Rich Americans Live Off Their Paper Wealth that very effectively minimizes taxes. Upon death, the large unrealized gains that would be transferred to heirs in the Die part of the strategy would now be subject to capital gains taxes at the much higher rates proposed.

More On the Horizon?

Unmentioned by the White House so far are any changes to the estate and gift tax, a levy of as much as 40% affecting only very large fortunes that were created more than a century ago to break up dynastic wealth. But by targeting the powerful tools that allow the rich to avoid the estate tax entirely, the Biden administration may end up causing an even bigger headache for the wealthy.Tax Advisers interpreting the Green Book can’t be sure exactly how the provisions will work in practice. The final language in any tax bill will be up to Congress and assuming legislation is eventually enacted, some details might not be even settled until the IRS issues regulations.

Changes to Tax Planning

In any case, the proposal to tax property transfers into and out of trusts will significantly change several current planning techniques. When asked about the proposals, Karl Swaidan, a partner at Hahn & Hahn, stated that he worries about unintended consequences. “The rule appears vague and may be another example of legislation casting too wide a net in addressing specific techniques.”I will continue to keep you apprised of the latest tax and estate changes that can affect your investments in Mark’s Corner – An Estate and Tax Newsletter in the coming months.Our advisors have the experience necessary to develop a financial plan that works for you, your family, and your future. Reach out for a complimentary 15-minute consultation today by calling 480.493.2300 or contact us online.