Future Returns: A Wealth Management Approach Against Biden’s ‘Billionaire Tax’

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Americans are watching with curiosity the Biden administration’s billionaire minimum income tax to see if it can solve the problems it promises to solve, from tax fairness to solving the objections its predecessors have been faced with. confronted.

The initiative, proposed for the 2023 federal budget, would apply to households worth more than US$100 million and tax at least 20% of total income, including unrealized capital gains. (Households who already pay this amount will not be subject to an additional tax under the proposal.)

“That obviously applies to a lot more than billionaires,” says Pam Lucina, trustee director at Northern Trust Wealth Management in Chicago. “And it’s certainly different from other wealth taxes that have been recently proposed.”

US Senate Democrats explored a similar billionaire tax last October to help pay for social spending plans. He didn’t get wide support.

At the heart of this current proposal is the taxation of unrealized income or investment growth, which the White House characterizes as a way to make taxation fairer.

“If tax-free unrealized income allows a wealthy household to pay less than 20 percent of their total income, they will owe a top-up payment to meet the 20 percent minimum,” the White House said in a news release.

Top-up payments can be spread over several years to “smooth out year-to-year variations in investment income”. The White House suggests that within 10 years, this new tax will reduce the deficit by about US$360 billion, with more than half of that income coming from households worth more than US$1 billion.

Although federal wealth tax reform is rare in the United States, the proposed change is set to be the biggest since the Reagan era in the 1980s – several countries, including Spain and Switzerland, levy taxes on the net wealth of wealthy households.

“Wealth taxes have also been proposed and enacted in the states, so Biden’s decision is not completely unprecedented,” Lucina says.

The proposal attempts to downplay some of the arguments and criticisms made against wealth taxes in the past, she says. For example, to counter the difficulty of obtaining valuations each year on illiquid assets, this proposal provides a formula to work from. Even so, critics, including West Virginia Sen. Joe Manchin, still oppose taxing unrealized gains as proposed.

“Another issue that people have raised in the past is that a wealth tax is unconstitutional and that’s trying to say it’s a tax on unrealized gains,” adds Lucina. “Whether it’s a nuance that has constitutionality – it’s anyone’s guess.”

In an interview with pentaLucina explained how households facing this potential new tax should consider approaching it.

Plan, don’t panic

While some investors may feel the instinct to start making changes to their estate plans after the tax announcement, Lucina thinks they should ignore that urge.[Insteadit’stimetostepbackandfocusonplanning[Aulieudecelailesttempsdeprendredureculetdeseconcentrersurlaplanification[Insteadit’stimetostepbackandfocusonplanning

“Keeping aware that it exists is good, careful planning,” she says. “But reading too much into a particular layout would be difficult at this point.” If a billionaire tax plan is passed, it will likely be different from Biden’s proposal. Instead, the proposal is more indicative of a general direction that will be followed.

In a broader sense, the fact that a billionaire tax proposal has come this far may be a signal to start thinking about these taxes differently. With an increasing number of Americans supporting such taxes in recent years, even if this particular proposal does not go as far as expected, it could open up future opportunities to move in that direction. Or even further.

“It’s a slippery slope because it might start to apply to more and more people,” Lucina says.

Use the goals as a guide

Anticipating future tax regulations is difficult, if not impossible. This is why investors should center their wealth management plans on their financial goals, instead of building them on predictions of tax law.

Lucina says goals to keep in mind include an investor’s cash flow needs, how they want to benefit family members, and whether or not they want to benefit charities. “These things should be your guide, and then you want to try to do it in the most tax-efficient way possible.”

It is important not to make decisions such as creating entities or modifying existing structures based on the predictions of tax law. “In 2012, people rushed to create irrevocable trusts based on perceived changes in tax law, but those changes never materialized,” she says. Instead, for maximum flexibility, investors should consider different strategies in their portfolio that incorporate means of exit, if tax-advantaged.

Lucina also notes that taxes aren’t always permanent either. “Taxes will come and go with the administrations,” she says. For example, OECD member countries levying net wealth taxes have ranged from eight in 1965, to a high of 12 in 1996, to just five in 2020.

Flexibility in your trust entities

With a new tax looming, a natural opportunity arises to revisit the way investors currently plan for trusts. When considering new trust strategies, flexible is the word to keep in mind.

Although similar billionaire tax proposals from Democratic senators Bernie Sanders and Elizabeth Warren specifically included trusts as a tax base, Lucina says that based on the way Biden’s proposal is drafted, it’s not certain that it will. will or will not apply to trusts.

Lucina says trusts should be drafted to allow trustees to make tax-efficient decisions, taking into consideration estate, GST (generation skip tax), income and now wealth tax.

If aligned with family goals, Lucina says some types of flexibility investors might want to have include giving trustees maximum discretion to distribute to beneficiaries who may not be subject to that tax and allowing the creator of the trust to replace the assets of the trust with an equivalent value. Investors can also include a “trust protector”. (Someone who can make changes or modify the trust in the future, so that it aligns with tax efficiency goals.)

“Even with existing plans, there may be options to reform the trust, decant it to a new trust or otherwise modernize the arrangements,” adds Lucina. “Don’t rule out the possibility of making changes.”


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