Tax Nightmare

There is a potentially alarming tax scenario shaping up from our blue wave in Washington D.C. last week. For such an incredibly important issue at stake, I’m shocked there isn’t a major effort to make known what can be the greatest wealth tax of all time if a current promise by the Biden campaign is fulfilled.

“By 2030, millennials are expected to inherit more than $68 trillion in wealth”, according to a recent research report by Coldwell Banker Luxury. If Democratic presidential nominee Joe Biden is elected and gets his wish, the government could receive a far bigger share of that money while those who inherit keep less of it.” Coldwell Banker Luxury

This so-called estate and gift tax exemption is $11.58 million per individual or $23.16 million per married couple in 2020 without being subject to the 40% estate and gift tax. Joe Biden’s proposed tax plan would call for a 50% reduction of the exclusion amount for estate and gift taxes to $5.79 million.

Bernie Sanders wants to reduce it down to $3.5 million. Such a measure would clearly affect the top 1%-10%, but not necessarily 90% of everyone else.

However, there is a proposed tax measure that will spare no one, no matter what their net worth might be. The warning flags are out as RIAs and investors need to consider higher capital gains taxes on inherited wealth that may force trillions of dollars to the IRS.

 Joe Biden has indicated that he would eliminate a tax-planning benefit known as the “step-up in basis,” which allows heirs to minimize taxes when they sell holdings they’ve inherited. Currently, when a person receives an asset from a giver after the benefactor dies, the asset often receives a stepped-up basis, which is its market value at the time the benefactor dies.

A stepped-up basis is often much higher than the before-death cost basis, which is primarily the benefactor’s purchase price for the asset. Biden’s plan would be to have ALL inherited assets taxed at their original cost basis, possibly affecting not just stock portfolios, but homes, property, family-owned businesses, family farms, all manner of collectibles, and other assets. Call it the greatest redistribution of the wealth of all time designed to expand and finance monumental government-sponsored social programs.

“When someone dies and the asset transfers to an heir, that transfer itself will be a taxable event, and the estate is required to pay taxes on the gains as if they sold the asset,” said Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center. And you can’t steer clear of the tax hit by merely gifting the asset to another person while you’re alive. The appreciation would still be subject to taxes upon transfer under Biden’s proposal, Gleckman said.

Here’s where it gets very troubling. For generations, small businesses have counted on this. Say you have a family business worth $20 million that you started from scratch. How is it taxed if the married couple dies? Right now, the business goes without estate tax to the kids. If both parents die,  the $23.16 million estate tax exemption should mean no estate tax for that  $20 million business. Forbes

Biden’s proposal would tax an asset’s unrealized appreciation at transfer.  This means the kids get taxed whether or not they sell the business. At ordinary income tax rates, of say 25%, that would require the kids to pay $5 million in inheritance tax, which will invariably force countless family-owned businesses to be sold for not being able to pay the tax.

Here’s where it can get ugly. Let’s say Congress does reduce the so-called estate and gift tax exemption from $11.58 million to $5.79 million per person. That same transfer of the $20 million family business to a married couple is now subject to not only the $5 million tax in unrealized appreciation but is also now liable for paying 40% estate tax on the difference between the $20 million valuation and the $11.58 million exempt thresholds, which comes to $8.42 million – or $3.37 million. The two taxes together amount to $8.37 million of the $20 million being transferred, or 41.2% of the asset value of the family-owned business.

I hope I’ve gotten everyone’s attention. The business of transferring wealth and steering clear of capital gains can get very serious. And RIAs and investors might only have until December 31, 2020, to do something about it. 

Contact us to discuss your tax deduction options with our CPA.

This could be the greatest wealth tax of all time if a current promise by the Biden campaign is fulfilled.

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