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Legislative outlook for high income and net worth individuals

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April 2021

In brief

With the enactment of the American Rescue Plan Act of 2021 (ARPA), legislative attention has turned to tax increase legislation that may offset some of the cost of President Biden’s Build Back Better economic recovery plans. President Biden is expected soon to propose an “American Families Plan” that will include specific revenue raising measures directly affecting high-income individuals. 

The release of President Biden’s American Families plan would follow the recent release on March 31 of the President’s American Jobs Plan, which includes tax incentives for clean energy and domestic manufacturing, and the “Made in America Tax Plan,” which contains corporate tax increase proposals. (See our prior Insight, White House lists corporate offsets for Biden infrastructure plan.)

While no individual tax proposals were included in the Made in America Tax Plan, White House statements noted that the coming American Families Plan would seek to make sure the highest income individuals ‘pay their fair share.’ Additionally, on April 9, the President’s request for fiscal year funding was announced, which included a 10.4% increase over 2021 of the IRS budget with the stated purpose to “increase oversight of high-income and corporate tax returns to ensure compliance,” among others.

This Insight focuses on recent Congressional proposals affecting high-income individuals that have been offered in advance of the release of President Biden’s proposals. The proposals discussed below have not been directly endorsed by the administration, although some of them do generally align with prior Biden campaign proposals. 

On March 29, HR 2286 was introduced by House Ways and Means Committee member Bill Pascrell Jr. (D-NJ), which would generally subject appreciated property transferred by gift or at death, to capital gains tax by treating the property as sold for fair market value. On the same day, Senators Chris Van Hollen (D-MD), Cory Booker (D-NJ), Bernie Sanders (I-VT), Sheldon Whitehouse (D-RI), and Elizabeth Warren (D-MA) put forth a discussion draft of the Sensible Taxation and Equity Promotion Act (STEP Act), the stated purpose of which is to “close the stepped-up basis” loophole, which allows transfers at death or by gift to avoid paying tax on appreciation that occurred while owned by the transferor. Senators Whitehouse and Warren are both members of the Senate Finance Committee.

Previously in March, Senator Warren introduced the Ultra-Millionaire Tax Act, and a similar measure was introduced in the House by Rep. Pramila Jayapal (D-WA), a member of the House Budget Committee, and Rep. Brendan Boyle (D-PA), a member of the House Ways and Means Committee. Also on March 25, Senators Sanders and Whitehouse introduced the For the 99.5% Act

Action item: Understanding the impact of the various federal proposals may assist individual taxpayers in commenting on proposed legislation and in quickly adjusting their wealth management plans should certain legislation be enacted.

See our Insight, House clears $1.9 trillion relief legislation for President Biden’s signature for a detailed discussion of the ARPA.

Overview

With the anticipated release soon of President Biden’s American Families Plan featuring revenue raising proposals affecting high-income individuals, individual taxpayers may now be advised to revisit the specifics of Biden’s individual tax proposals discussed during his campaign. 

Key Biden campaign proposals include:

  • Tax rates: Eliminate the 2017 federal tax reform legislation tax rates of 37% for taxpayers with income above $400,000 and restore the highest rate to 39.6%.
  • Capital gains rate: Tax long-term capital gains and qualified dividends at ordinary tax rates for taxpayers whose adjusted gross income (AGI) exceeds $1 million. For qualifying taxpayers, this modification would tax long-term capital gains and qualified dividends in the same manner as short-term capital gains and ordinary dividends, respectively. 
  • Eliminate stepped-up basis: In addition, certain unrealized capital gains in excess of $100,000 are taxed at death or upon gift, as opposed to waiting until the sale or exchange of the asset. 
  • Roll back other changes made by 2017 tax reform. 

Read more about the details of these campaign proposals in our prior Insight, Individual tax considerations for the upcoming Presidential election.

Recent proposals
HR2286 - Taxing capital gains at the time of gift or death

On March 29, Rep. Pascrell introduced HR 2286, which would tax appreciated property at the time of transfer by gift or death and would be effective for transfers occurring after December 31, 2021. 

In an approach similar to President Biden’s campaign proposal mentioned above, HR 2286 would generally subject appreciated property that is gifted or bequeathed to a deemed capital gains tax. Under current tax law, property included in a taxpayer’s estate generally would receive a ‘stepped up basis’ to the fair market value on the date of death regardless of the decedent's basis in such property without being subject to a capital gains tax. Under the current law, a transferee of a gift would generally receive the same cost basis as the transferor or ‘carryover basis.’ This potentially allows the transferor to pass their unrealized gain in the transferred property to their heirs. 

Special rules for transactions to/with trusts

To prevent long-term deferral of capital gains tax using trusts, HR 2286, in general, would trigger capital gains tax on any property that is held continuously in trust without being subject to capital gains tax every 30 years. This will apply on the effective date of January 1, 2022 to any property already held 30 or more years in trust. This will not apply to qualifying spousal trusts, revocable trusts, or other trusts included in the estate of the grantor or other person. 

As the bill is currently drafted, any property transferred to trusts would be subjected to the capital gains tax on the date of the transfer. It may be interpreted that the deemed capital gains tax on unrealized gains does not only apply to transfers to a trust via a gift or at death but also on non-gift transactions, such as a sale to an intentionally defective grantor trust or exercising a power of substitution. However, there is an exception for grantor trusts where the property is included in the grantor’s estate (i.e. revocable trusts) The bill also treats any modifications of the direct or indirect beneficiaries of a trust (or the rights of the beneficiaries to trust assets) or any transfer or distribution of trust assets (including into another trust, i.e. decanting) as a transfer which would potentially trigger a capital gains tax.  

Observation: There are some notable differences between HR 2286 and the Senate discussion draft proposal, the Sensible Taxation and Equity Promotion Act (STEP Act). For example, under the STEP Act, all property held in trust shall be treated as sold at fair market value on the last day of the taxable year ending 21 years after the latest of a) December 31, 2005, b) the date the trust was established, or c) the last date on which such property was treated as sold under the Act. The STEP Act also would apply to all transfers by gift, to trust, or at death occurring after December 31, 2020; which means the bill would take effect in 2021 for calendar year taxpayers. The House bill, on the other hand, has an effective date of post December 31, 2021. Taxpayers who are seeking to gift or engage in trust transactions this year should consider what impact these proposals could have on their current plans and in particular, track the effective date as it could impact gifts made in 2021.  

Exclusions and limitations to the tax

The House bill also provides that transfers to a spouse (who is a US citizen), charities, and certain qualifying trusts (qualifying spousal trusts, revocable trusts and other grantor trusts included in the estate), would not be subject to tax. However, spouses, charities and qualifying trusts would still be subject to a carryover basis. Similarly, to limit the impact of the tax, a $1 million exclusion from taxation is available for unrealized gains at death. 

ObservationSpecifically excluded are transfers of tangible personal property except for property held in connection with a trade or business, property held for investment and ‘collectibles’ as defined in IRC Sec. 408(m). 

Impact on gifts under the annual gift exclusion amount

The bill provides that the dollar value of the annual gift exclusion, as determined under Sec. 2503(b), would not be subject to the tax.

The 99.5% Act

On March 25, Senators Sanders and Whitehouse introduced the 99.5% Act, which would have a significant impact on gift, estate, and generation skipping transfer (GST) taxes, if enacted. Some key changes include:  

  • Reducing the estate tax exemption to $3.5 million per person ($7 million per married couple), 
  • Reducing the lifetime gift tax exemption to $1 million and the annual gift exclusion to $10,000 per donee,
  • Increasing estate tax rates, with a top rate of 65% for estates over $1 billion, 
  • Including grantor trusts created or funded after enactment in the gross estate of the grantor,
    • Existing trusts, in general, would be grandfathered unless assets are added or exchanged with it
  • Limiting minority valuation discounts on transfers,
  • Providing a minimum 10-year term for Grantor Retained Annuity Trusts (GRATs)
  • Eliminating GST tax exemption for trusts that do not terminate within 50 years of the date created
    • For existing GST tax exempt trusts, after 50 years of the date of enactment they will no longer be GST tax exempt

ObservationAs introduced, the changes would apply on the date of enactment, with the exception of the amendments to the estate tax rate and the reduction of estate, gift, and annual exclusion amounts, which would apply to estates of decedents dying, and generation-skipping transfers and gifts after December 31, 2021. The legislation may face opposition from more moderate House and Senate Democrats whose support would be needed in a narrowly divided Congress. 

Ultra-Millionaire Wealth Tax Act

Introduced on March 1, the Ultra-Millionaire Wealth Tax Act (Wealth Tax) would create a new wealth-based tax on the highest net worth individuals and implement anti-evasion measures to increase compliance. Specifically, the Wealth Tax would impose: 

  • A 2% annual tax on the net value of all taxable assets of households and trusts between $50 million and $1 billion
  • A 1% annual surtax (3% tax overall or 6% if a health insurance program is established that provides to all US residents) on the net value of all taxable assets of households and trusts above $1 billion

For purposes of this tax, if property would be included in the estate of the taxpayer, it is considered owned by the taxpayer and subject to tax. Similarly, if an individual is considered the owner of any trust then it must also be included by that individual and subject to their wealth tax. The Wealth Tax is proposed to be applicable to tax years beginning after December 31, 2022.

Observation: Under the draft bill, it appears that even ‘defective’ grantor trusts (i.e., trusts which are excluded from an individual taxpayer’s estate) could be includable in calculating that individual’s total assets subject to the surtax.

The ‘net value of all taxable assets’ means, as of any date, the value of all property of the taxpayer, not otherwise excluded, real or personal, tangible or intangible, wherever situated, reduced by any debts (including any debts secured by property otherwise excluded) owed by the taxpayer. 

To bolster the compliance and auditing of this tax, the Wealth Tax proposal includes $100 billion in funding for the IRS to hire and train additional personnel, update the technology, and implement the new asset valuation, reporting, and enforcement requirements for the Ultra-Millionaire Tax. Additionally, the proposal provides for specific anti-avoidance measures, such as a 30% minimum audit rate for taxpayers subject to the Ultra-Millionaire Tax 

If enacted, taxpayers subject to the tax may face difficulties in obtaining annual appraisals or determining another acceptable valuation method that would be needed in order to properly value assets to pay the tax.

Observation: President Biden did not propose a wealth tax during his presidential campaign and did not endorse the proposal offered by Senator Warren during her presidential campaign. Biden administration officials have indicated that the President has not taken an official position of the wealth tax bills recently introduced in the House and Senate. The legislation, however, is expected to face opposition from more moderate House and Senate Democrats whose support would be needed in a narrowly divided Congress.

The takeaway

President Biden is expected soon to unveil details of his American Families Plan, and the individual tax increase proposals that are intended to offset his plan’s cost. In addition, key members of Congress have made it clear that advancing wealth tax proposals will be a priority for them. 

High net worth and income individuals may see significant changes to their personal income tax calculations or estate plans if some of these proposals are enacted. Staying abreast of and understanding the scope of the impact of these possible changes, modeling out their impact, and discussing options are the steps high net worth and income individuals should be taking through the spring to be well positioned to implement changes before year end, if necessary.

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Frank Graziano

Personal Financial Services Leader, PwC US

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