In addition to plans to increase income and capital gains taxes, the corporate tax, and beef up the death tax, the Biden administration is now attacking family wealth held in trusts.
President Joe Biden never mentioned his plan to confiscate trust assets in his campaign or even in his “tax the rich” speeches made since taking office. This latest policy change will not just hammer the “one percent,” as it will affect ordinary family estate planning used for many decades.
A trust operates as a separate legal entity, much as a corporation does. A belief is essentially a contract between a grantor and a trustee. According to the grantor’s instructions, when a trustee takes possession of granted assets, they are managed and controlled for named beneficiaries.
Trust instruments have allowed families to avoid probate proceedings, protect young or disabled beneficiaries, and take advantage of specific death tax provisions. In short, trust instruments enable many families to perpetuate the American dream of building wealth and handing it down to future generations.
Regarding death, or “estate” taxes, Biden is moving to eliminate the benefit of the stepped-up basis for assets transferred at the end. Under existing law, a beneficiary may “step up” the tax basis of assets they inherit when sold to the value at the time of the grantor’s death. The capital gains tax would only be imposed on the gain recognized since the time of death. With stepped-up basis treatment removed, all progress since the decedent initially acquired the asset would be subject to tax.
Biden’s new plan will attack the use of trust instruments to protect assets by triggering taxes when assets are transferred into a trust instead of when they are sold to third parties.
The new tax rules would exempt transfers to a surviving spouse and property donated to a charity.
The new Biden proposal will make it much more likely that heirs will sell a family business to pay the taxes incurred. Some protections against immediate liquidation are provided, but only at the expense of a federal tax lien to protect the government’s interest in the uncollected tax. The impact that would have on the ability to raise capital for the business is evident.
Additionally, if Biden’s proposal is enacted, the IRS is sure to issue an incredible number of new regulations and guidance provisions. As usual, this change in the tax law will only benefit tax attorneys, accountants, and a federal government thirsty for more hard-earned assets.