Nov 2, 2020 - Economy & Business

The wealthy rush to shield their assets from Biden

Illustration of $100 bill protected by sandbags
Illustration: Eniola Odetunde/Axios

High-net-worth Americans are busy setting up trust funds, giving large gifts to heirs and philanthropies, and even selling family businesses as they brace for the tax hikes a Biden presidency might bring.

Why it matters: President Trump has jacked up the amount that people can leave tax-free to their heirs to record highs. If Biden wins, his tax shakeup would have ripple effects on how the wealthy buy and sell properties, allocate savings and investments, and give to charity.

Driving the news: Biden says he wants to raise taxes on people who earn more than $400,000 a year — which excludes most Americans — and lower the amounts people can give tax-free to their spouses and heirs.

  • He also wants to tax capital gains and dividends at 39.6% for people making over $1 million (which would be bad for private equity investors and others).
  • The goal is to raise revenue for federal coffers while targeting a segment of society that can best afford it (and for whom few people feel sorry).

"Most of our clients would be would be impacted by the Biden tax policy in a negative way," says Ryan L. Losi, executive vice president of the Richmond-based accountancy PIASCIK, whose practice includes professional athletes, real estate investors and business owners.

  • Biden's tax proposals, with analysis of their effects by the Tax Foundation (which is often described as tilting conservative), can be found here.
  • The structure of any new tax laws could determine if wealthy investors dump stocks for bonds, or if business owners take less money out of their firms as "compensation" and more as "distributions."

How it works: Biden proposes to cut in half the unusually generous cap of about $23 million that a couple can leave to heirs tax-free. This means gift and estate taxes, which can climb to 40%, would kick in at much lower dollar amounts.

  • "People are making extraordinary gifts before the end of the year, getting those amounts out of their estate," says Joe Maier, an estate and succession planning attorney at the Johnson Financial Group in Racine, Wisconsin.
  • If Biden wins, tax professionals expect an even greater stampede of customers who want to make gifts, set up trusts, and establish philanthropic vehicles called donor-advised funds (DAFs) — all before Dec. 31.

Family business owners who have been flirting with selling their companies are making a big rush to the exits, since it takes months to close such a deal — and waiting until next year could mean paying 40% in taxes on the transaction vs. 20% this year, Maier tells Axios.

  • "For a lot of clients, it's a once in a lifetime event," Maier says. "So there's huge urgency right now to even take a lower purchase price."
  • Buyers are lowballing their bids — knowing that a seller could be grateful for a 10% smaller offer as long as the deal closes in 2020.

Yes, but: "Just 1.9 percent of taxpayers would see a direct tax hike" if Biden’s tax proposals for individuals were in effect in 2022, according to the Institute on Taxation and Economic Policy (ITEP).

  • West Virginia would see the fewest taxpayers affected (0.6%), and Connecticut would see the highest (3.7 percent).
  • Many of Biden's proposals would simply attempt to roll tax laws back to where they were when Barack Obama left office.

Individuals aside, Biden wants to raise tax rates on corporations to 28% from 21%.

The bottom line: Biden has said that tax law change is a priority, but nobody knows how soon he would tackle it or what any new laws might ultimately say.

  • If Biden tries to pass expensive bills in 2021 — like on infrastructure or climate change — he'll have an immediate need "to raise revenue to pay for the associated spending," Rohit Kumar, co-leader of the Washington national tax services practice at PwC U.S., tells Axios.
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