High-Wealth Taxpayers Can Guard Against ‘Tax the Rich’ Proposals

Democrats are stepping up their tax-the-rich agenda, with Sens. Elizabeth Warren (Mass.) and Ron Wyden (Ore.) leading the way. Both have pitched proposals targeting the use of trusts, and President Joe Biden’s budget includes various proposals to rein in the use of trusts.

While the proposed legislation is unlikely to become law in the near future, these proposals may have wealthy Americans and non-resident, non-citizens with US assets wondering how best to protect their gains.

It’s a difficult question to answer because there is still so much that’s unknown, but there are some potential strategies to consider.

Asset Valuation Planning

Taking advantage of valuation discounts often can help reduce one’s net worth significantly. This is generally accomplished by owning assets through legal entities such as corporations or limited liability companies.

Interests in such entities are often worth considerably less than the same percentage ownership in the underlying asset itself. Discounts are often available for lack of control, minority interests, lack of transferability, and lack of marketability.

Owning hard-to-value assets and illiquid assets also can help reduce net worth, as they’re generally worth less than liquid marketable assets.

Gifting and Transfers

Consider accelerating gifts and gratuitous transfers to certain types of nongrantor trusts. Now is an especially good time to do this because of the increased gift tax exclusion of $13.61 million per donor in 2024. Remember, the higher gift and estate tax exclusions sunset at the end of 2025.

A gifting strategy is most effective when coupled with proper asset valuation planning since more assets can be transferred for less.

Keep in mind that the proposed legislation contains a provision that gratuitous transfers to certain nongrantor trusts will be disregarded in the year of transfer. As such, any amount transferred would be subject to wealth tax as if it still belonged to the donor in the year of transfer.

Additionally, gifts to family members under 18 years of age will be disregarded and any amount gifted will continue to be included in the donor’s net worth until such year as the donee attains the age of 18.

Accelerate gifts to qualified charitable organizations such as churches, hospitals, educational institutions, museums, and other public charities. For those who prefer to have more control over their long-term philanthropic strategy, consider setting up a private 501(c)(3) foundation and donating to it.

Debt and Compliance

The value of an asset is generally reduced by any debt secured by it. By strategically using debt, net worth can be reduced. One should be careful, however, not to overleverage oneself.

Taxpayers with international assets should ensure they are tax compliant and have properly reported all foreign income and assets. To date, the Foreign Account Tax Compliance Act data has been scantly used for enforcement. Under the proposed legislation, this would change.

Expatriation

Wealthy American citizens and permanent residents who are considered long-term residents should consider expatriating sooner rather than later. It is important to keep in mind, however, that in the unlikely event the proposed legislation became law in 2024, those covered expatriates who expatriated in 2024 would likely be subject to the higher 40% tax rate mentioned above.

Nonresidents With US Assets

Non-resident, non-citizens with sufficient US assets to be subject to the wealth tax should consider restructuring their ownership of US assets in a way that would avoid it. This could be accomplished by owning US assets through a foreign corporation. However, transferring individually owned assets to a foreign corporation could trigger a taxable gain.

Additionally, owning US assets through a foreign corporation may result in the imposition of the Branch Profits Tax and double taxation. Investing in US assets or transferring currently owned US assets to new structure always requires careful analysis.

Outlook

The uncertain political landscape makes tax planning challenging, to say the least, and any meaningful tax legislation is highly unlikely to be passed before the election.

If Republicans win control of the White House and Congress this November, any planning done in preparation of a Democratic victory may be for naught. But if the Democrats win control, any planning done in anticipation of their victory will likely prove to have been worthwhile.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jimmy Sexton is founder and CEO of Esquire Group and chairman of the International Business Structuring Association (Middle East Chapter).

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