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Bloomberg

Biden tax rule would rip billions from the largest fortunes at death

(Bloomberg) – Jeff Bezos has an ex-wife, a girlfriend, four children and billions of reasons to see if Joe Biden’s tax watchdog wins congressional approval. The heirs of the Amazon.com Inc. founder may have to pay more than $ 36 billion if the president succeeds in closing a loophole that helps the rich transfer their fortunes tax-free on death. Under the current rules, anyone who inherits the Amazon shares that Bezos bought in 1

994 for $ 10,000, worth $ 180 billion today, will receive a so-called step-up, basically eliminating any capital gains tax liability. The city plan would close the loophole and apply the top capital gains tax immediately when assets are transferred to wealthy heirs. If the rate goes up – that’s 20% for companies like Bezos, and Biden has called for it to increase to 39.6% – the possible tax bill would too. For Bill and Melinda Gates, who announced on Monday that they would divorce, a change in the ascent rule may be cheaper. Gates’ fortune, worth 145.8 billion. $, Are older, and have already sold or donated much of their stake in Microsoft Corp. Men 26 billion. $ Microsoft shares remain, and it is not clear how the couple will manage their assets in Congress estimates that the increased tax base for inherited assets will cost the government approx. $ 43 billion a year. Ending this practice and raising the rate would constitute the greatest brake on dynastic prosperity for decades, changing an American economic landscape dominated by a few wealthy families. A spokesman for Amazon did not respond to emailed questions about Bezos’ shares. The proposals are far from becoming law, though Democrats control both houses of Congress as they threaten wealthy donors to both political parties who have lobbied against them. But advocates say it is crucial to achieving Biden’s vision of tax law to get rid of the start-up rule known to property planners as the Angel of Death. Otherwise, economists estimate that the proposed increase in the capital gains tax rate will further encourage holding assets until death, reducing Treasury revenues. The step-up rule allows investors to transfer assets to heirs almost tax-free and raise the taxable value of a property to its fair value at the time it is inherited. A beneficiary who inherits a house worth $ 1 million bought for $ 100,000 two decades earlier would have no capital gains. If she later sells for $ 1.5 million, she only pays $ 500,000 in taxes. The rule also applies to Amazon shares, which have risen more than 200,000% since a public offering in 1997, as well as other valued assets. The Joint Committee on Taxation, a non-Paris congressional group, estimates that untaxed capital gains on inherited assets run into the hundreds of billions of dollars a year. About half of unrealized gains belong to the richest 1%, according to an analysis of data in the Federal Reserve Board’s Survey of Consumer Finances. And unrealized and accrued capital gains account for about 40% of wealth in the top 1%, the Fed data shows. The step-up rule has been criticized as a state-sponsored engine for amassing dynastic wealth and a cause for expanding economic inequality. Even some prominent property planners say the provision – passed a century ago to avoid double taxation at a time when property taxes had few exceptions – has survived its original purpose. Millionaires’ lawyers have developed sophisticated strategies to avoid property taxes, making the ascent surcharge an unallocated blessing. “It’s a huge loophole,” said Jonathan Blattmachr, a trust attorney and senior adviser at Pioneer Wealth Partners, a financial advisory firm for high-value clients and family offices. Republicans and some business organizations have criticized the Biden proposal. A study by Ernst & Young commissioned by the Family Business Estate Tax Coalition predicted that eliminating the ascent rule could cost tens of thousands of jobs a year and reduce $ 10 billion from annual gross domestic product. avoided by the ultra-wealthy who can afford sophisticated property planning and instead fall for small businesses and family businesses that may have to be sold to pay tax bills. “Abolition of reinforcement could have a dramatic impact on small producers across the country, potentially requiring families to wind up businesses, exploit assets or lay off employees to cover tax hits,” said Chris Netram, vice president of tax and national economic policy at The National Association of Manufacturers, which supported President Donald Trump’s tax in 2017 Bidens’ plan addressed some of these concerns by sparing the first $ 1 million in inherited valued assets from capital gains taxes and by exempting family businesses one and smaller businesses in cases where heirs continue to drive them. The plan has been hailed by progressives who have long called for an end to the preferential treatment given to capital gains. Frank Clemente, executive director of Americans for Tax Fairness, an advocacy group allied with unions, said the gap between taxes on labor and capital is fundamentally unfair, and the administration’s plan simply seeks to “tax wealth as labor.” A version of Biden’s plan was flown by President Barack Obama in 2015, but it died in a Republican-controlled Congress. Any significant change to the ascension rule could increase economic planning for America’s richest families, including the techniques they use to avoid incurring capital gains for decades. “To the extent that there is the ability to circumvent the policy, it is largely a political choice,” said Chye-Ching Huang, executive director of the Tax Law Center at the New York University School of Law. “There are ways to design and implement it so that it does not allow for large, inefficient tax havens.” Currently, wealthy people who need cash can take out loans using shares as collateral instead of selling shares, which would trigger a tax bill. . The technique allows billionaires to finance their lifestyle and then transfer their assets to their heirs without ever realizing capital gains. Larry Ellison, the founder of Oracle Corp., which bought Hawaii’s sixth largest island in 2012, had $ 17.5 billion in shares pledged for such loans. from September shows figures in a company information. The strategy has also been used by Elon Musk, the world’s second richest person, and Sumner Redstone, the former chairman of Viacom Inc., who died in August. If the step-up rule were changed, taxes on capital gains on the assets of these billionaires would be triggered by death. When Apple Inc. co-founder Steve Jobs died in 2011, his $ 10 billion fortune was relatively small compared to today’s technical billionaires. But an ascent in base still proved valuable. Jobs’s largest stake was in Walt Disney Co., which gave him shares in connection with its 2006 acquisition of Pixar, the animation studio Jobs had bought from filmmaker George Lucas two decades earlier. When Jobs died, his Disney shares were worth $ 4.5 billion, and his shares in Apple, derived from a 2003 share grant, were worth approx. $ 2.1 billion. Between the two holdings, there was at least $ 5 billion. Of untaxed capital gains at the time of his death, meaning starting up base could have saved his family more than $ 750 million in taxes, a review of the company’s filing shows. Jobs’ fortune passed to his wife Laurene Powell Jobs, whose fortune has since swelled to $ 22 billion, making her the world’s 80th richest person, according to the Bloomberg Billionaires Index. A spokeswoman for Laurene Powell Jobs, who would have inherited any Apple stock at an intensified price, did not respond to a request for comment. The nation’s richest families have spent millions of dollars lobbying Congress in recent years to blunt attempts to increase the tax on inherited wealth, and this effort has often paid off. The Mars family, who built an empire on candy and pet care, helped lead the fight against the property tax during George W. Bush’s presidency and have lobbied against efforts to increase the tax on inherited wealth since, according to congressional records. When Forrest Mars Jr. died in 2016, he left his heirs a fortune worth more than $ 25 billion dollars. Today, six family members are among the world’s 500 richest people, according to the Bloomberg Index, sharing a total fortune of more than $ 130 billion. A spokesman for the Mars family declined to comment. Administration officials say maintaining the start-up rule would undermine efforts to raise more income from the wealthy through higher taxes on investment income. An estimate released by Penn Wharton Budget Model, a nonpartisan fiscal tax policy research group at the University of Pennsylvania’s Wharton Business School, found last week that raising the top capital gain to 39.6% would increase $ 113 billion in new revenue over the course of the year. of the next decade – but only if the rise in bases is severely limited. If the policy remains unchanged, raising the capital gains rate would motivate more wealthy people to avoid selling assets before their death and cost the Treasury $ 33 billion. $ In lost revenue over 10 years, the study found. Another study published in January by the National Bureau of Economic Research says that an increase in the top capital gains rate may generate more revenue than congressional estimates because asset owners have less flexibility in when to realize gains. Eliminating step-up in basics would further reduce flexibility, the study said. “You tell me that if I effectively doubled the rate and turned death into an event of cognition, you would not get much money from it?” said Owen Zidar, a professor of economics and public policy at Princeton University and one of the study’s authors. “I have a hard time believing that.” But even if Biden’s plan is adopted, tax lawyers and accountants are likely to find ways to increase flexibility through charitable donations and new property planning strategies. “The story of taxing rich people throughout history is that they will always find ways to avoid taxes,” said John Ricco, author of the Wharton study. “This will certainly narrow down the avoidance options – perhaps not as much as supporters of the Biden proposal hope, but it will have something to bite for it.” For more articles like this, visit us at bloomberg.com Sign up now to stay ahead with the most trusted business news source. © 2021 Bloomberg LP


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