As the race for the presidency in 2020 is heating up, we are hearing many new ideas and new plans for the direction of the country. And of course, tax plans are no exception.  Among the tax plans, some of the front runners on the Democratic ballot are proposing a new form of a tax plan that has received a lot of attention and press thus far – a wealth tax.

The proposal being floated is to begin taxing households on their accumulated net worth above a certain threshold. This proposal has been pitched by both Elizabeth Warren and Bernie Sanders, though their views on who should get taxed and by how much differ significantly. Elizabeth Warren is proposing a tax on households with a net worth above $50 million, while Sanders wants to start the threshold at $32 million. The wealthiest Americans may pay a top rate of 3% and 8% on their “excess” net worth under Warren’s and Biden’s plans, respectively.Money and Percentage Signs

Sanders’ plan is clearly more aggressive in taxing the wealthy, but both proposals would have serious consequences for high net worth households. As an example, a family with a net worth of $50 million would pay a tax equal to $180,000 each year under Sanders’ plan. No tax would be due under Warren’s proposal since the household didn’t break through the $50 million threshold. Step the net worth up to $100 million and now the taxpaying couple will owe $1.18 million under Sanders’ plan and $1 million under Warren’s. Under this scenario, let’s also assume that the taxpaying couple earned $1 million during the year through their income streams such as salaries and investments. This means that the taxpaying couple will owe at least $1 million of wealth tax plus roughly $300K of federal income tax. Therefore, the couple will pay about $1.3 million of total tax on $1 million of income. That makes for an effective tax rate of about 130 percent measured by their income! The point of this example is to show that Warren and Sanders’ proposals could create a situation where taxpayers will actually owe more in tax than they make in any given year.

Support has been building for these types of proposals among the American people and many politicians.  A wealth tax is extremely complicated to administer and may also come with some constitutional questions and challenges before it ever becomes reality. We don’t have a crystal ball, but it certainly isn’t far fetched to think that given a certain political climate, wealthier taxpayers could face far steeper tax rates in one form or another.   While the challenges of implementing a wealth tax may keep it from ever taking flight, there is already another form of a wealth tax that has been in place and that the IRS already has extensive experience in administering – the estate tax.  And what do we see as being even more likely to be succesfully implemented than the new weath tax proposals?  A substantially increased and broadened estate tax.  By the way – the estate tax historically has taken a bite out of the wealth of a large multitude of people with a lot less than $50 million tucked away – so a revamp in this area may affect a lot more people than just the uber-rich that have been put in the spotlight right now.  If most of your wealth is contained in an operating family business you have built, such a high tax rate could decimate or end the business if you have not properly prepared for the tax due before you kick the bucket.    So if an “enhanced” estate tax may be the easier play for a new administration, what can one do to help ensure that more of the wealth they have worked for passes on to their heirs and loved ones?

One of the best provisions high net worth taxpayers can take advantage of right now under current law is the generous gift and estate tax exemption that was expanded by the Tax Cuts and Jobs Act. Under the new law, married taxpayers can transfer a cumulative $22,800,000 ($11,400,000 for an unmarried individual) tax free to their beneficiaries within the taxpayers’ lifetimes. This is a very favorable provision that provides a window to transfer a large amount of wealth to family members or other beneficiaries, while having the simultaneous benefit of reducing a couple’s net worth.  This could have the effect of lowering or eliminating their possible estate tax liability in the event of harsh changes, and may also lower or eliminate wealth tax liability should it end up becoming law. There are also various gift and estate planning tools that are available under current law such as GRATs and valuation discounts that can also be utilized in transferring your assets on to the next generation.  Several of these planning tools have already been the target of some lawmakers to further reduce the ability of taxpayers to transfer wealth and reduce their estate values and tax liability.  So it is certainly possible, whether a wealth tax is enacted or not, that these peripheral options could also disappear.

If you haven’t given much thought to wealth transfer planning in recent years, your time could be running out.  As we have said, we can’t prognisticate on what the tax laws will be in a few years so we don’t know if the tax planning clock is close to midnight or not.  But, if we do see some of these changes proposed come to fruition and you are still holding all your chips, you may find those chips are worth a lot less than you thought when it’s time to cash them in.  As always, you’re not in this alone.  We are here to help determine what might be the best course of action for you.


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