Dynastic Wealth among the Rich Predicted upon Implementation of Trump Tax Code Changes

Thursday, November 17, 2016
(photo: ThinkStock/Getty Images)


By Paul Sullivan, New York Times


If Donald Trump follows through on his campaign promises, a host of taxes that affect only the very richest Americans may be eliminated, along with almost all tax incentives to be philanthropic. As a result, wealthy families may find it much easier to amass dynastic levels of wealth.


At the top of the list is the estate tax. Currently, the rules are straightforward: A married couple is exempt for the first $10.9 million in their estate, and they pay a 40 percent tax on the amount above that.


Trump’s campaign proposal seems straightforward: Repeal the estate tax — the death tax, in his words.


Back in 2012, most tax experts had considered the estate tax issue resolved when, on New Year’s Eve, the Republican-majority Congress and President Barack Obama reached a so-called grand bargain on taxes. As part of that deal, the current estate tax exemption was set, with annual increases indexed to inflation.


With that agreement, more than 99 percent of Americans were exempted from the estate tax.


Last year, for example, the Internal Revenue Service processed just 4,918 federal estate tax returns (though it collected about $17 billion in taxes).


Working on a policy to appease such a small number of people could be seen in two ways: a waste of political capital or an end to a tax that Republicans have historically decried as unfair and Democrats have held up as a guard against generational wealth.


But Trump’s proposal is not as straightforward as simple repeal. His plan also said, “Capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms.” In other words, the tax on capital gains above $10 million would have to be paid only when, or if, the assets were sold.


For some accountants, the proposal brought back memories of 2010, when the estate tax briefly expired and assets in a wealthy person’s estate were subject to capital gains tax on the appreciated value. This proved to be a headache. Few people keep sufficiently detailed records to find the original purchase price on stocks or to account for improvements to properties over decades.


Yet the Trump plan, as some attorneys and accountants have read it, would allow the wealthiest heirs to never pay capital gains taxes if they did not sell what they inherited. This would be difficult for those with a modest inheritance because they generally sell and spend what they get. But it might not be for people with a large inheritance, like Trump’s children, who would receive a portfolio of income-producing real estate and golf courses, which they could borrow against and never sell.


“Most people who have substantial wealth have that wealth in capital assets that tend to grow in value,” said Marc J. Bloostein, partner in the private client group at Ropes & Gray. “It comes down to whether you’re going to sell those assets. Someone who inherits the family compound, that’s great. Someone who inherits a business on the auction block, you have to pay the taxes.”


As for deductions for charitable contributions, Trump addressed that in two areas of his platform. As part of his proposal on the estate tax, he said, “To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.” In the section on the income tax, he said all itemized deductions would be capped at $200,000 for a couple.


While most people use itemized deductions for state income taxes paid and mortgage interest, those deductions for wealthier people who live in states without income tax and have no mortgages on their homes come from charitable contributions. And those contributions are often in the millions, or tens of millions, of dollars.


Capping the deduction at $200,000, and disallowing a deduction, it seems, for putting appreciated assets into a private family foundation would greatly limit the financial incentive for the wealthy to be charitable, financial advisers said.


Of course, many advisers will say that tax incentives are not the only reason people give to charity. But tax incentives factor in at some level and are generally credited with making Americans the most philanthropic people in the world.


“I’m upset by the possibility that I will be limited in my deductions to help more needy people,” said Todd M. Morgan, chairman and chief executive of Bel Air Investment Advisors, who is in favor of repealing the estate tax. “I’ll still do it, but it’s unfortunate. If it doesn’t get watered down, that part of the tax law will be negative for the needy people.”


Two taxes that in recent years have been coupled with the estate tax could also go away: the gift tax and the generation-skipping tax. Trump’s proposal does not address them explicitly. But tax advisers said they believe he could repeal them, as well. If that happened, the economic impact could be greater than the end of the estate tax.


The gift and generation-skipping taxes have existed to keep wealthy individuals from avoiding an income tax. If, for example, a wealthy individual were to give assets to children or grandchildren who are in lower income tax brackets, they would pay a lower tax on them, reducing the amount of money the U.S. Treasury would bring in.


On the face of it, Trump’s estate tax plan seems tailored for someone like himself: His wealth is tied up in real estate, which his heirs would not have to sell so would not be subject to the capital gains tax for assets above $10 million, and he has not been particularly charitable, so he would not benefit from a deduction for philanthropic gifts.


“The estate tax isn’t going to affect people in rural areas who came out in droves to vote for him,” said Sarah T. Connolly, a partner at the law firm Nixon Peabody. “On the other hand, he’s promised all kinds of tax reform.”


While the Republicans will have control of the Senate and the House of Representatives, Trump may still struggle to repeal the estate tax.


Richard Behrendt, director of estate planning at Annex Wealth Management and a former IRS inspector, said, “It’s not going to be as easy as it might appear on the surface.”


But for the superwealthy, the election of Trump may already have rendered moot a hearing that was set to happen on Dec. 1 to consider huge tax benefits granted to family limited partnerships.


Such partnerships are typically used to hold family assets, like a private company. The IRS has allowed discounts of around 30 percent for the shares in those entities since the pool of willing buyers is presumably small. (If the partners consist of relatives, the theory goes, an outsider would buy into a share only at a steep discount.)


But these entities have been under scrutiny for abuse, as some wealthy people have filled them with assets that can easily be valued, like marketable securities, but still take a large discount.


Now, advisers said this week they believe the meeting scheduled to close this loophole will do nothing, if it even takes place.


All these tax changes are on top of the broader ones aimed at reworking corporate taxes — which would benefit some business owners, too — lowering personal income tax rates and eliminating the 3.8 percent investment income tax that was used to pay for the Affordable Care Act, which Trump said he wants to repeal.


From a candidate whose message has been described as populist, his tax proposals seem to run counter to that. They would allow for the creation of generational wealth to rival that of the last Gilded Age, after which the modern estate tax was enacted in 1916.


Not everyone sees Trump’s tax proposals as contrary to his campaign message. Joe Duran, founder and chief executive of United Capital, a wealth management firm, said the president-elect’s tax proposals are wholly consistent with his campaign.


“Usually, populist votes are about bigger government,” Duran said. “This is about less taxes, less government, less regulation. That’s what the overwhelming number of people were voting for.”


Still, the tax proposals could mean giving up revenue that could help fund many of the projects, like infrastructure, that Trump has promised will create jobs.


And Duran said he is also convinced that Trump’s tax proposals, if approved, will contribute to the further concentration of wealth. “Dynastic wealth is here to stay,” he said, “and people don’t want to admit it.”


To Learn More:

Obama Tax Hikes on the Rich Found to Have Damaged neither the Rich nor the Economy (by Christopher S. Rubager, Associated Press)

CEO Group Launches Campaign to Reduce Corporate Tax Rate to 25% (and Keep the Loopholes) (by Noel Brinkerhoff, AllGov)

Corporate Tax Rate Too High? Not for GE…2.3% over 10 Years (by Noel Brinkerhoff and David Wallechinsky, AllGov)

39 of the Biggest Corporations Paid a Lower Tax Rate than the Average American (by David Wallechinsky, AllGov)

Corporations Have Easy Time Beating Tax Code (by Noel Brinkerhoff, AllGov)    


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