Democrats, with Senators Elizabeth Warren and Ron Wyden leading the charge, are amplifying their tax-the-rich agenda, including proposals targeting the use of trusts. President Joe Biden’s budget also suggests various means to curtail the use of trusts. However, it is uncertain whether such laws will be enacted in the near term, leaving high-wealth Americans, as well as non-resident non-citizens with US assets, mulling over how to shield their wealth.
Potentially effective strategies might include Asset Valuation Planning, Gifting and Transfers, leveraging Debt and Compliance measures, and for some, considering Expatriation.
The Asset Valuation Planning approach often uses valuation discounts to lower one’s net worth significantly, typically achieved by owning assets through legal entities like corporations or limited liability companies. Interests in these entities may have less value than the same share ownership in the core asset itself. Discounts often apply to lack of control, minority interests, lack of transferability, and lack of marketability.
It might be prudent to fast-track gifts and gratuitous transfers to certain types of nongrantor trusts, especially due to the larger gift tax exclusion of $13.61 million per donor until 2024. Be mindful that the higher gift and estate tax exclusions expire at the end of 2025. Coupling a gifting strategy with asset valuation planning since more assets can be transferred for less could be beneficial too.
Also, accelerating gifts to public charities, or to a private 501(c)(3) foundation, are options to consider for those desiring more long-term control over their philanthropy.
The value of an asset can generally be deducted by any debt secured by it. Strategic use of debt can therefore reduce net worth. However, overleveraging must be avoided.
For non-resident non-citizens, restructuring the ownership of US assets to circumvent wealth tax could be done by owning US assets through a foreign corporation. But moving individually held assets to a foreign corporation could trigger a taxable gain. Double taxation and imposition of the Branch Profits Tax may result.
The ongoing uncertainty in the political landscape makes tax planning challenging, though the fallout from the upcoming election may validate or nullify any strategies based on the election outcome.
It is important to note, however, that regardless of the strategies outlined here, a more in-depth analysis and guidance are always advised when considering making substantial financial decisions.
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