Dear Clients and Friends:

This morning President Biden announced a framework that he believes will secure unanimous Democratic approval, but details remain unknown. Democrat infighting has caused a substantial reduction in their tax and spend reconciliation proposal, which is now reduced and projected at $1.85 trillion. The extent to which this alters the House and Senate tax reform proposals to date is not clear. Biden has warned Democrats that his presidency hinges on what happens over the next week. It appears that estate tax reform; curtailing use of common estate and trust planning techniques; and taxing unrealized capital gains have been removed from consideration, but this is far from clear until proposed legislation or Senate and House bills are reviewed.

Tax Increases within the Framework: Statements released this morning by President Biden suggest a workable framework has been agreed in principle, but this too is far from clear as the final legislation hinges on support from key moderates and progressives. The framework suggest by Biden includes:

a minimum 15% tax on corporations with financial reporting profits exceeding $1 billion:
a minimum 15% global tax that has also been agreed by OECD members and others:
a 1% tax on stock buybacks:
a 5% surtax on incomes of individuals above $10 million;
an additional 3% surtax on individual incomes above $25 million;
the closing of an “S” corporation loophole, sometimes called the “Biden loophole,” that avoids certain self employed taxes, such as the 3.8% Medicare tax on closely-held business profits; and
a plan to roughly double the size of the IRS with a focus on tougher enforcement for administration high-income taxpayers.

This framework does address objections by Senators Manchin and Sinema, and Congressman Neal, but none offered explicit support for the spending framework though stated material progress has been made. A proposed tax on the unrealized gains of billionaires has been removed; increases on the marginal income and capital gains rates of all but the wealthiest .02% have been eliminated; and IRS scrutiny of bank reporting of taxpayer deposits and withdrawals appears to have been eliminated.

Unanswered Questions and Planning: Questions remain. Over the course of the last 18 months, many have taken steps to address their estate plans. Billions if not trillions of dollars of wealth have moved to beneficial trust and other structures to escape the reach of taxation or to use exemptions before they are reduced. A recap of the most recent proposals prior to this mornings announcement by President Biden can be found here: https://www.jckempe.com/client-alert-tax-reform/ .

It is uncertain if any of these prior House and Senate proposals will be made a part of final legislation. At this point the following can be concluded:
it appears inevitable that some form of reconciliation tax and spend legislation will be passed;
some members in Congress are leery of new and unique forms of taxation, that don’t currently exist in the Internal Revenue Code- taxing unrealized gains is one of them;
a reduction of the estate and gift tax exemption to pre-Trump levels by accelerating the sunsetting that occurs in 2026 is likely acceptable to moderates, including Sinema and Manchin, but this is far from a certainty; and
many taxpayers who have created trusts in 2021 may have built-in measures to rescind trusts and transactions, or to avoid use of exemptions, that will extend into 2022 when it is hoped legislation and the impact would be clearly understood. https://www.jckempe.com/client-alert-tax-reform/ .

As such, it would appear we are all in the same position we have been in, with the full content, and thus impact, of legislation being unknown. Some will choose to continue down the path of funding trusts and completing gifts to fully use their existing exemptions, recognizing that this will not only fully use their exemptions but also shelter growth from the wealth transfer tax system. Others may continue, provided there exists flexibility with flexibility subject to a variety of restraining tax laws. Some may delay and risk an adverse impact on their affairs but greater certainty. We just don’t yet know, but on its face it appears that some of the more substantial measures that caused an acceleration of planning (grantor trust provisions discussed in the above link) could be off the table, but this is far from certain. A reduction of the estate tax exemption to $6 million from $12 million could remain (some believe it likely), but within the House bill it wasn’t effective until January 1, 2022 thus leaving some time but not much to react.

We continue to be available to help clients with decision making and are pleased to be of service.

Joe Kempe

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