Bernie Sanders’ Plan for Taxing the Wealthy

Here are just a few reasons to believe he’s correct:

• U.S. Sen. Bernie Sanders is one of the leading candidates for the Democratic nomination.
• The national debt is $23.4 trillion, and the projected 2020 national deficit is $1 trillion.
• Wealth and income inequality are at extraordinary levels and eroding trust in democratic societies according to the United Nations.  
• U.S. life expectancy hasn’t kept pace with other wealthy nations and has decreased since 2014.

Income inequality has also widened. U.S. women in the top 1% of income live 10 years longer on average than women in the bottom 1%, and U.S. men in the top 1% of income live 15 years longer than men in the bottom 1%.

• Morgan Stanley estimates that $50 trillion worldwide will be needed to meet the targets of the Paris climate agreement.
• The American Society of Civil Engineers estimates that $4.6 trillion is needed to fix U.S. infrastructure.

Increased taxes on the wealthy will be a significant source of new revenue. Sanders is one of the leading Democratic candidates at present, so his proposals to increase taxes on wealthy Americans should be closely reviewed. They include:

Annual Wealth Tax

The idea of Senator Sanders’ wealth tax is to cut the wealth of billionaires in half within 15 years. The Senator’s website also states that “[a]ssets placed in a trust would be treated as owned by the grantor of the trust (by the person giving assets to the trust) until that person’s death.” Presumably, this means the wealth tax would apply to irrevocable trusts that estate planning attorneys, like us, have helped clients create to shift assets outside of their taxable estate for federal estate tax purposes – in other words, at least until the grantor dies. Stay tuned!

Federal Gift, Estate & GST Taxes Become Robust

Senator Sanders introduced the “For the 99.8 Percent Act” in the Senate on Jan. 31, 2019, and his campaign website refers to this Act as being his plan as President. Among other changes:

• The gift and estate tax exclusions are reduced from their current $11.58 million level to $1 million and $3.5 million, respectively.
• While the exclusions fall, the gift and estate tax rate increases: 45% (up from 40%) from $3.5 million to $10 million, 50% from $10 million to $50 million, 55% from $50 million to $1 billion and 77% for amounts over $1 billion.
• Generation-skipping transfer (GST) trusts (for example, dynasty trusts) are limited to 50 years.
• The annual gift tax exclusion is reduced to $10,000.
• Valuation discounts for interfamily transfers of assets are limited.
• Grantor retained annuity trusts (GRATs) are required to have a minimum 10-year term and minimum remainder value.
• Estate taxes are imposed at the grantor’s death on the value of any irrevocable “grantor” trust (and lifetime distributions from such trusts are subject to gift tax). These proposed rules for grantor trusts apply to such trusts created or funded after the date of enactment.
• One additional thought about the GST tax. Throughout its history, the basis for the rate of the GST tax has been the “maximum Federal estate tax rate” (Internal Revenue Code Section 2641(a)(1)).  Senator Sanders’ proposal makes no reference to any changes to the methodology used in calculating the GST tax, so does this mean that any transfer subject to the GST tax would be taxed based on the maximum federal estate tax rate of 77%? The answer is unclear.

Income Taxes Increase

Income taxes increase dramatically for earners over $10 million, and favorable capital gains and dividends rates are eliminated for the top 1%. In a presentation at the 2019 ACTEC Fall National Meeting in Philadelphia, “Well-Being Supported by Family Wealth — A Foundation to Flourish,” I explained why I believe that accumulated family wealth can be used to support family well-being. Therefore, I also believe it’s necessary to protect accumulated wealth from risks associated with taxation, investment, creditors and other threats. Previously, I suggested that wealthy families should be focused on using the current $11.58 million exclusion amount by lifetime gifts before it can be reduced. That suggestion still applies, but also the window may be closing to implement GRATs, make sales to grantor trusts, make taxable gifts at a 40% rate, and on and on.

Of course, none of these tax changes may actually happen. The status quo may persist.