Paul L. Caron

Wednesday, November 3, 2021

When $200k Is Taxed Like $10 Million: Latest Tax Plan Targets Less Affluent With Trusts

Lynnley Browning (Financial Planning), When $200k Is Taxed Like $10 Million: Latest Tax Plan Targets Less Affluent With Trusts:

Democrats have pivoted to the wallets of the working wealthy in their hunt for cash to fund a winnowing social spending agenda. Their latest proposals could lead to higher taxes on working professionals and business owners who earn good money but aren’t crazy-rich — a stark contrast to their earlier focus on billionaires.

After scrapping efforts aimed at the very richest Americans, lawmakers last week proposed new surcharges that would affect certain trusts and estates with annual income as little as over $200,000. While millionaires to the richest billionaires would also pay the new surcharges, their taxes would kick in at far greater thresholds while they’re alive.

“The people who are going to get hurt are not the really wealthy people doing sophisticated planning but the ordinary taxpayer,” including “mass affluent” individuals worth between $100,000 and $1 million and the would-be rich with small businesses, farms and properties, said Martin Shenkman, an estate planning lawyer based in Fort Lee, New Jersey. ...

On the trusts front, the proposed surcharges apply only to garden-variety, basic trusts that themselves pay tax. That includes so-called simple trusts, but not the fancy grantor trusts that are favored by the ultra affluent. (A grantor is the person who creates, funds and owns the trust, and who personally pays any taxes owed.)

It’s the far lower limits for trusts that pay their own taxes, like garden-variety revocable trusts, not grantor trusts, that have jolted advisors, who say a much less wealthy swath of people would feel the pain. A multimillionaire has to earn over $10 million before the surcharges kick in, but a simple trust owner gets hit at just over $200,000.

“Congress believes that all trusts are used by wealthy people to avoid tax,” said Jonathan Blattmachr, an estate planning lawyer with Pioneer Wealth Partners in New York who is noted for his work on trusts. But they’re not, he and other estate planners said.

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