BIDEN TAX RULE MAY RIP BILLIONS FROM TOP FORTUNES AT DEATH

Proposal says capital gains tax of upto 40% will be applied immediately when assets are transfered to wealthy heirs

Jeff Bezos has an ex-wife, a girlfriend, four children and billions of reasons to watch whether Joe Biden’s tax overhaul wins congressional approval.

The Amazon founder’s heirs may have to pay more than $36 billion if the president succeeds in closing a loophole that helps the rich transfer their fortunes tax-free at death.

Under current rules, whoever inherits the Amazon shares Bezos bought in 1994 for $10,000, worth $180 billion today, will receive a socalled step-up in basis, wiping out any capital gains tax liability. Biden’s plan would close that loophole and apply the top capital gains tax immediately when assets transfer to wealthy heirs. If the rate increases — it’s 20% for holdings like Bezos’s, and Biden has called for boosting it to 39.6% — the eventual tax bill would too.

For Bill and Melinda Gates, who announced on Monday that they would be divorcing, a change in the step-up rule might be less costly. The Gates fortune, valued at $145.8 billion, is older, and they’ve already sold or donated much of their stake in Microsoft. But $26 billion of Microsoft shares remain, and it isn’t clear how the couple will manage their assets in a split.

Congress estimates that stepping up the tax basis of inherited assets costs the government about $43 billion a year. Ending that practice and raising the rate would amount to the biggest curb on dynastic wealth in decades, altering an American economic landscape dominated by a few wealthy families. The proposals are far from becoming law, even though Democrats control both houses of Congress, as they threaten wealthy donors to both political parties who have lobbied against them. But proponents say getting rid of the step-up rule, known to estate planners as the Angel of Death loophole, is crucial to achieving Biden’s vision of tax fairness. Otherwise, economists project that the proposed increase in the top capital gains tax rate would further encourage holding assets until death, decreasing revenue for the Treasury. The step-up rule allows investors to pass on assets to heirs virtually tax-free, raising the taxable value of a property to its fair market value at the time it is inherited.

The Joint Committee on Taxation, a nonpartisan arm of Congress, estimates that about half of unrealized gains belong to the wealthiest 1%, according to an analysis of data in the Federal Reserve Board’s Survey of Consumer Finances. And unrealised and accrued capital gains account for about 40% of the wealth of the top 1%, the Fed data show.

The step-up rule has been criticised as a governmentsubsidised engine for amassing dynastic fortunes and a cause for widening economic inequality. Even some prominent estate planners say the provision has outlived that original purpose.

Republicans and some business organizations have criticised the Biden proposal. A study by Ernst & Young commissioned by the Family Business Estate Tax Coalition predicted that eliminating the stepup rule could cost tens of thousands of jobs a year and cut $10 billion from annual gross domestic product.

Opponents of the plan say the burden would largely be avoided by the ultra-wealthy, who can afford sophisticated estate planning, and fall instead on small businesses and family farms, which might have to be sold to pay tax bills.

“Repealing step-up could have a dramatic impact on small manufacturers across the country, potentially requiring families to liquidate businesses, leverage assets, or lay off employees to cover the tax hit,” said Chris Netram, vice president of tax and domestic economic policy at the National Association of Manufacturers.

But even if Biden’s plan is adopted, lawyers and accountants will likely find ways to increase flexibility by using charitable donations and novel estate planning strategies.

“The story of taxing rich people throughout history is that they will always find ways to sidestep taxes,” said John Ricco, author of the a study. “This will certainly narrow the avoidance opportunities — perhaps not as much as the proponents of the Biden proposal hope, but it will have some bite to it.”