US gift, estate exemptions to be dramatically lowered

The US election results pose some serious tax challenges not only for millions of US taxpayers who live in the US, but also for hundreds of thousands who live in Israel or have family or assets in Israel. 

President-elect Joe Biden has announced he will undo some of the tax regulations introduced by the Trump Administration through the Tax Cuts and Jobs Act of 2017. 

Here are some of the key points in Biden’s proposed tax policy:

• The plan proposes an increased corporate tax rate of 28%, up from 21%, for business income. 

• Biden vows to impose a tax rate of 39.6%, up from the current 37%, for individual income. The taxable income is set at a mark of $400,000.

• The plan also proposes taxing the dividend and capital gains income at the same rate as the ordinary income tax rate for any income above $1 million.

• The plan vows to tax the Gifts and Estate tax exemption at a “historical norm”; under Obama, this was $5 Million, and under Biden, it will be $3.5 Million. It is currently set at $11.5 Million per individual.

Under Biden, high-income taxpayers will see both an increase in individual taxes and the current gifts and estate tax exemptions lowered to approximately $3.5m, as opposed to the current $11.58m.

Further, estate tax rates could increase to 60% from its current 40%, and the current step-up in basis at death could be eliminated. Currently, an asset held at death is “stepped up” to fair market value at the taxpayer’s date of death. An heir is, therefore, able to minimize their tax liability when they sell these assets. Biden has proposed taxing the unrealized appreciation of the assets at death, so the heir would be subject to taxes at the transfer.

So what should you do if you are an American taxpayer and live in Israel or you live in the US and have family in Israel or Israeli assets and want to avoid the possibility of having to suddenly pay far more tax, either alive or upon death?

One of the solutions that work both in the US and in Israel is creating a trust. The exact details of creating and the workings of this structure are too detailed for this article, but basically, the settlor (the person who owns the assets) will fund the trust with their assets. These can be shares, stocks, bonds, private equity, real estate, art, anything of value. The trust will be managed by a trustee according to the settlor’s instructions, and the assets will subsequently be transferred to the beneficiaries. The trustee can be overseen by a Protector.

Under the above solution, the beneficiaries will receive the assets without any tax due, and no inheritance tax is due by the settlor with minimum or no tax to be paid upon creating the trust for the settlor. In addition, the trust creates asset protection and an easy way to manage assets in the case of multiple assets and beneficiaries.

The current Tax Cuts and Jobs Act is an opportunity that should not be missed, and transferring assets to a well-structured dual US and Israel compliant trust presents a chance to secure your assets safely and efficiently. Minimizing losses is a critical detail to act on with the election results.

Time is of the essence, however, and any trust structure must be in place before December 31, 2020. So trust it or lose it.

Adv. Dave Wolf is a US and Israeli tax attorney and the managing partner of Dave Wolf & Co. Law Firm, a law firm specializing in US and Israeli taxation of high net worth individuals. 

Adv. (CPA) Eitan Asnafy is the owner of Asnafy – Law Firm, specializing in Israeli and International tax law. Mr. Asnafy co-authored the treatise “International Taxation – The Law in Israel.”

Source link

Leave a comment