As discussed in an earlier post, the concept of a “Wealth Tax” has resurfaced as a possibility in the U.S. again in the form of a proposal titled the “Ultra-Millionaire Tax Act for 2021”.

If enacted, this U.S. proposal it would provide for:

  • A 2% annual tax on the net worth of households and trusts between $50 million and $1 billion, and
  • A 1% annual surtax (3% tax overall) on the net worth of household and trusts over $1 billion.

The proposal also anticipates that some U.S. citizens may want to relinquish their U.S. citizenship so as do avoid its impact altogether. To address this type of planning the proposal provides for a 40% exit tax on any U.S. citizen that would otherwise be subject to the tax and who gives up U.S. citizenship.

Those who oppose the concept of a wealth tax are quick to point out that these taxes have been tried in other counties without success. It is true that countries such as Germany and Spain have previously abolished their internal wealth taxes. However, this is not true everywhere. Norway has a wealth tax that is regularly assessed and paid. More recently, Bolivia enacted a wealth tax.  In the case of Bolivia, it was originally proposed as a mechanism to cover the cost of Covid-19, but in its final form it became an annual tax.

President Biden had a recent success and signed the American Rescue Plan into Law on March 11, 2021 (a $1.9 trillion COVID-19 relief package). In coming weeks and months, the focus is likely to shift to looking at ways to pay for this. It will be important to remember what was on the mind of Candidate Biden last year.

As a candidate he was clear that he he wanted to increase the U.S. estate tax by reducing the $11.7m exemption down to $3.5m. This would have a significant impact on many estate plans. At first glance these exemption amounts may look impressive, but it is they do apply to worldwide assets in the case of estates of U.S. citizens and non-U.S. and foreign nationals who were domiciled in the U.S. at death.

It is also important to remember that candidate Biden did not look favorably on the concept of the “step up in basis” which eliminates built in capital gains on inherited assets. He has discussed eliminating this and deeming appreciated assets to be sold at death, resulting in a taxable capital gain. Many carefully crafted cross-border estate plans rely on the concept of the step up in basis extending to foreign family assets. Historically, with careful planning in place this was an effective tool in keeping non-U.S. sourced appreciation out of the U.S. tax net.

These taxes (particularly if all three are enacted together) present a significant risk to family wealth. In the cross-border context however, this could be particularly troubling as many counties are also moving in the same direction. These proposals (along with those of other countries) will need to be monitored in the coming weeks and months.