Articles and

Your money. Your plan. Our help.



Or you can call us at (800) 548-8138.

Green Book clues for taxing the wealthy

When President Biden proposed the American Families Plan, he called for an end to stepped-up basis at death.  The White House later clarified that a $1 million exemption would excuse smaller estates from this new tax, but the implementation details were left fuzzy.

The picture became much clearer with the release of the Treasury Department’s Green Book on May 28, outlining legislative recommendations for fiscal 2022.  Death and gifts would both be treated as realization events for appreciated assets.  Dynasty trusts would have to pay tax on capital gains every 90 years. Gain realization would be deferred for family-owned businesses so long as the business remains family owned.  For illiquid assets, such as fine art, the tax on the gain could be spread over 15 years.

The Green Book also includes the $1 million exemption for smaller estates, and it provides that the exemption would be portable between spouses. Transfers to a spouse or a charity would not be realization events. The exemption is in addition to the exemption from tax of the first $250,000 of gain from the sale of a principal residence ($500,000 for couples). Also, for married couples the residence gain would be portable, so married couples would have $2.5 million to work with.  Finally, the exemption would be indexed for inflation.

Importantly, the tax on capital gains at death would be deductible on the decedent’s estate tax return, if there is one, reducing double taxation.

However, when an exemption-protected gift is made, the donee will take the donor’s tax basis, and so will have to pay tax on the gain if there is a sale.  Some have observed that this seems like a waste of the exemption.

This new rule would not go into effect until the first of next year.


Retroactive taxes on long-term gains

Taxpayers with adjusted gross income in excess of $1 million will see the tax rate on their long-term capital gains jump from 23.8% under current law to 40.8%, according to the Green Book. (Others have mentioned a 43.4% tax rate, the sum of the new 39.6% top rate plus the 3.8% tax on net investment income.)

This rule would apply “for gains required to be recognized after the date of announcement,” presumably April 28 when the fact sheet was released for the American Families Plan.  In other words, the new top rate would be retroactive.

Oddly enough, the retroactive effective date was justified as preventing the wealthy from realizing gains early to avoid the tax rate increase.  While it does achieve that goal, it would do so at the expense of revenue.  If the wealthy did sell assets to lock in lower tax rates, much more money would flow to the IRS in the near term from their sales.  Raising the rate will tend to have the opposite effect, slowing capital gain realizations.  This phenomenon was observed when rates were changed in the 1986 Tax Reform Act.


Article ©2021 M.A. Co. All rights reserved. Used with permission. 

Tax disaster: Transfer of inherited IRA assets to non-IRA account is held irreversible

A parent named an irrevocable trust as the beneficiary of his IRA, designated “IRA X” in a recent IRS private ruling.  His children were the beneficiaries and trustees of the trust.

Soon after the parent died, the children were advised by the custodian of IRA X that they could not trade stocks in that account and that a transfer to a different account would be required for that to happen.  The custodian is not identified in the ruling. The children, acting as trustees, moved substantially all the IRA money to a non-IRA account that allowed for trading stocks.

Several months passed, and perhaps someone noticed the looming tax problem.  The children asked the IRS for permission to move the money back into an IRA to preserve their tax benefits.

Sorry, no, said the IRS. “The only permitted method of transferring assets from an inherited IRA to another inherited IRA is via a trustee-to-trustee transfer, which requires a direct transfer from one IRA to another IRA. Therefore, once the assets have been distributed from an inherited IRA, there is no permitted method of transferring them back into an IRA.”

That conclusion also means the entire transfer of funds to the non-IRA account is taxable to the trust in the year that the transfer occurred.  Thus, the children have inadvertently accelerated the income tax on substantially all of the inherited IRA assets.


Article ©2021 M.A. Co. All rights reserved. Used with permission. 

Due diligence for DAFs

A donor-advised fund (DAF) provides budding philanthropists with a mechanism for making a large charitable contribution, securing an immediate corresponding tax deduction, while deferring the selection of charitable beneficiaries for the future.  The donor may also be able to advise the fund on investment choices. However, the right to advise as to future beneficiaries, and the right to advise on investments, are limited to being advice. The DAF has no legal obligation to follow the advice, only to listen.  If the advice were to be binding, the charitable deduction would be lost.

But as a practical matter, DAFs want to keep their donors happy, so they will generally follow the advice that they receive.

Philip Pinkert made a substantial donation to the Schwab Charitable Fund, which was a DAF.  Schwab Charitable pays fees to Charles Schwab & Co. (a legally distinct company) for custodial and brokerage services. Mr. Pinkert felt that the DAF was overpaying for the services it received from Charles Schwab.  Specifically, he alleged:

  • Cheaper alternatives were available for money market and index funds;
  • Schwab Charitable bought the retail classes of shares instead of the cheaper wholesale shares;
  • Schwab Charitable could have used its market clout to negotiate better terms from Charles Schwab.

Pinkert brought a class-action lawsuit to get Schwab Charitable to change its policies. He claimed that his charitable donees were being shortchanged because too much money was flowing to Charles Schwab.

Unfortunately for him, the Court ruled that Mr. Pinkert did not have standing to bring the lawsuit. The transfers to a DAF are irrevocable; there is no lingering property interest sufficient to base a lawsuit upon. The Court dismissed the case without addressing its merits.

Mr. Pinkert should have done his due diligence before making his contribution.


Article ©2021 M.A. Co. All rights reserved. Used with permission. 

Ask a trust officer:
Bond prices

I’ve read that when interest rates go up, bond prices go down.  Why should this be so?  It seems a bit irrational to me.—CYNICAL INVESTOR

It’s not irrational. It’s not emotional at all; it’s just math.

Here’s a simplified example. You have a bond with a face value of $1,000 that pays 5% every year, or $50.  When the bond matures you receive $1,000.

Now imagine that interest rates have jumped to 7%, so a new $1,000 bond pays $70 every year.  What happens to the value of your 5% bond?

If you hold the bond to maturity, nothing happens, you still get that $50 every year and $1,000 at maturity.  But if you want to sell your bond early, no one will pay $1,000 because they will want to collect 7% per year, the same as from a new bond. They will pay only $714 for your bond, because 7% of that amount comes to the $50 your bond pays.  

Changes in interest rates are only one part of the story.  The amount of decline in a bond’s value also depends on its maturity.  Shorter-term bonds do not decline nearly so much in value, because the principal will be repaid sooner. Longer-term bonds are more vulnerable to interest rate changes.

This is why bond investors tend to keep a sharp eye on inflation and inflationary expectations.


Article ©2021 M.A. Co. All rights reserved. Used with permission. 

Are you ready to move forward?

Let's discuss the details.