In 2017, a far-reaching set of tax reforms came into force in the US, initiated by President Donald Trump. Among other things, the federal corporate tax rate was cut from 35% to 21%, te threshold for estate tax, which had previously been imposed on anyone inheriting assets worth over $5.49 million, was raised, and the number of income tax brackets for individuals was reduced. Some parts of the reform were heavily criticized; many argued that it was good for the wealthy in the US, but not so good for everyone else.
If we are to go by the promises of president-elect Joe Biden, all this is about to change. Before the election in the US, Biden declared that, if elected, he would act to cancel several of the tax arrangements that Trump introduced in the Tax Cuts and Jobs Act of 2017 - and now he has won.
Biden's taxation policy, if he keeps his promises, will look like the opposite of that of Trump, aimed at taking more from the rich and less from those on low incomes. High-earning individuals can expect a heavier tax burden, in the form of higher tax rates on their incomes and reduced exemptions from gift tax and estate tax.
Biden says he also intends to raise the corporate income tax rate from 21% to 28%; to raise the tax rate on individual income over $400,000 annually from 37% to 39.6%; to make taxation of dividends and capital gains equal to the rate of tax applying to earned income on income above $1 million, and to eliminate the step-up in basis for taxation of capital gains on inheritances. "Currently, the value of an asset is updated to its market value on the date the owner dies. This of course directly reduces the amount of capital gains tax payable on the sale of the asset by the heirs. Biden proposes to tax the increase in value of the unrealized asset on the day of death, meaning that the heirs will pay tax on receiving the asset from the estate," explains Adv. Dave Wold, who specializes in US and Israeli taxation.
Biden has also declared his intention of reverting to the previous rules on exemptions from gift tax and estate tax. "Under the Trump administration, the exemption stands at $11.5 million for individuals. Biden proposes reducing the exemption threshold to just $3.5 million," Wolf explains.
In addition, the rate of estate tax will rise from its current level of 40%.
"Under the Biden administration, Individuals with high incomes will bear a higher tax burden: a rise in tax rates on their incomes, and lower exemptions from gift tax and estate tax," says Wolf. "The Democratic administration's tax program will dramatically raise the tax burden on wealth, both in individual taxation and in taxation of business income."
Americans in Israel will be affected
"The results of the US election present taxation challenges not just to millions of American taxpayers in the US, but also to hundreds of thousands of them who live in Israel or who have family or assets in Israel," says Wolf.
"The US taxation method is based on citizenship, and therefore anyone who is a US citizen, wherever they reside, is affected, and is exposed to these changes, even as a resident of Israel," Wolf continues. "This is relevant for thousands of Israelis with US citizenship, whether they live in the US or in Israel, as well as for US citizens residing in Israel without Israeli citizenship, and any US citizen who does not live in Israel but who has family in Israel, that is, future heirs. It's probably a case of millions of people."
Adv. Boaz Feinberg, head of the taxation department at Tadmor Levy & Co., says, "Under the tax reform plan that Biden presented before the election, and on the assumption that he will keep his promises, the intention is to reduce the minimum value of assets liable to estate tax and gift tax from $11.5 million to just $3.5 million. This means that for any US citizen who personally owns assets anywhere in the world above this value, his or her estate will be liable to pay tax when they die at 40%, and to pay gift tax if they made lifetime gifts amounting to more than the new value ceiling. This change could have a material effect both on Israelis with US citizenship and on American Jews considering immigration to Israel."
Israeli companies won't transfer to the US
Adv. Tali Yaron-Eldar, a partner at Yaron-Eldar, Paller, Schwartz & Co. and a former Income Tax Commissioner, adds, "If Biden acts on his promise to raise federal corporate tax, it will become much less worthwhile for Israel technology companies to set up a substantial activity base in the US. Although Israel has the Law for the Encouragement of Capital Investment, which gives large tax breaks, Trump's tax cuts in the US created an incentive for companies to move their activities there.
"Biden's declared policy will play into the State of Israel's hands," Yaron-Eldar continues. "It means that Israeli companies that were considering shifting the center of their activity will prefer to leave it in Israel, or in other places where tax rates are substantially lower.
"According to his declarations, Biden plans to lower the exemption ceiling for estate tax, which currently stands at $11.5 million, and that will lead Israelis with US citizenship to prefer not to hold assets in the US, in order not to risk paying estate tax of 40%."
Tax planning: In trusts we trust
Adv. and CPA Eitan Asnafy, an expert on Israeli and international taxation, suggests a solution for a US taxpayer who lives in Israel, or who lives in the US but has family or assets in Israel, and seeks to avoid liability to additional taxes, during life or after death.
"A possible solution, which conforms with both US and Israeli law, is to create a trust," Asnafy says. "Usually, the trustor, the owner of the assets, will set up a trust and transfer his or her assets to it, be they shares, other securities, cash, real estate, works of art, or anything else of value. The trust is run by a trustee, in accordance with the trustor's instructions, and the assets are distributed to the beneficiaries in the way and at the time determined by the trustor. It is also possible to appoint a trust protector to supervise the trustee's actions.
"The trust solution enables the beneficiaries to receive the assets without tax liability. Similarly, the transfer of the trustor's assets to the trust will be free of US estate tax, and will give rise to a minimal tax liability, if any. The trust also affords protection to the trustor's assets, and is an instrument that allows a great deal of flexibility and ease in managing assets where there are many assets and beneficiaries."
Asnafy, who co-authored the book "International Taxation - The Law in Israel", says, "There is a narrow window of opportunity for exploiting the substantial benefits that apply today. The transfer of assets to an Israeli trust that also meets the current requirements in the US will facilitate the efficient transfer of family wealth between generations, taking advantage of the benefits in the existing tax regime - benefits that are expected to be cancelled under the new administration. The time element is critical. Any such trust structure has to be put in place before December 31 this year."
Adv. Feinberg adds, "The accepted inheritance arrangement for planning for estate tax and reducing it is through forming a trust, but the difficulty is that in the State of Israel the taxation rules for trusts are problematic, especially in the case of trusts with American trustors and Israeli beneficiaries. So, for example, following the 2014 reform of taxation of trusts, a trust beneficiary who immigrates to Israel and whose parents, the trustors, die after he or she does so, is liable to find himself or herself owing tax on all the profits of the trust, regardless of his or her share in it.
"This means that if Biden's tax reform is passed, Israeli tax policy on trusts will deal a critical blow to rates of Jewish immigration from the US. In these circumstances, the Israel Tax Authority ought to reconsider the way it taxes trusts with beneficiaries who are US citizens who have immigrated to Israel."
Published by Globes, Israel businests news - en.globes.co.il - on November 10, 2020
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