When contemplating how to address any tax to be imposed by government, it is often helpful to review a quote from Judge Learned Hand:

“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir., 1934)

This quote serves as a great reminder that proper tax planning is not something unusually nefarious, but rather a right we have to minimize government impact on our affairs. Governments have, do, and will continue to propose and implement taxes – all with varying degrees of consequences to those subject to them.

Recently, the concept of a “wealth tax” exploded on the domestic political scene. Several candidates for president have proposed a wealth tax in some form. But what exactly is a wealth tax, and why do some feel it is necessary? What follows is not a response to a partisan question. Instead, it is meant to help those who would be subject to such a tax think about its potential impact and provide options to plan for its effect.

Worldwide, wealth taxes are not new. Many countries have had a wealth tax, and some have subsequently eliminated it(1). According to the Organization for Economic Cooperation and Development (OECD), as recently as 1990 more than a dozen countries (including Austria, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Spain, Sweden, and Switzerland) imposed a wealth tax. By 2017, only four (France, Norway, Spain, and Switzerland) still did so(1).

Some of the European criticisms levied against wealth taxes include inefficiency and administrative challenges, failure to accomplish the redistributive objectives, and failure to collect revenue targets(1). Moreover, the report indicates that wealth taxes can be difficult to administer and challenging to enforce(1). The OECD notes that there are many reasons most of Europe has eliminated the wealth tax. The more compelling justifications include: wealth taxes have a disappearing wealth base; since the tax is a net wealth tax, debt is deductible; when exemptions are made for certain types of assets, taxpayers incur debt to acquire such assets; and the determination of an asset’s value can be problematic, particularly for items such as real estate holdings and privately-held businesses(1).

A wealth tax differs from a traditional income tax in that it is a tax on the existing value of wealth – often referred to as net worth (net worth is the value of all assets minus outstanding debt.) What would be subject to a proposed wealth tax? In short, mostly everything: cash, real estate, investments, business holdings, trusts, personal property (cars, art, jewelry), etc.

Why is such a tax being proposed? Two primary reasons. First, wealth inequality. The belief is that a wealth tax is needed to help remedy the growing chasm between those with substantial wealth and those without. Second, to pay for greatly expanded government-funded health care.

The wealth tax proposals vary, but each proposes to tax a percentage of wealth on an annual basis – anywhere from 2 to 8 percent each year. Proponents claim the wealth tax could raise around $2.75 trillion over 10 years and would impact roughly 75,000 U.S. households (less than 0.1% of all U.S. households(2).) At least one proposal targets households with at least $50 million or more in net worth(2).

While the enactment of a wealth tax is unlikely at this point, if it were to occur, it could be challenging for many families of wealth to have the liquidity needed to pay the tax. Many wealthy individuals and families only have a small percentage of their wealth in liquid form. They would be left with two options: borrow the money or liquidate assets. However, there may be an opportunity to defer payment of the wealth tax with interest(2).

To stop wealthy U.S. taxpayers from simply moving out of the country and renouncing their U.S. citizenship to avoid the tax, the current proposals would assess a one-time “exit tax” on net worth above a certain threshold(2). As an example, a taxpayer with a net worth of $100 million could be assessed an exit tax of $20 million(3).

While many questions remain unanswered as to how a wealth tax would be implemented and administered by the Internal Revenue Service (IRS), there are several things wealthy individuals and families can explore now to prepare.

  1. Meet with your advisors to design and implement an estate plan that is appropriate for your circumstances. Move assets outside your taxable estate if possible. This will likely remove them from the scope of a wealth tax since you no longer own or control them.
  2. Determine the scope of your difficult-to-value assets you plan to continue to own, such as an operating business. Speak with your accountant/CPA about how to establish their values now and going forward.
  3. Evaluate how much debt you have and how much you can take on comfortably. Having debt on your balance sheet offsets the value of assets and thereby reduces net worth, which could lower the impact of a wealth tax.
  4. Lastly, as an extreme measure, before any wealth tax is implemented, expatriation may be an option worth considering for those taxpayers who do not own highly appreciated assets. Have a discussion with your family and advisors on the viability of this as an option.

There are many unanswered questions surrounding the wealth tax proposals, such as exactly what is included in the calculation of net worth, how debt is treated in this calculation, how “household” is defined, what exemptions will exist, what the requirements are around difficult to value assets, how valuation principles apply to these types of assets, and finally what support or documentation is required when declaring an asset’s value.

As unlikely as a wealth tax becoming a reality may be, it is important to be as prepared as possible. The advice and counsel of a competent financial professional should be sought to be ready for whatever the future may hold.

[1] “The Role and Design of Net Wealth Taxes in the OECD” published by the Organization for Economic Cooperation and Development on April 12, 2018
[2] “Facts on Warren’s Wealth Tax Plan” by Robert Farley posted June 25, 2019 on www.factcheck.org
[3] One proposal would assess a one-time 40% “exit tax” on net worth above $50 million, e.g., (calculated as $100 million net worth)