Joe Did What? A Matter of Trust

Modification by Epic Games of a scene from the Peter Jackson movie, via The Verge.

From National Review tax expert Daniel J. Pilla ("Biden Gets More Aggressive With the Confiscation of Capital"), the most poetic description you'll ever see of a tax dodge: 

Trusts are used in estate planning as a means of putting the assets into the hands of a holder who is, so to speak, immortal. Families often put investment assets into trust to avoid probate, thus allowing the assets to continue to work and grow without the need to liquidate them upon the death of the owner.

Because trusts don’t “die” (or, to put it more technically, enjoy perpetuity of life, like a corporation), future generations can realize the benefits of income generated by trust assets but without the heavy hand of estate and gift taxes carving their way through the assets themselves.

Far from being a tax dodge, a beneficiary trust is a kind of beautiful alchemy, that gives your money eternal life! Protecting its integrity from the unseemly violence of probate! You may die, but your money lives forever, industrious and expanding, bringing happiness wherever it turns, not maimed and scarred by—well, yes, taxes, but not just because they're taxes. It's because they're heavy-handed taxes, kicking and slashing their way onto your deck like a pirate crew carrying cutlasses.

What this is about is the Biden proposals to reform the taxation of capital income, included in the American Families Plan and destined (I hope) for the human infrastructure budget reconciliation bill. Under current US tax law, if you buy an asset, a house, say, or a painting, or a stock portfolio, and it increases in value during the time you own it, and then you leave it to somebody in your will, or give it to them as a present, then they receive it at its "stepped-up" value, and when they sell it, and pay the capital gains tax on the sale, they only pay it on the gains over the period after they got it; that is, if I buy a house for $150,000, and leave it to you, and die 30 years later when it is worth $2 million, and you sell it right away at that price, you don't pay any capital gains tax at all; nobody ever pays any tax on the $1.85 million we earned by me buying the house and you waiting for me to die. Which is bad for a couple of reasons, as the "Green Book" released by the Treasury Department last May explains:

Under current law, since a person who inherits an appreciated asset receives a basis in that asset equal to the asset’s fair market value at the time of the decedent’s death, appreciation that had accrued during the decedent’s life is never subjected to income tax. In contrast, less-wealthy individuals who must spend down their assets during retirement pay income tax on their realized capital gains. This increases the inequity in the tax treatment of capital gains. In addition, the preferential treatment for assets held until death produces an incentive for taxpayers to inefficiently lock in portfolios of assets and hold them primarily for the purpose of avoiding capital gains tax on the appreciation, rather than reinvesting the capital in more economically productive investments.

It's inequitable, giving special privileges to rich people's money that poor people's money doesn't have; and it harms the economy through what I'd like to call Smaug Syndrome, where a treasure never does anybody any good because there's a dragon sitting on it, deep inside a mountain, just because the dragon doesn't want to pay taxes on it.

So the big reform Biden (that is, Warren/Saez/Zucman) is proposing is to charge capital gains tax on gifts or inherited asset on their original base value (when the donor bought it) , not the stepped-up value of when the donee received it, as I've mentioned before, and tax it at the time of transfer (a "realization event"):

the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset. For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset. That gain would be taxable income to the decedent on the Federal gift or estate tax return or on a separate capital gains return.

But the thing that has Daniel J. Pilla's knickers in such a desperate twist, which apparently nobody knew about until the Green Book came out, is that this is going to apply to beneficiary trusts too; coming into your trust fund is going to be another "realization event" and you will have to pay capital gains on that too, in a relentless attack on the sacred principle that there must be some way for rich people to acccumulate wealth without paying any taxes on it at all, just on the interest and dividends, for endless generations of Smaugs out to the crack of doom.

"Please, Mr. Pirate, did you not have a mother? I'm sure there's a heart beating under that rough exterior, don't hurt my sweet little $10-million estate! You can't even call it taxation, that makes it sound too benign. It's confiscation of capital! Don't confiscate my capital, bro!" No, pal, we're putting that capital to work. Railroad track, broadband, and FREE EARLY CHILDHOOD EDUCATION FOR EVERY KID WHOSE PARENTS WANT IT. Eat your heart out.