Following a year of COVID-19 relief packages, aggressive spending programs and reduced tax revenue due to COVID, the federal and state governments are facing growing deficits and mounting debt. In an effort to address these deficits, many lawmakers are resorting to “tax the rich” maneuvers, including wealth taxes. Tom Archer, Founder and Chief Executive Officer of The Archer Financial Group, is telling high-net-worth individuals that they should prepare for a flurry of proposed tax hikes and buy life insurance.
Currently, the U.S. government debt is more than $27.97 trillion, according to data supplied by TreasuryDirect.gov. In an effort to close this gap, members of Congress and the U.S. Senate recently introduced the Ultra-Millionaire Tax, or the “wealth tax,” which would impose a 2% surcharge on those with a net worth of more than $50 million. Anyone with a net worth of over $1 billion would be assessed an additional 1% surtax. In addition, the president is proposing a tax hike on those making more than $400,000 a year.
“Some people think a 1-2% increase isn’t much, but, when you’re talking about someone who is worth eight or nine figures, it adds up,” Mr. Archer says. “The Ultra-Millionaire Tax will have a serious impact on their assets, much of which may be invested in stocks, bonds and real estate and may not be liquid. It will hurt them more than they will realize.”
Mr. Archer says these proposed tax hikes are just the tip of the iceberg as the government seeks to make changes to the estate and gift tax exemptions, the step-up basis and the estate tax. “The estate tax exemption of $11.7 million for individuals may be reduced to as low as $3.5 million,” he says. “The exemption is scheduled to sunset in five years, but the government is looking to move the expiration date to the end of next year. Plus, the reduced exemption would be applied retroactively.”
The government is considering changing the step-up basis, in which the beneficiary can sell off an inherited asset for what it’s worth after the previous owner’s death without any tax implications. “If your relative bought a house for $100,000 and it is valued at $600,000, you can inherit the house for $600,000 after their death and not have to pay taxes on the home’s value,” Mr. Archer says. “The government wants to change that by taxing the appreciation of the asset; in this case, the inheritor would have to pay taxes on the $500,000 upon their relative’s death.”
Currently, the federal estate tax is at 40%, but the government is seeking to increase the tax rate significantly. Mr. Archer explains how life insurance acts as a form of wealth protection. “The life insurance policy creates cash liquidity needed at death to pay taxes,” he says. “Therefore, people don’t have to liquidate assets or have a fire sale to create the cash that is needed.”
Among those who are part of Mr. Archer’s clientele include private billionaires, professional athletes, entertainers and celebrities, many of whom reside in New York and California — two high-tax states. In fact, New York State is proposing increasing the state income tax on The Empire State’s top earners from 8.82% to 10.82%, citing a $15 billion budget hole. Meanwhile, some members of the New York State Senate are proposing progressive tax brackets in which those with incomes of more than $100 million a year would be taxed at 15%. California currently has the highest income tax rate at 13.3% for those earning more than $1 million annually.
“For those who are in New York and California, there is a possibility that they may face larger tax burdens if these new wealth taxes are passed into law,” Mr. Archer says. “If they do not have a wealth protection plan in place, such as a life insurance policy, they should meet with a financial advisor immediately who has experience in wealth management and asset protection.”
Mr. Archer holds the record for the largest life insurance policy ever sold. He sold over $2 billion in life insurance in 2020 and has been named the number one life insurance advisor for several carriers. For more information, visit www.thearcherfinancialgroup.com.