Democratic senators take aim at estate tax strategies for ultra-wealthy

Democratic lawmakers are asking the Treasury Department to curb strategies utilized by the ultra-wealthy to avoid estate taxes while also criticizing the financial advisors who tout such strategies.

“Billionaires and multi-millionaires use trusts to shift wealth to their heirs tax-free, dodging federal estate and gift taxes,” Sen. Elizabeth Warren, D-Mass., and three other senators wrote in a letter Monday to Treasury Secretary Janet Yellen. “And they are doing this in the open: their wealth managers are bragging about how their tax dodging tricks will be more effective in the current economy. The ultra-wealthy should pay their fair share, not avoid taxes by hiring elite lawyers and accountants.”

Warren, a member of the Senate Banking Committee, was joined by Sens. Chris Van Hollen, D-Md., Sheldon Whitehouse, D-N.H., and Bernie Sanders, I-Vt. Sanders caucuses with other Senate Democrats.

They appealed to Yellen to use her regulatory authority to limit how high-net-worth individuals use trusts to reduce the amount of estate taxes they pay. The senators argued that it would introduce more fairness into the tax system.

The lawmakers cited a statistic that only 0.1% of Americans pay estate taxes. In part, they blamed the 2017 Tax Cuts and Jobs Act for doubling the estate-tax exemption.

“But there is another cause of this low payment rate: millionaires and billionaires engaging in increasingly complex tax planning that exploits trusts to avoid paying taxes,” the senators wrote.

They took particular aim at grantor retained annuity trusts, a strategy in which an individual moves assets into a vehicle that then generates annual income. When the annuity expires, the money in the trust can be donated to a beneficiary, who has little gift-tax liability.

“Tax planning via grantor trusts, including grantor retained annuity trusts (“GRATs”), is a kind of shell game, with a wealthy person and their wealth managers able to pass assets back and forth in ways that effectively pass wealth to heirs while minimizing tax liability,” the senators wrote.

The strategy is a popular one for financial advisors to recommend to wealthy clients, especially when interest rates are low.

The senators outlined several steps that they said Yellen could take to clamp down on GRATs, including making the transfer of assets to a grantor trust taxable and requiring GRATs to hold a minimum remainder value.

They also bashed perpetual dynasty trusts and a wealth management firm that recommends them.

“Wealth management firms openly brag about the millions in tax dodging they can achieve for their ultra-wealthy clients using a dynasty trust,” the senators wrote. “For example, one wealth management firm advertises the ‘extraordinary opportunity’ to accumulate an additional $367 million of wealth over 75 years by avoiding taxes via dynasty trusts.”

They then quoted from the website of The Northern Trust Institute.

The senators only briefly mentioned “legislative solutions” to reforming trusts. They focused instead on regulatory actions Yellen can implement. A bill containing the senators’ estate tax reform ideas would face longs odds against a Senate filibuster and almost no chance in the Republican-controlled House.

“We share the Biden Administration’s desire to stop tax abuse through use of grantor trusts, and, while we look forward to continuing to partner with you on legislative solutions, we strongly encourage the Treasury Department to use its existing authority to limit this tax dodging by the ultra-wealthy,” the senators wrote.  

[More: The Trump family used this strategy to save on taxes]