Senator Warren Urges Treasury To Deal With Abuse of Trusts To Dodge Taxes

In full transparency, the following is a media release from Sen. Elizabeth Warren’s office. She was elected by voters in the Commonwealth of Massachusetts to serve the state in Washington DC in the US Senate. She is a Democrat. (stock photo)

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WASHINGTON DC – U.S. Senators Elizabeth Warren (D-Mass.), Chris Van Hollen (D-Md.), Bernie Sanders (I-Vt.), and Sheldon Whitehouse (D-R.I.) sent a letter to Treasury Secretary Janet Yellen, urging her to use the full extent of the Treasury Department’s regulatory authority to crack down on the ultra-wealthy’s use of trusts to dodge paying their fair share in taxes. 

“Billionaires and multi-millionaires use trusts to shift wealth to their heirs tax-free, dodging federal estate and gift taxes. 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,” wrote the senators. “The Treasury Department can and should exercise the full extent of its regulatory authority to limit this blatant abuse of our tax system by the ultra-wealthy.” 

The senators raised concerns that the wealthiest millionaires and billionaires use increasingly complex tax planning to exploit trusts and avoid paying taxes, including through using grantor retained annuity trusts (GRATs), other grantor trusts, and perpetual dynasty trusts.

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Only the richest American families are required to pay taxes when they pass on their massive wealth, with a whopping $25.84 million exemption for married couples. These transfer taxes include the estate tax, gift tax, and generation-skipping transfer tax and provide a small check on the growing wealth gap and help fund public infrastructure for all Americans. But today, less than 0.1% of American pay the estate tax – largely because of increases to transfer tax exemptions passed by Republican tax laws in 2017, which doubled the gift and estate tax exemption for married couples from $11.1 million in 2017 to $22.8 million in 2019 in a massive giveaway to the ultra-wealthy.

The senators are calling on Treasury to exercise its authority to address the abuse of GRATs and other grantor trusts, including: 

• Revoke Revenue Ruling 85-13 and follow Rothstein v. US: Revenue Ruling 85-13 provides that the transfer of assets between a grantor and a grantor trust is a non-taxable event for federal income tax purposes. Rothstein holds that transfers between a grantor and grantor trusts are taxable events. Revoking Revenue Ruling 85-13 and following Rothstein, with appropriate exceptions to prevent disruption of business operations conducted for legitimate non-tax reasons, provides a more sensible tax framework for grantor trusts. 
• Revoke Revenue Ruling 2004-64: Revenue Ruling 2004-64 holds that gift tax would not apply to a grantor’s payment of income tax attributable to trust income, which effectively allows grantors to make additional, tax-free gifts to the trust beneficiaries.  
• Require GRATs to have a minimum remainder value: The Biden Administration’s fiscal year 2023 budget proposal would require GRATs to have a remainder interest value equal to or greater than 25% of the contributed assets. In the absence of legislative action, however, Treasury should exercise its regulatory authority to require a GRAT’s remainder interest to be a set minimum percentage of contributed assets. 

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• Reissue family limited partnership regulations: The Obama Administration proposed a regulation, later withdrawn by the Trump Administration, to address the abuse of valuation discounts through family limited partnerships that are used to reduce the value of taxable estates and thereby avoid transfer taxes. Treasury and the IRS should reissue these important regulations to end this abuse of family limited partnerships.
• Clarify that Intentionally Defective Grantor Trusts (IDGTs) are not entitled to stepped-up basis: The Treasury Department should use its regulatory authority to issue a regulation or revenue ruling confirming the consensus view that IDGT assets that are not part of an estate for estate tax purposes do not receive stepped-up basis when the grantor dies.
• Issue clarifying regulations: The Treasury Department should issue regulations clarifying language within Section 2702(a) and 26 CFR § 25.2702-3, which address certain valuation rules for estate and gift tax purposes, in order to help to eliminate some exploitative tax opportunities. 

Read text of Letter here.