Bill Would Address Abuse of Grantor Retained Annuity Trusts by the Ultra-Wealthy to Dodge Income, Gift and Estate Taxes
Washington, D.C. – Senate Finance Committee Ranking Member Ron Wyden, D-Ore., and Senator Angus King, I-Maine, introduced legislation today that would crack down on schemes involving the abuse of certain high-value trusts by ultra-wealthy individuals to avoid income, gift and estate taxes. The Getting Rid of Abusive Trusts Act would close a loophole and modify rules dealing with grantor retained annuity trusts (GRATs). Under current law, GRATs are commonly used by the ultra-wealthy to minimize or zero-out any income, gift or estate tax liability on assets worth at least tens of millions of dollars. They are neither available nor useful to middle-class Americans as a financial planning tool.
“If you want to see a clear case of ultra-wealthy tax dodgers hiding their schemes with overcomplicated tax rules and mind-numbing financial jargon, look no further than grantor retained annuity trusts,” Senator Wyden said. “This is a garden-variety tax dodge in which a billionaire signs some papers and moves some money around, and suddenly they owe little or no tax on assets worth millions and millions of dollars. Bottom line, as a matter of basic economic fairness, we’ve got to close loopholes like this one to make sure the ultra-rich pay a fair share”
“Well-off Americans shouldn’t be able to move assets around on paper and make their tax bill disappear,” said Senator King. “The Getting Rid of Abusive Trusts Act brings some common sense and fairness back into the equation by adding reasonable guardrails to reduce abuse of GRATs while preserving legitimate estate planning tools. If America is going to stabilize our financial situation, the first step should simply be that people pay what they owe.”
The text of the bill is here. A one-page summary is here and below. A section-by-section technical summary is here.
The GRATs Act addresses the most prevalent planning methods that grantors use to reduce the value of their estate, consequently lowering their estate tax burden, while avoiding additional income or gift tax. The GRATs Act would also modify the tax rules for grantor trusts by putting in place some downside risk on the use of GRATs so they are less likely to be used purely for tax avoidance purposes.
Additional Requirements for Grantor Retained Annuity Trusts
The bill adds the requirement that a GRAT must have a minimum term of fifteen years and a maximum term of the life expectancy of the annuitant plus ten years. Second, this section prohibits any decrease in the annuity during the GRAT term. Finally, this section adds the requirement that the remainder interest in a GRAT at the time of transfer must have a minimum value for gift tax purposes. The purpose of applying additional requirements is to impose costs on the use of GRATs, so they are less likely to be used entirely for tax avoidance purposes.
Transfers of Property Between a Trust and its Deemed Owner will be Treated as Sales
Transfers of property between a trust and the deemed owner of the trust will be treated as a sale or exchange for income tax purposes. This change is intended to address prevalent tax planning methods where a taxpayer’s appreciating assets can be transferred in and out of a GRAT without incurring income tax.
Income Tax paid on the Trust’s Income will be Designated as a Gift
Any income tax paid on the GRAT’s income is designated as a gift for the purposes of the gift tax, unless the owner is reimbursed from the GRAT during the same calendar year. The gift amount cannot be reduced through the use of deductions such as the charitable deduction, marital deduction, or deductions for gifts of tuition or medical care. This change is intended to address prevalent tax planning methods where a grantor of a GRAT uses the trust to reduce the value of their estate, consequently lowering their estate tax burden while avoiding additional income or gift tax.
A web version of this release is here.
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