March 20,2024

Wyden, King Introduce Bill to Close Major Tax Loophole Involving High-Value Trusts

New 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 Chair 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. 

“The abuse of these high-value trusts is a clear-as-day example of how there’s a special set of tax rules that allows the ultra-wealthy to pay what they want, when they want, and oftentimes nothing at all,” 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 have to pay little or no tax on appreciating assets worth tens of millions of dollars. This abuse of GRATs skates by because it’s an incredibly complicated subject with a jargon-heavy name, but the bottom line is it’s fundamentally unfair and it’s past time for Congress to put a stop to it.”

“In the midst of tax season, most Americans will spend many hours filing paperwork and documentation, all to pay for programs and services that benefit our entire society,” Senator King said. “The Getting Rid of Abusive Trusts Act would close a loophole many wealthy Americans use to escape their responsibility to society by redirecting the vast gains on their fast-appreciating assets, like tech stock, into tax-free trusts for their children. Those who benefit extraordinarily from American workers, capital markets, and rule of law should support our communities at least as much as our teachers and first responders do.”

A one-page summary of the bill is available here and below. A section-by-section technical summary is available here

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 or capital gains 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.