Democratic Senators Urge The Biden Administration To Go After Ultrawealthy Tax Dodgers
Ultrawealthy Americans enjoy so many ways to avoid taxes that Gary Cohn, former President Donald Trump’s director of the National Economic Council, once wisecracked, “Only morons pay the estate tax.”
On Monday, a group of four Democratic senators urged Treasury Secretary Janet Yellen to crack down on a host of specially-designed trusts and financial vehicles that allow the wealthiest individuals to shield their personal fortunes and pass down massive inheritances tax-free.
The letter, from Sens. Elizabeth Warren, Bernie Sanders, Chris Van Hollen, and Sheldon Whitehouse, laid out a series of potential IRS regulations that would make trusts, particularly, less attractive as tax shelters for the 1%.
“Billionaires and multi-millionaires use trusts to shift wealth to their heirs tax-free, dodging federal estate and gift taxes,” the senators wrote. “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.”
Only about 0.1% of Americans pay estate taxes, despite thousands of families having fortunes larger than the current $25.48 million exemption.
When President Joe Biden promised on the campaign trail to raise taxes on the richest Americans, it unleashed a race to set up the kinds of legal tax shelters that would protect their inheritable assets from the estate tax.
They feared Biden would lower the estate tax exemption — which Republicans under Trump had raised to its all-time high — and resuscitate proposed IRS rules that make it more difficult to use trusts to avoid taxes on substantial inheritances.
But Democrats dropped their plans to raise inheritance taxes early on in the Biden administration. And in their letter, the lawmakers argued there is far more the IRS can do to crack down on the “shell games” the ultrawealthy use to shield huge generational wealth transfers from taxation.
Popular schemes they highlighted include families using special vehicles, called family limited partnerships, to understate the values of their estates; placing assets that will rise in value, such as a stock portfolio, inside a tax-shielded trust before the price can rebound; and cycling stocks and other assets through a grantor trust to avoid inheritance taxes.
The current economy, where stocks have lost double digits in value, actually supercharges some of these tax shelters because they shield future appreciation from taxation.
“As the richest Americans celebrate and take advantage of these favorable tax opportunities, middle-class families struggle with inflation and Republicans threaten austerity measures and the end of Social Security and Medicare,” the lawmakers wrote.
They argued that the Treasury Department could crack down on these tax-avoidance vehicles without action from Congress.
It can revoke a rule that currently exempts transfers between grantors and grantor trusts from taxes, and it can require grantor trusts to hold a minimum value so they would be less useful as a pass-through for avoiding taxes. And it can clarify and rein in the kinds of asset sales and valuation practices tax planners have abused to wedge their clients’ enormous estates into various tax-shielded trusts and partnerships.
“Although the details of various trusts may differ, the result of wealthy individuals transferring millions in assets to heirs tax-free does not,” they continued. “The ultra-wealthy at the top of the socioeconomic ladder live by different rules than the rest of America.”