Warren, Democrats Target Estate Tax Dodges Ahead of 2025 Fight

Democrats want to crack down on how wealthy Americans avoid taxes through trusts, previewing a debate to come around the estate tax in 2025.

A swath of tax cuts from the Republican-passed 2017 tax law expire at the end of 2025, including the boosted estate and gift tax exemption. Lawmakers from both sides of the aisle have said they see 2025 as a chance to address a broad set of tax issues, even those that aren’t sunsetting.

For Democrats, 2025 offers the opportunity to push a tax-the-rich agenda, which in part means more restrictions on trusts.

“It’s important that it’s an election year,” said Goldburn Maynard Jr., an Indiana University law professor who specializes in wealth inequality and trusts and estates. “They’re trying to start with the issues on which they’re going to run their campaign.”

Senate Finance Committee Chair Ron Wyden (D-Ore.), who in March introduced a bill targeting use of grantor retained annuity trusts to avoid taxes, said his legislation is one of many ideas that Democrats may consider next year. Sen. Elizabeth Warren (D-Mass) has also proposed stricter requirements on trusts in her latest wealth tax proposal, and the Biden administration laid out several measures to put stricter rules on trusts in its latest Treasury Department Greenbook.

Trusts are “clearly one of the favored paths for being able to pay very little in the way of taxes,” Wyden said in late March.

Tax Avoidance

The ultra-wealthy use grantor retained annuity trusts to pass wealth to their heirs. A person can transfer assets such as stocks into the trust and then receive the amount they contributed back through annuity payments. The grantor avoids gift taxes because their contribution is paid back to them, and they can pay income tax on the gains, further lowering their taxable estate. Those gains then go to the trust beneficiaries.

Nike founder Phillip Knight used these trusts to transfer Nike shares tax-free between 2009-2016 that were worth about $6.1 billion as of October 2021. ProPublica found in 2021 that more than half of the 100 richest people in the US use this strategy to avoid gift and estate tax.

People can set up as many of these trusts as they want because there are no tax consequences for trusts that lose value, which tax lawyers call a “heads I win, tails we tie” strategy, said Bob Lord, senior tax policy adviser for the left-leaning Patriotic Millionaires.

Wyden’s bill would put a minimum value of $500,000 to the remaining money in the trust, meaning if the assets didn’t perform and were worth less than that amount, the grantor still would have a tax bill.

“It really takes the opportunity to game things out of the equation,” Lord said.

Other provisions include a minimum 15-year term for these trusts and classifying the income tax paid on the trusts as gifts, which prevent grantors from using tax payments on trusts to drain their estates to avoid the gift and estate tax, Lord said.

Warren’s bill includes stricter treatment of trusts than previous versions of her wealth tax proposal and an increase in IRS funding in part to boost auditing required to go after the tax avoidance.

“With any sort of proposals that would clamp down on tax avoidance, IRS enforcement would be very important to make sure those are working as intended,” said Samantha Jacoby, a tax analyst at the Center for Budget and Policy Priorities.

The Biden administration’s Greenbook of tax proposals also includes multiple policies, estimated to raise $97 billion in 10 years if implemented, to tighten restrictions on trusts. They include improving tax administration and modifying rules for certain trusts and property valuations, which have been included for the last three years.

“If Congress were to enact all the proposals in the Greenbook, that would pretty much shut down every estate planning technique that contemporary estate planners use to help wealthy people reduce estate and gift taxes,” said Beth Shapiro Kaufman, a partner at Lowenstein Sandler LLP who previously worked at Treasury.

Pushing for Full Repeal

Republicans, meanwhile, continue to push for a full repeal of the estate tax. More than a dozen House Republicans at the end of March blasted Biden’s budget proposal in a letter, calling out the proposal to allow the enhanced estate tax exemption to expire.

Their efforts so far have been largely successful in chipping away at the tax, most recently with the 2017 tax law that increased the exemption to around $13.6 million per person for 2024. The boost to the exemption amount expires at the end of 2025, and the exemption will drop significantly in 2026 absent congressional action, with tax professionals estimating it would be about $7 million.

It’s possible, though, that lawmakers could find agreement on measures such as Wyden’s, Jacoby said.

“Senator Wyden’s bill and similar proposals could hopefully be a point of compromise given that these aren’t tax rate increases, they’re base broadening loophole closers,” Jacoby said.

Andrew Lautz, associate director for the Bipartisan Policy Center’s economic policy program, said there could be some agreement from lawmakers on changing tax rules for trusts, particularly as some Republicans tilt more populist.

Lautz cautioned, though, that there are always more loopholes to be found.

“You reduce the number of holes in what some folks call the Swiss cheese that is the tax code,” Lautz said, “but until it’s a block of cheddar, folks are always going to find a way to reduce their tax liability.”