White House ‘billionaire tax’ shadows other more powerful tax changes

As the Biden administration touted its new proposal of a minimum income tax for households worth more than $100 million, estate lawyers Monday were paying attention to a more technical but also more powerful set of proposed revisions to estate and gift taxes that would go after inherited caches of wealth that have long stood beyond the reach of tax collectors.

The changes seek to downgrade sophisticated types of shelters available to the ultra-rich and their financial engineers that allow piles of money worth billions of dollars to go untaxed as they accrue over centuries.

While the fiscal 2023 revenue provisions in the Treasury’s so-called green book will be debated by lawmakers over the next several months and may not make it into law, tax attorneys are describing the proposals as much more expressly targeted than similar measures put forward last year.

“It’s very subtle in the green book, and it doesn’t seem to be what [the Biden administration] is promoting, but I’ve seen the language, and it’s serious,” Daniel Hemel, a law professor at the University of Chicago, said in an interview. “These changes would take the juice out of estate tax planning.”

Under current law, a $12 million exception from estate and gift taxes, known as the generation-skipping transfer tax (GST) exemption, allows for a scheme whereby far greater sums of money can go untaxed forever. Once an exempt trust is set up, it can acquire more assets, such as stocks or other forms of equity, which can then accumulate value while preserving the tax exemption.

These trusts, which can be enormous, are referred to as “defective” because the parents and grandparents who typically set them up hold on to the restricted tax liability, while the children and grandchildren who effectively own them remain liability-free.

According to a February report from Florida-based advocacy group Americans for Tax Fairness, “a dynasty trust established in 2021 in Nevada (which allows trusts to endure for 365 years) with the full $11.7 GST exemption allowed that year would after 75 years (roughly three generations) grow to over $454 million.”

“And that’s even if it experienced only a modest 5 percent annual return on investments,” the report goes on. “After 120 years, at slightly higher rates of return, $5 million held in a GST-exempt dynasty trust could grow to several hundred billion dollars.”

The Biden proposal, which builds on similar designs put forward by the Obama administration, aims to restrict this loophole by limiting the length of a dynasty trust to two or sometimes three generations.

“It would shield the trust assets from GST tax only as long as the life of any trust beneficiary who either is no younger than the transferor’s grandchild or is a member of a younger generation but who was alive at the creation of the trust,” according to the legalese of the Treasury Department.

Another powerful loophole the Treasury wants to plug has to do with money piles known as Grantor Retained Annuity Trusts (GRATs). These employ a similar tax-avoidance mechanism to the generation-skipping tax exemption by locking in low tax liabilities and then allowing for a rapid accumulation of nontaxable wealth.

The Treasury’s proposed provisions would impose some downside risk on the use of GRATs to make them less likely to be used simply for tax avoidance purposes.

The various fine-print initiatives announced Monday by the Treasury follow in the wake of a more high-profile tax reform plan by the Biden administration to increase taxes on households worth more than $100 million.

According to the plan, “wealthy households already paying 20 percent on their full income – standard taxable income plus unrealized income – [will pay] no additional tax under this proposal. If tax-free unrealized income allows a wealthy household to pay less than 20 percent on their full income, they will owe a top-up payment to meet the 20 percent minimum.”

Legal analysts say the plan faces the possibility of resistance in court, as direct wealth taxes based on property have been deemed unconstitutional in the past.

A Biden administration plan to tax unrealized capital gains at death failed to make it through Congress last year, as the administration’s broader domestic agenda was toppled by Democratic moderates.