(CBS News) - With the U.S. having the dubious distinction of serving as one of the world's biggest tax havens, some senators are pushing the Treasury Department to crack down on what they describe as abusive tax-avoidance schemes commonly used by the wealthiest Americans.
While people who get a paycheck or receive tips must pay taxes on their income, and savers with ordinary bank accounts must pay tax on any interest their funds earn, some of the country's richest citizens can exploit special vehicles designed to shelter their assets from tax. Hundreds of billions of dollars are stored in these legal tax shelters, called trusts, investigative journalists have found.
In a March 20 letter shared with CBS MoneyWatch, Senators Elizabeth Warren, Bernie Sanders, Chris Van Hollen and Sheldon Whitehouse are asking the Treasury to "limit this blatant abuse of our tax system by the ultra-wealthy."
"Billionaires and multi-millionaires use trusts to shift wealth to their heirs tax-free, dodging federal estate and gift taxes," the lawmakers said. "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."
Such tax-avoidance vehicles include Grantor-Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs), while another loophole stems from a 1980s-era IRS decision that allows the person setting up the trust to transfer assets into and out of it essentially tax-free.
"A kind of shell game"
By using all three of these tactics, critics say, the ultra-wealthy can pass on vast assets to their heirs without paying estate taxes or exposing their children to a big tax bill.
"Tax planning via grantor trusts, including grantor retained annuity trusts ("GRATs"), is a kind of shell game, with a wealthy person and their wealth managers able to pass assets back and forth in ways that effectively pass wealth to heirs while minimizing tax liability," the senators said in the letter.
Take GRATs, which JPMorgan's wealth management unit describes as "an efficient way to transfer wealth with little or no gift tax liability." The person setting up the GRAT — a grantor — can put some assets into the trust and receive an annuity payment every year, based on the value of the assets. Typically, JPMorgan writes, GRATs are structured so that the annuity payments "zero out" the value of the trust's assets, letting the grantor pass their wealth on tax-free.
For decades, Congress has steadily reshaped the tax code in ways that help the richest Americans stash their wealth beyond the reach of the IRS, while reform efforts have failed. Yet the senators claim that Treasury officials don't have to wait for a law change to crack down on cheating, but can simply revoke previous decisions that worsened the current crisis.
Permissive rules
More specifically, the senators want Treasury to block tax-avoidance tactics including:
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Allowing wealthy people who set up trusts for heirs to pay gift taxes for those trusts without penalty — essentially increasing the size of the gift they're giving
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Letting wealthy families understate the value of their assets by using "family limited partnerships," unfairly reducing their tax burden
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Allowing grantors who set up grantor trusts to transfer assets into and out of the vehicles tax-free
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Allowing beneficiaries of an IDGT to avoid paying taxes when assets placed into the trust, such as real estate or stock, rise in value
Addressing what they call such examples of "grantor trust abuse" could raise as much as $5 billion a year in taxes, the senators write, citing a Bloomberg report. And, while the amount of money lost to these wealth-hiding schemes is vast, the number of Americans sheltering their money this way is relatively small because the estate-tax exemption already excludes significant assets from taxation — up to $25.8 million for a married couple.
"The vast majority of Americans never receive an inheritance and of those who do, the vast majority do not owe any taxes. Only the wealthiest American families — those with over $25.84 million in wealth for a married couple — are asked to chip in a share via transfer taxes, and only on each dollar over that whopping $25.84 million exemption," the senators write.
The left-leaning Center on Budget and Policy Priorities recently estimated that only 0.1% of Americans pay any sort of estate tax.
