March 21, 2023

Warren, Van Hollen, Sanders, Whitehouse Urge Treasury to Crack Down on Ultra-Wealthy Abuse of Trusts to Dodge Taxes

More than Half of America’s 100 Richest People Exploit Trusts to Pass on Billions Tax-Free

“The ultra-wealthy at the top of the socioeconomic ladder live by different rules than the rest of America, especially when it comes to our tax system.”

Text of Letter (PDF)

Washington, D.C. – U.S. Senators Elizabeth Warren (D-Mass.), Chris Van Hollen (D-Md.), Bernie Sanders (I-Vt.), and Sheldon Whitehouse (D-R.I.) sent a letter to Treasury Secretary Janet Yellen, urging her to use the full extent of the Treasury Department’s regulatory authority to crack down on the ultra-wealthy’s use of trusts to dodge paying their fair share in taxes. 

“Billionaires and multi-millionaires use trusts to shift wealth to their heirs tax-free, dodging federal estate and gift taxes. 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,” wrote the senators. “The Treasury Department can and should exercise the full extent of its regulatory authority to limit this blatant abuse of our tax system by the ultra-wealthy.” 

The senators raised concerns that the wealthiest millionaires and billionaires use increasingly complex tax planning to exploit trusts and avoid paying taxes, including through using grantor retained annuity trusts (GRATs), other grantor trusts, and perpetual dynasty trusts.

Only the richest American families are required to pay taxes when they pass on their massive wealth, with a whopping $25.84 million exemption for married couples. These transfer taxes include the estate tax, gift tax, and generation-skipping transfer tax and provide a small check on the growing wealth gap and help fund public infrastructure for all Americans. But today, less than 0.1% of American pay the estate tax – largely because of increases to transfer tax exemptions passed by Republican tax laws in 2017, which doubled the gift and estate tax exemption for married couples from $11.1 million in 2017 to $22.8 million in 2019 in a massive giveaway to the ultra-wealthy.

The senators are calling on Treasury to exercise its authority to address the abuse of GRATs and other grantor trusts, including: 

  • Revoke Revenue Ruling 85-13 and follow Rothstein v. US: Revenue Ruling 85-13 provides that the transfer of assets between a grantor and a grantor trust is a non-taxable event for federal income tax purposes. Rothstein holds that transfers between a grantor and grantor trusts are taxable events. Revoking Revenue Ruling 85-13 and following Rothstein, with appropriate exceptions to prevent disruption of business operations conducted for legitimate non-tax reasons, provides a more sensible tax framework for grantor trusts. 
  • Revoke Revenue Ruling 2004-64: Revenue Ruling 2004-64 holds that gift tax would not apply to a grantor’s payment of income tax attributable to trust income, which effectively allows grantors to make additional, tax-free gifts to the trust beneficiaries.  
  • Require GRATs to have a minimum remainder value: The Biden Administration’s fiscal year 2023 budget proposal would require GRATs to have a remainder interest value equal to or greater than 25% of the contributed assets. In the absence of legislative action, however, Treasury should exercise its regulatory authority to require a GRAT’s remainder interest to be a set minimum percentage of contributed assets. 
  • Reissue family limited partnership regulations: The Obama Administration proposed a regulation, later withdrawn by the Trump Administration, to address the abuse of valuation discounts through family limited partnerships that are used to reduce the value of taxable estates and thereby avoid transfer taxes. Treasury and the IRS should reissue these important regulations to end this abuse of family limited partnerships.
  • Clarify that Intentionally Defective Grantor Trusts (IDGTs) are not entitled to stepped-up basis: The Treasury Department should use its regulatory authority to issue a regulation or revenue ruling confirming the consensus view that IDGT assets that are not part of an estate for estate tax purposes do not receive stepped-up basis when the grantor dies.
  • Issue clarifying regulations: The Treasury Department should issue regulations clarifying language within Section 2702(a) and 26 CFR § 25.2702-3, which address certain valuation rules for estate and gift tax purposes, in order to help to eliminate some exploitative tax opportunities. 

Senator Warren has led the fight for a fairer tax system – making it easier and cheaper for normal taxpayers to file their taxes and making sure the ultra-wealthy and corporations pay their fair share: 

  • In March 2023, Senators Warren and Angus King (I-Maine) wrote a letter with 19 other senators to the Internal Revenue Service and Secretary Yellen expressing strong support for Secretary Yellen’s directive for the IRS not to raise audit rates for small businesses or households making under $400,000 annually. 
  • In July 2022, Senator Warren led 22 of her colleagues in introducing the Tax Filing Simplification Act of 2022 to simplify the tax filing process for millions of Americans by lowering costs, eliminating red tape for all taxpayers, and saving them hours and hundreds of dollars. 
  • During an exchange of the United States Senate Finance Committee in June 2022, U.S. Treasury Secretary Janet Yellen agreed with Senator Warren on the need to create a free tax filing system that actually works for Americans. 
  • In April 2022, Senator Warren and Representatives Sherman and Porter sent a letter to Intuit regarding the company’s unethical use of the revolving door to hire former regulators to defend their shady business practices that scam taxpayers out of billions of dollars. 
  • In April 2022, Senator Warren and Representative Judy Chu (D-Calif.) sent a letter to Secretary Yellen and IRS Commissioner Charles Rettig expressing concerns about higher IRS tax audit rates for low-income Americans. The lawmakers called on the IRS to cease this unfair practice and asked for information regarding their audit rates on low-income Americans and their plans to make the audit data accessible to the public. 
  • In February 2022, Senator Warren and Representative Pramilla Jayapal (D-Wash.) sent a letter to the Acting Inspector General of the Department of Treasury and the Treasury Inspector General for Tax Administration, calling on them to open an investigation into the unethical revolving door between the world’s largest accounting firms and the Treasury Department and IRS. 
  • In May 2021, Senator Elizabeth Warren introduced the Restoring the IRS Act of 2021, which would provide the IRS with the resources it needs to go after wealthy tax cheats and close the tax gap.