Senators introduce bill to curb GRAT tax break

A pair of lawmakers proposed a bill Wednesday to end the abuse of grantor-retained annuity trusts to avoid taxes.

GRATs are trusts that enable individuals and families to move their wealth to heirs while using as little as possible of their lifetime federal gift and estate-tax exclusion and minimizing estate and gift taxes. Senate Finance Committee chair Ron Wyden, D-Oregon, and Sen. Angus King, I-Maine, introduced the Getting Rid of Abusive Trusts Act. The GRAT Act would add the requirement that a GRAT must have a minimum term of 15 years and a maximum term of the life expectancy of the annuitant plus 10 years. It would prohibit any decrease in the annuity during the GRAT term. It would also add a requirement that the remainder interest in a GRAT at the time of transfer would need to have a minimum value for gift tax purposes. The additional requirements would impose costs on the use of GRATs, so they would be less likely to be used entirely for tax avoidance purposes.

“The abuse of these high-value trusts is a clear-as-day example of how there’s a special set of tax rules that allows the ultra-wealthy to pay what they want, when they want, and oftentimes nothing at all,” Wyden said in a statement. “This is a garden-variety tax dodge in which a billionaire signs some papers and moves some money around, and suddenly they have to pay little or no tax on appreciating assets worth tens of millions of dollars. This abuse of GRATs skates by because it’s an incredibly complicated subject with a jargon-heavy name, but the bottom line is it’s fundamentally unfair and it’s past time for Congress to put a stop to it.”

Under another provision of the bill, transfers of property between a trust and the deemed owner of the trust would be treated as a sale or exchange for income tax purposes. That provision aims to curb use of tax planning methods in which a taxpayer’s appreciating assets can be transferred in and out of a GRAT without incurring income tax or capital gains tax. 

“In the midst of tax season, most Americans will spend many hours filing paperwork and documentation, all to pay for programs and services that benefit our entire society,” King said in a statement. “The Getting Rid of Abusive Trusts Act would close a loophole many wealthy Americans use to escape their responsibility to society by redirecting the vast gains on their fast-appreciating assets, like tech stock, into tax-free trusts for their children. Those who benefit extraordinarily from American workers, capital markets, and rule of law should support our communities at least as much as our teachers and first responders do.”

In another provision of the bill, any income tax paid on the GRAT’s income would be designated as a gift for the purposes of the gift tax, unless the owner is reimbursed from the GRAT during the same calendar year. The gift amount could not be reduced through the use of deductions such as the charitable deduction, marital deduction, or deductions for gifts of tuition or medical care. That provision would crack down on tax-planning strategies in which a grantor of a GRAT uses the trust to reduce the value of their estate, thereby lowering their estate tax burden while avoiding any extra income or gift taxes.