Tax Notes Quotes Beth Kaufman on Billionaire's Tax and Grantor Trusts

04.01.2022
Tax Notes

The Biden administration was eager to tout a new billionaire minimum income tax proposal in its latest budget, but estate planners are far more interested in what’s buried deeper in Treasury’s green book.

. . .

“There’s a lot in this bill to try to squeeze more taxes out of the wealthy,” Beth Shapiro Kaufman of Caplin & Drysdale said. “It seems like one of those things where the idea was: Here are all the arrows in our quiver — we'd be happy to use any or all of them,” she said.

Realistically, it’s highly unlikely that the Biden administration will be able to muster support for a bill that includes all of these proposals, Kaufman said. Nevertheless, “it demonstrates the array of tools you could use to tax the wealthy, if that's what you were going to do,” she said.

Biden’s budget retains last year’s proposal that targets the tax-free step-up in basis that would treat both gifts and death as realization events, with a year-end effective date. “If this were to get some traction, we would probably find ourselves with another year in which people want to make gifts,” Kaufman said.

. . . 

New to Treasury’s green book this year are a handful of proposals specific to trusts and estates.

The budget’s proposal on grantor trusts — an evolution of the grantor trust tweaks in last year’s House-proposed Build Back Better Act (H.R. 5376) — boils down to saying that transactions between a grantor and a grantor trust, unless it’s a wholly owned grantor trust, will be treated as realization events, according to Kaufman.

“It attacks much more precisely the transactions that some of the bills last year were aiming at,” Kaufman said, by targeting two core grantor trust planning techniques: swapping assets without that being a realization event and allowing the grantor to pay the grantor trust’s income tax without that being treated as a gift.

Last year’s legislative proposals to crack down on grantor trust planning focused on the estate tax treatment of grantor trusts, but Biden’s latest budget proposal “really gets to the heart of the aspects of grantor trusts that the government doesn’t like,” Kaufman said, adding, “It’s a much more targeted proposal.”

The proposal would reverse Rev. Rul. 85-13, 1985-1 C.B. 184, which estate planners have leaned on for the past 35 years to confirm that transactions between a grantor and a grantor trust aren’t gain recognition events, Kaufman explained. But the Biden administration then goes further with its second prong of attack that would treat grantors’ paying their grantor trust’s income taxes as a gift.

“I haven't seen that,” Kaufman said. “I've heard it talked about before, just in academic circles, but I haven't seen it in a legislative proposal before,” she said.

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However, one proposal calls for requiring U.S.-based trusts to report the estimated total value of the trust’s assets. That could turn out to be a bit of a “Trojan horse,” according to Kaufman.

The IRS has trouble knowing what to do about trusts because it has no effective way of knowing how much money or assets are being held in trusts. This proposed disclosure of that information could allow the IRS to come up with better-targeted proposals that go after unreported income or other trust structures the agency considers abusive, Kaufman said.

For the full article, please visit Tax Notes’ website (subscription required).

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