New legislation, the Fair Trusts for Fiscal Responsibility Act, seeks to close loopholes used by the wealthiest Americans to avoid paying taxes through trust arrangements, specifically dynasty trusts.
The bill, introduced by Sens. Patty Murray, D-Wash., and Ron Wyden, D-Ore., would apply a tax rate of:
— 1% on trust assets between $50 million and $100 million;
— 1.5% between $100 million and $250 million;
— 2% between $250 million and $1 billion; and
— 3% on assets above $1 billion.
"The very wealthiest Americans hide their fortunes in a trust for generations and call it tax planning — that is absurd and those are dollars that should be going to our schools, infrastructure, and health care," Murray said in a statement. "In America, if you earn a paycheck, you are paying taxes — it's time to close the loophole that lets individuals with armies of lawyers stash away billions without paying taxes."
Dynasty trusts are structured to avoid estate and generation-skipping taxes when wealth is transferred from one generation to the next.
The dynasty trust "allows grandparents to leave money to their grandchildren, or great grandchildren etc. thus skipping generations and avoiding that generation having to pay estate taxes," Jeff Bush of The Washington Update told ThinkAdvisor Monday in an email. "If you named great grands, you're skipping two generations of estate taxes. Meanwhile, the trust can still make distributions of income etc. as outlined in the trust."
Murray said she's "simply proposing that the ultra-wealthy — people with more than $50 million sitting in a trust — finally pay what they owe."
Fewer than 0.1% of Americans pay estate tax, the lawmakers said, citing the Tax Policy Center.
"Yet many of the very wealthiest Americans use special trusts to delay, minimize, and avoid paying taxes," Murray and Wyden said in a statement. "Experts estimate that hundreds of billions of dollars and potentially trillions of dollars are held in generation-skipping transfer tax exempt trusts that are not subject to the rule against perpetuities."
Murray and Wyden's proposal "appears designed to impose an annual tax regime on large trusts based on the appreciation and size of trust assets, rather than waiting until assets are distributed or realized through traditional taxable events," Bush said.
While the Democrats are focused on taxing what they consider "dynastic wealth," Bush added, "I could see them cracking any number of trust strategies with this approach."
The lawmakers said in a statement that "to ensure fairness, the bill provides full refundability of the withholding against estate tax liability so that only those actively avoiding transfer taxes face increased burdens, while also capping total withholding so it does not exceed estate tax owed."
"In other words, taxes paid along the way could potentially be credited against future taxes owed when assets are distributed, realized, or the trust terminates," Bush said. "That is an important distinction from some previously discussed wealth-tax style proposals."
Charitable trusts, ERISA-qualified employee benefit trusts, and other trusts not typically used in estate planning are exempt.
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