Sanders Estate Tax Bill Shuts Down Wealth Hiding Loopholes

Senator Bernie Sanders has introduced two new pieces of legislation, including a bill to restore the corporate tax rate to its pre-Trump levels. The second bill, the "For the 99.5 Percent Act," is a reform of the federal estate tax, our nation's only levy on the inherited wealth of multi-millionaires and billionaires.

This estate tax reform is important for several reasons. It institutes a graduated rate structure, so that the wealthiest billionaires pay at a higher rate. Under current law, a rich person with $25 million will pay the same estate tax rate as an oligarch with $25 billion. Sanders proposes a 65 percent top tax rate on estates over $1 billion, a restoration of the highest rate that existed between 1942 and 1976.

"At the end of the day, we need massive tax reform in this country, so that we end the tax loopholes and the giveaways that the wealthy and large corporations."
--Sen. Bernie SandersThis will greatly slow the build-up of inherited wealth dynasties, especially if combined with an annual wealth tax, along the lines introduced by Senator Elizabeth Warren and Rep. Pramila Jayapal.

But one important feature of the Sanders bill is that it closes down some of the more insidious ways that the wealthy avoid estate taxs. While most attention will be focused on the higher rates and lower exemptions, some of the most meaningful provisions are tucked into the "loophole closing" section. As Sanders told NPR, "At the end of the day, we need massive tax reform in this country, so that we end the tax loopholes and the giveaways that the wealthy and large corporations."

Over the last two decades, right-wing anti-tax groups failed to abolish the estate tax, though they have come close on several occasions, most recently as part of the 2017 Trump tax cut. They did succeed in raising the exemption so that in 2021, only those with wealth over $11.7 million--or a couple with $23.4 million--are subject to the tax.

Behind the scenes, however, the real attack on the estate tax has taken place in the offices of tax lawyers, accountants and wealth managers who are paid millions to hide trillions of wealth. This "wealth defense industry" serving the super-rich has gotten adept at creating complex tax dodging vehicles, including dynasty trusts, grantor trusts, manipulation of valuations, and other mechanisms so complicated that I'd lose your attention, dear reader (For an accessible primer on this topic, check out my new book, The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions).

What's important is to understand that these are intentionally intricate and impenetrable. The wealth defense industry thrives on the creation of complex trusts, opaque transactions, and volumes of paperwork that justify their highly paid services. Complexity is their bread and butter.

The Sanders team, however, is undaunted. As part of the "For the 99.5 Percent" estate tax reform, they take direct aim at these sacred planning devices.

One wealth advisor, Martin Shenkman, sounded the alarm in Forbes when Sanders first suggested these provisions in 2019. "Whoever helped craft those proposals understood many of the tax planning strategies the uber-wealthy use to shift assets outside their trusts," Shenkman complained.

"Bernie's changes include restrictions on the use of valuation discounts, GRATs, and more that have been the grease for many estate plans," wrote Shenkman. Sanders' provisions "would emasculate this type of planning and might result in a costly tax after fifty years of a trust." Shenkman advised his clients to go out and create new dynasty trusts before a Sanders law could take effect.

"Sanders estate tax reform legislation is a truly a plutocracy prevention act, squarely aimed at preventing the children of today's billionaires from accumulating democracy-distorting concentrations of wealth."

One provision of the bill would end tax breaks for dynasty trusts, a form of trust that can exist for centuries of tax avoidance. Billionaire dynasties like the Walton family and the late Sheldon Adelson have manipulated the rules of trusts for decades to pass on billions in wealth to their children while avoiding estate and gift taxes. The Sanders bill would:

• Strengthen the "generation-skipping tax," which is designed to prevent avoidance of estate and gift taxes, by applying it with no exclusion to any trust set up to last more than 50 years.
• Prevent abuses of grantor retained annuity trusts (GRATs) by barring donors from taking assets back from these trusts just a couple of years after establishing them to avoid gift taxes (while earnings on the assets are left to heirs tax-free). The lawyer who invented this technique for the Walton's claims it has cost the Treasury $100 billion since 2000. This is grotesque understatement.
• Prevent wealthy families from avoiding gifts taxes by paying income taxes on earnings generated by assets in "grantor trusts."
• Sharply limit the annual exclusion from the gift tax (which was meant to shield the normal giving done around holidays and birthdays from tax and recordkeeping requirements) for gifts made to trusts.

The Sanders bill would also close other common loopholes used by estate planers called "valuation discounts," restrictions placed on interests in family businesses that are claimed, falsely, to reduce the value of the estate. Another loophole game involves claiming that the value of an inherited asset is lower, for estate tax purposes, than what is claimed for income tax purposes to calculate gains when the asset is sold.

Sanders estate tax reform legislation is a truly a plutocracy prevention act, squarely aimed at preventing the children of today's billionaires from accumulating democracy-distorting concentrations of wealth. But its most important provisions may be in the "fine print."