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Senators Ron Wyden of Oregon and Angus King of Maine introduced the Getting Rid of Abusive Trusts Act on Wednesday to address tax avoidance tactics by the ultra-wealthy. The bill targets the misuse of grantor-retained annuity trusts (GRATs) to sidestep taxes.

GRATs allow individuals and families to transfer wealth to heirs while minimizing estate and gift taxes. However, the proposed legislation seeks to curb the exploitation of these trusts for tax avoidance purposes.

Under the proposed GRAT Act, significant changes would be implemented. Notably, a minimum term of 15 years and a maximum term of the annuitant’s life expectancy plus ten years would be mandated for GRATs. Additionally, any decrease in the annuity during the term would be prohibited. The bill also stipulates a minimum value requirement for the remainder interest in a GRAT for gift tax purposes.

Senator Wyden emphasized the inequity of the current system, stating, “The abuse of these high-value trusts is a clear-as-day example of how there’s a special set of tax rules that allow the ultra-wealthy to pay what they want when they want, and often nothing at all.”

Furthermore, the legislation addresses property transfers between a trust and its deemed owner, treating them as a sale or exchange for income tax purposes. This provision aims to prevent the manipulation of tax planning methods to avoid income or capital gains taxes.

Senator King echoed Wyden’s sentiments, highlighting the responsibility of wealthy individuals to contribute to society. He remarked, “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 into tax-free trusts for their children.”

Another key provision of the bill designates any income tax paid on the GRAT’s income as a gift for gift tax purposes unless reimbursed within the same calendar year. This measure aims to prevent the reduction of gift amounts through deductions, such as charitable deductions or deductions for tuition or medical care gifts.

Understanding the implications of such legislation is crucial for small business owners, self-employed individuals, and entrepreneurs. The proposed changes could impact estate planning strategies and tax obligations for those with substantial assets. By closing these loopholes, lawmakers seek to ensure a fairer tax system and greater accountability among society’s wealthiest members.

Source ( Accounting Today News).