Congressman prods Treasury to clamp down on grantor trusts

House Ways and Means Oversight Subcommittee chairman Bill Pascrell, D-New Jersey, is asking the Treasury Department to curb the use of irrevocable grantor trusts by wealthy families to avoid taxes.

In a letter Tuesday to Treasury Secretary Janet Yellen, Pascrell called on her to issue regulations on the trusts to limit use of the stepped-up basis, which he calls a loophole.

“The most glaring loophole in today’s income tax base is the ability of heirs to obtain tax-free stepped-up basis on appreciated assets they inherit upon the death of a taxpayer,” Pascrell wrote.

He has proposed legislation to limit the tax break, and a similar proposal was in the Treasury Department’s Green Book last year, however, neither proposal has yet been passed by Congress. In the meantime, Pascrell believes the Treasury and the Internal Revenue Service under current law could take “targeted actions” to limit or even eliminate strategies to exploit the tax break.

Rep. Bill Pascrell, D-N.J.

Christopher Goodney/Bloomberg

“In the absence of legislative change, it is imperative that wealthy individuals’ exploitation of the stepped-up basis loophole in the tax code be shut down where it can be, by prompt and aggressive regulatory action where there is a firm basis in law to do so,” said Pascrell. “This is one of those opportunities.”

Under the strategy, a taxpayer can claim stepped-up basis for assets in an irrevocable grantor trust upon the grantor’s death. “A common estate planning technique used by wealthy individuals is to transfer assets to an irrevocable grantor trust while the individual is still alive,” said Pascrell. “The trust’s property will generally not be included in the individual’s gross estate at death, thereby avoiding the estate tax.”

He noted that Section 1014 of the Internal Revenue Code generally provides that the basis of property acquired from a decedent is the fair market value at the decedent’s death under a stepped-up basis. “Property is eligible for this treatment if it is acquired by bequest, devise or inheritance or by the decedent’s estate from the decedent,” said Pascrell. “Also eligible for the stepped-up basis treatment is property included in the decedent’s estate for federal estate tax purposes. Thus, assets outside the estate in an irrevocable trust do not qualify for Code section 1014’s stepped-up basis treatment under long-established interpretations of the language of Code section 1014.”

During a congressional hearing last December of Pascrell’s subcommittee, he heard testimony about the use of the tax break by aggressive estate planners. He wants the Treasury to write regulations clarifying that the phrase “bequest, devise, or inheritance” in Section 1014(b)(1) does not apply to the termination of grantor trust status upon the grantor’s death or to the transfer of an irrevocable grantor trust’s property upon a grantor’s death.

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