Transfer Taxes in Flux: A Comparison of Alternative Plans for GRAT Reform

Scarcello, Samuel R. | December 1, 2012

Estate and gift taxes may be a topic of national discussion, but few Americans are familiar with the methods taxpayers utilize to minimize these taxes. For decades, the Internal Revenue Code (the Code) has rewarded taxpayers who employ complex transfer tax strategies that take advantage of “estate freeze” techniques, which can reduce or even eliminate the taxes imposed on large wealth transfers. One particularly popular technique, the grantor retained annuity trust (GRAT), facilitates tax savings for individuals who plan in advance of significant asset appreciation. Regrettably, such tax savings fail to conform to the widely held belief that taxpayers of comparable income or wealth should pay similar taxes. Aiming to tighten the rules on GRATs, President Obama has repeatedly introduced reform proposals, but each time, he has neglected to address the technique’s biggest vulnerability to abuse: that it allows ultra-wealthy individuals to shield unlimited amounts—potentially billions of dollars—from the transfer taxes that other Americans must pay. This susceptibility to aggressive planning undermines the spirit of the Code and deprives the government of much-needed tax revenue. Recognizing that GRATs fit snugly within a larger body of interrelated tax provisions, this Comment advocates for the imposition of a lifetime limit on tax-free GRAT transfers, a solution that hampers the technique’s more dubious uses while preserving, to the greatest extent possible, its creation of an incentive to invest in entrepreneurial activity.