Bloomberg Tax
Feb. 4, 2019, 5:01 PM

Bernie Sanders’ Plan May Spur Types of Tax Dodges It Aims To Stop

Allyson Versprille
Allyson Versprille

Senator Bernie Sanders’ recent proposal to rein in estate tax avoidance could create a scenario that is more like the Greek myth of the Hydra: cut off one head and two grow back in its place.

“It’s hard to win at this game if you’re Congress,” said Beth Shapiro Kaufman of Caplin & Drysdale in Washington. Once lawmakers draft new rules, “They can be used in some cases to the government’s advantage and in other cases to the taxpayer’s advantage. It’s hard to write a rule that just says, ‘The taxpayer always loses’ because there aren’t such rules.”

The bill—released Jan. 31 by the potential 2020 presidential contender—takes aim at several of the most popular strategies people use to dodge estate and gift taxes. It also proposes a top estate tax rate of 77 percent—up from the current top rate of 40 percent.

But every time one door closes, another one opens, estate tax attorneys told Bloomberg Tax. They said they haven’t yet considered specific strategies for reducing estate and gift tax liability under the Sanders’ plan because it has a slim chance of becoming law anytime soon, but they are confident new opportunities would present themselves.

For a historical example, look to the intentionally defective grantor trusts that Sanders, an independent from Vermont, proposes curtailing in his bill. The strategy allows a person to transfer assets into a trust and continue to pay income tax on the value of those assets, but freezes the value for estate tax purposes so any gain—which can be substantial—escapes the 40 percent tax.

“That technique takes advantage of rules that were enacted decades ago to prevent other abuses,” Kaufman told Bloomberg Tax.

The estate tax, and increasing taxes in general on the rich, are measures likely to play a central role in the 2020 presidential election, with other hopefuls in addition to Sanders like Sens. Cory Booker (D-N.J.) and Elizabeth Warren (D-Mass.) already talking about such issues. Booker announced his candidacy Feb. 1. Warren has announced an exploratory committee.

Sanders’ proposal would also impose new limits on the creation of “dynasty trusts,” which can currently be used to shield assets from the estate and gift tax system forever, and would restrict the amount of tax-free gifts a person can make each year.

Sanders’ office didn’t return a request for comment.

New Opportunities

Sanders’ proposal includes protections for farm land and conservation easements.

A conservation easement is a legal agreement to permanently restrict development on property. Individual owners or partners can receive a tax deduction if they donate for this purpose under tax code Section 170(h).

Sanders’ bill would allow farmers to lower the value of their farmland by up to $3 million for estate tax purposes. It would also increase the maximum exclusion for conservation easements to $2 million from $500,000.

These changes are “kind of the making of a new loophole,” said Kyle Pomerleau, economist and director of the Center for Quantitative Analysis at the Tax Foundation. “People may take advantage of that to reduce their tax liability.”

Under the easement proposal a wealthy landowner wishing to preserve property from development in future years could—through the use of a testamentary conservation easement—reduce the taxable estate by up to $2 million, which could result in a substantial estate tax savings, said Michael H. Barker, a partner at McGuireWoods LLP in Richmond.

In theory, the proposal would spur additional conservation efforts by large land holders. However, in practice that effect may be limited because most landowners prefer to place a conservation easement on property while they’re alive to get a charitable deduction for income tax purposes and to enjoy the benefits of the undeveloped land, Barker told Bloomberg Tax.

The proposed change for the valuation of farm land would triple the available estate tax benefit to farm owners, he said. And it it would benefit not only professional farmers, but also wealthy individuals who own farms or ranches for recreational purposes.

More taxpayers may take advantage of the sweetened farmland and conservation easement tax perks than they have in the past if Sanders’s bill is enacted. But the trend would likely be limited among ultra-high net worth individuals, because the benefits may not be significant enough to prompt a change in behavior, Kaufman said.

Barker noted that the farm provision may have been placed in the bill to help Sanders combat the talking point that the estate tax hurts family farmers—a stance often that conservative lawmakers often tout.

More Motivation

Under the bill estates would face a much higher tax rate. That may create more incentive for the wealthy to find new ways to avoid the estate tax, Pomerleau said.

The bill would set a 45 percent tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77 percent for estates worth more than than $1 billion.

This change would significantly pare back the estate tax provisions passed in the 2017 GOP-led tax overhaul.

The law doubled the exemption amount for very wealthy estates, meaning that in 2019 an individual can pass up to $11.4 million without paying estate tax at death, and a married couple can pass twice that at $22.8 million. The higher exemption expires after 2025.

“When the tax savings of one dollar avoided is 77 cents, that creates a slightly larger incentive than what we currently have of 40 cents per dollar avoided,” Pomerleau said.

“So while he does end up closing loopholes, he also by raising the statutory rates probably motivates people to find new loopholes or exploit ones that the Sanders’ proposal may have glossed over,” Pomerleau said.

The incentive to find new and unique ways to plan around the estate tax will apply both to the few estates worth more than $1 billion, as well as to smaller estates that have historically been exempt from the tax but would now be included in the system under the proposal, said Jonathan S. Forster, a shareholder at Weinstock Manion in Los Angeles.

Soaring real estate values and securities prices may expose larger numbers of taxpayers at the margins—with estates around the $3.5 million mark—to the estate tax, he told Bloomberg Tax.

Loophole or Not?

Sanders’ proposal labels many of the popular tools used by estate planners as “loopholes,” but attorneys note that several of the strategies were created by Congress and the Treasury Department.

“There are a number of things that I would hesitate to call loopholes,” Kaufman said.

For example, Barker noted that the grantor retained annuity trust, targeted by Sanders’ proposal, is “a creature of legislation and regulation.”

This tool has been used by some of the wealthiest people in America to lower tax bills, including Facebook Inc. Chief Executive Officer Mark Zuckerberg and Las Vegas Sands Corp. CEO Sheldon Adelson.

But to extent the strategy is a loophole, it’s “a congressionally created loophole,” Kaufman said.

The bill would also restrict the use of valuation discounts that reduce the overall value of assets held in family-owned businesses, lowering estate and gift tax liability.

The discounts are typically applied to compensate for the lack of marketability and control that can make assets within those entities harder to sell. The Internal Revenue Service sought to place some limitations on these discounts in proposed regulations (REG-163113-02). The rules were issued during the Obama administration but later withdrawn under the Trump administration.

“I think almost certainly there are lots of people who abuse and take advantage of valuation discounts in ways that have no real business purpose and are strictly designed for the avoidance of taxes,” Barker said.

It’s unclear exactly how restrictive the proposal would be without regulations defining some of the terms in the bill, but “I do think that the legislation would have to be careful about not going too far because there are valuation discounts that are real and are a result of actual business purposes,” he said.

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; Colleen Murphy at