Tax Industry Gears Up to Fight Democrats’ Avoidance Crackdown

The tax-planning industry is lining up to fight Democrats’ renewed interest in cracking down on strategies that wealthy Americans use to reduce their tax bills.

With political winds potentially blowing in Democrats’ favor in the November midterm elections, lawmakers looking to retake power reintroduced bills reining in legal tax avoidance strategies as populist messaging becomes a core part of their campaign message.

“This is a chance to look at some of the areas where there are real questions about whether people are exploiting the tax code in an unfair way,” Senate Finance Committee ranking member Ron Wyden (D-Ore.) said in an interview. “We’re raising the issue now, so people start thinking about it.”

Those who for years have seen these proposals championed by Wyden and other lawmakers—including Senate Appropriations Committee ranking member Patty Murray (D-Wash.)—indicate they’ll be ready to block them.

The proposals include bills that would end tax breaks for derivatives contracts on underlying investments, carried interest, niche life insurance policies, and certain trusts.

“There was a time when proposals like this really terrified people,” said Beth Shapiro Kaufman, partner at Lowenstein Sandler LLP. “But now they’ve been introduced so many times, I’m not really sure they make much of a ripple.”

Generational Wealth Transfers

One of the biggest targets for Murray and Wyden are certain trusts, including grantor retained annuity trusts—an estate planning tool used to reduce tax burden when passing a person’s assets to their heirs—which the Oregon Democrat already targeted with legislation (S. 4287).

But critics say the Democrats’ push to rein them in wouldn’t ensnare the gilded upper crust of the ultra-wealthy. Instead, changes would mostly just hurt family-run business owners trying to pass their companies on to the next generation without facing a big tax bill or having to sell off company assets.

“GRATs have been a core succession-planning tool used by family-run manufacturers, distributors, and farmers for over thirty years,” Palmer Schoening, chairman of the Family Business Coalition, said in a statement. “The legislation unfairly lumps multigenerational Main Street family businesses together with Wall Street tax-avoidance schemes.”

The early reaction underscores the limitations of Wyden’s agenda as he continues Democrats’ long-running crusade dating back to proposals during the Obama and Biden administrations.

During debate over what became the 2022 tax-and-climate law, Democrats floated ending the carried interest tax break for private equity and venture capital managers. The proposal ultimately was stripped out as Democrats, using the expedited reconciliation procedure to unilaterally enact tax policy, changed the bill to win support from former Sen. Kyrsten Sinema (D-Ariz.).

But with heterodox figures like Sinema and her moderate counterpart former Sen. Joe Manchin (D-W.Va.) gone, Democrats are returning to the idea.

Democrats in several states have enacted taxes on the wealthiest residents, and party lawmakers at the federal level have been putting up trial balloons on ways to tax wealthy Americans to fund tax cuts for middle- and lower-income Americans.

Insurance Policies

Wyden also has led a long-running probe on the use of so-called private placement life insurance policies and similar annuities that can be used to hold investments in hedge funds and other financial products, to shield wealth from income or estate taxes.

He reintroduced legislation in April and in previous congressional sessions that proposes reclassifying certain life insurance policies to be subject to tax on earnings or losses when they’re paid out.

Those pushing back the hardest on making changes to the insurance policies are the wealth planners who use the tool legally and are frustrated by bad actors, said Justin Miller, partner and national director of wealth planning at Evercore Wealth Management.

“There are a lot of proponents of the strategy who don’t want the law to change when people are being too aggressive about it,” he told Bloomberg Tax.

Industry groups, too, argue there are already clear guardrails from state regulators, the IRS, and the Securities and Exchange Commission that keep life insurance from being used for tax avoidance, and argue further changes are not needed.

“The focus should be on ensuring strong enforcement of those rules rather than changing the tax treatment of policies that families and businesses rely on for long-term financial planning,” Whit Cornman spokesperson at the American Council of Life Insurers, said in a statement.