If you think tax avoidance by the ultra-rich is at obscene levels, you’re right. Unfortunately, though, the worst may be yet to come. Past tax giveaways to the rich signed into law by every President from Reagan to Trump were mostly just that – giveaways. Proposals currently under consideration for inclusion in Trump’s “big, beautiful tax bill,” are far worse. They have the potential to destroy the foundation of America’s federal tax system.
When combined with recent court decisions and radical IRS budget cuts, Republican tax proposals could give rise to limitless tax avoidance by America’s ultra-rich.
Few guardrails remain today against that limitless tax avoidance. Already, there are tax avoidance strategies available to the ultra-rich that are close to, but not quite, limitless. I can identify three of them. There likely are others. After all, tax avoidance strategies work best when they’re not widely known.
Those few remaining guardrails, though, make complete avoidance of both federal income and wealth transfer tax by the ultra-rich extremely difficult, if not impossible. According to a study commissioned by the Treasury Department, annual tax payments by the richest Americans are only one or two percent of their wealth. That’s not nearly sufficient to constrain the horrifying concentration of wealth in America, a situation that presents a grave threat to our democracy.
Still, those current annual tax payments by the richest Americans are at least measurable. Looming changes in the tax landscape, however, from court decisions, IRS budget cuts and pending legislative proposals, could both eviscerate the remaining guardrails that prevent boundless tax avoidance and turbocharge the avoidance strategies that power that tax avoidance. Following is a summary of the primary known avoidance strategies used by the ultra-rich, the guardrails that limit them, how developments in the tax landscape could dramatically weaken or eliminate those guardrails, and how those developments also could make existing avoidance strategies far more detrimental to tax fairness and our society.
Potentially Limitless Avoidance Strategies
Buy-borrow-die. Buy-borrow-die is the strategy by which wealthy investors (or founders of phenomenally successful enterprises) hold investments for an entire lifetime, borrow at low rates against the investments if ever in need of cash, and die holding the investments. That strategy seizes on two provisions of the tax code: the rule that the increase in value of an asset only becomes taxable income when gain is realized (generally meaning when the asset is sold), and a rule known as “stepped-up basis,” under which the inheritor of an investment asset is treated for income tax purposes as if they paid for the asset at its fair market value on the date of death of the person from whom they inherited it. Together, those provisions allow for practically unlimited income tax avoidance. Jeff Bezos, for example, has close to $200 billion of untaxed gains in his Amazon shares. Were he to die before selling those shares, his inheritors would avoid income tax on all those gains.
The overstuffed Roth IRA. Unlike contributions to traditional IRAs, contributions to Roth IRAs are not deductible from current income. But once wealth has been lodged in a Roth IRA, its growth is exempt from income tax, no matter how extreme that growth turns out to be. In 2021, we learned that billionaire Peter Thiel grew the value of his Roth IRA to $5 billion. Lodging an exorbitant amount of wealth in a Roth IRA is challenging, but it’s not impossible. And those that meet the challenge have effectively placed themselves beyond the reach of our federal income tax.
Grantor trusts. A grantor trust is treated as owned by its grantor (that is, the person who created it) for income tax purposes but not necessarily for purposes of wealth transfer tax. The tax code provisions applicable to grantor trusts originally were developed to prevent high-income taxpayers from avoiding income tax by lodging income in multiple trusts with lower tax brackets. They are designed to force trust grantors to pay income tax on trust income in situations where defects in the trust structure gave the grantor an impermissible level of control over the trust.
Tax avoidance planners then developed strategies to avoid wealth transfer tax by intentionally including defects in the governing documents of trusts, thereby causing them to be treated as grantor trusts. Estate tax planners refer to these trusts as “intentionally defective grantor trusts” or IDGTs. They can be used to avoid estate and gift tax, without limit, through one or both of two strategies: sales to trusts known as intentionally defective grantor trusts and contributions to trusts referred to as “zeroed-out grantor retained annuity trusts” or “zeroed-out GRATs”. Among the billionaires who have made use of these strategies to avoid billions in wealth transfer tax are Phil Knight, Jensen Huang, and the Adelson family.
Both strategies that use grantor trusts seize on the shared identity of the trust and its grantor for income tax purposes. This causes there to be no income tax consequences to transactions between the trust and the grantor, and makes the grantor responsible for income tax on income flowing to the trust, effectively converting the grantor’s income tax payments into transfer-tax-free gifts to the trust.
In a sale to an IDGT, the grantor makes a relatively small taxable gift to a trust, which the trust then uses for a 10 percent down payment on assets the trust purchases from the grantor. The trust then uses the income from the assets (upon which the grantor pays income tax) to pay the deferred portion of the purchase price. The net effect of this arrangement is to cause the income tax on trust income to be credited against the purchase price paid to the grantor.
In a zeroed-out GRAT, the grantor contributes assets to a trust but retains the right to receive an annuity from the trust. The manner in which the annuity is valued for wealth transfer tax purposes causes the net value of the gift to the trust (that is, what’s left after payment of the annuity) to be zero or near zero. If the trust assets then perform beyond what’s needed to pay the annuity in full, the assets remaining in the trust after payment of the annuity equate to a tax-free gift. If the trust assets fail to perform well enough to pay the annuity, the net result, taxwise, is as if the trust had never been created in the first place. The assets simply revert back to the grantor. Because there is no limit on the number of zeroed-out GRATs a wealthy person may create, the process can be repeated indefinitely, until, eventually, the bulk of the grantor’s wealth has shifted to the GRATs he has established.
Guardrails and Their Potential Weakening or Elimination
Conflict between avoidance strategies. Ironically, the most effective guardrail against the possibility of near complete avoidance of income and wealth transfer tax through the various existing avoidance strategies is that implementation of wealth transfer tax avoidance strategies prevents full implementation of income tax avoidance strategies, and vice-versa.
When a billionaire succeeds in transferring billions of dollars of investment assets to a grantor trust for his descendants without paying a nickel in gift tax, those assets no longer are included in the billionaire’s estate. Consequently, they don’t qualify for stepped-up basis on the billionaire’s death. Ultimately, when the assets are sold, the taxable gains likely will be substantial.
Similarly, if a billionaire succeeds in growing the holdings of a Roth IRA to billions of dollars in value, those holdings likely will be hit with an estate tax on the billionaire’s death, because the rules prohibiting alienation of IRAs prevent their use in estate tax avoidance strategies. Ultimately, when the billionaire dies, the value of the Roth IRA will be subject to estate tax.
Republicans, however, have again introduced their Death Tax Repeal Act, as they have in each session of Congress since at least 2015, sometimes with Democratic support. This time, the bill’s lead sponsor, John Thune, serves as Senate majority leader and has 46 Senate cosponsors, so the possibility of passage should be taken seriously.
The Death Tax Repeal Act would retain the gift tax, but would eliminate both the estate tax and generation-skipping transfer tax. As structured, it would make the use of grantor trusts to avoid estate tax unnecessary. Consequently, it essentially would eliminate the guardrail presented by the conflict between income tax avoidance strategies and wealth transfer tax avoidance strategies.
Consider Jeff Bezos, for example. He could implement grantor trusts and, over the next several decades (assuming he doesn’t die prematurely) systematically move a large portion, possibly all, of his Amazon shares to those grantor trusts. He may already have done so. But under current law by doing so he loses the ability to avoid income tax on the ultimate sale of the shares by his inheritors. If the Death Tax Repeal Act becomes law, those grantor trusts will become unnecessary. He can hold the Amazon shares until his death without concern about estate tax. Upon his death, the income tax on all gains that have accrued during his lifetime would be eliminated. The end result would be the passage of several hundred billions of dollars of income to Bezos’ inheritors entirely free from both income tax and wealth transfer tax.
Time required for effective estate tax avoidance planning. The use of grantor trusts to avoid tax is not a strategy that can be implemented overnight. Whether assets are sold to an intentionally defective grantor trust or contributed to a series of zeroed-out grantor retained annuity trusts, the basic strategy involves the seepage of value over an extended period from the grantor to the trust(s), in a way that minimizes the amount of any taxable gifts involved. When a person holds billions of dollars of wealth, causing that wealth to seep over to one or more grantor trusts typically takes decades. If the grantor dies before the completion of the process, her estate likely will have an estate tax to pay.
The Death Tax Repeal Act would eliminate the guardrail presented by the time required for estate tax avoidance planning.
Difficulty of overstuffing a Roth IRA. The overstuffed Roth IRA is the giant of all income tax avoidance vehicles. At the same level of total asset value, it is far more powerful than buy-borrow-die. Unlike buy-borrow-die, which limits tax avoidance to investment gains, the income on which tax is avoided through a Roth IRA includes dividends, rents, interest, and other forms of passive income.
And while buy-borrow-die requires a rich investor to hold assets until death, assets held in a Roth IRA can be sold at any time. That allows the Roth IRA owner to jump from one investment to the next based solely on the expected performance of the investment without impacting the tax result. Buy-borrow-die, by contrast, can falter as a strategy if mediocre performance of an investment necessitates its sale before the investor’s death. (Don’t shed too many tears for the investor, though. He’ll still benefit from an avoidance strategy not quite as powerful as buy-borrow-die: buy-hold for decades-sell.)
The guardrail limiting the use of overstuffed Roth IRAs? The stuffing isn’t very easy. Peter Thiel managed to grow his giant Roth by hitting two consecutive home runs on investments, first PayPal, then Facebook, and getting in on the ground floor on both. Without this sort of success, it would be difficult to grow a Roth from what typically is a modest level, often barely into five figures and sometimes less, to an extraordinary level.
Furthermore, the strategies used to inflate a Roth IRA at a rapid rate often involve transactions that are not at arm’s length, which can invite IRS scrutiny. For example, if the Roth IRA owned by the founder of a startup buys shares in the startup, the IRS might challenge the valuation of the shares. In the early 2000s, tax avoidance planners developed strategies where Roth IRAs owned by their rich clients would start corporations that performed administrative services for businesses owned by those clients, thereby driving substantial fee income to the Roth IRA corporation. Ultimately, in Notice 2004-8, the IRS identified these transactions as “listed transactions” (also known as abusive tax avoidance transactions) and sought substantial penalties from taxpayers who engaged in them.
Two court decisions may have weakened the guardrails that interfere with the overstuffing of Roth IRAs. In Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), the Federal Court of Appeals for the 6th Circuit ruled that an IRS notice identifying a tax avoidance transaction as a listed transaction must comply with the notice and comment requirements of the Administrative Procedure Act. The decision is consistent with the holding of the Eleventh Circuit in Green Rock LLC v. IRS, 104 F.4th 220 (11th Cir. 2024).
The upshot of those decisions will be that the process of identifying listed transactions will require more IRS resources and more time. When combined with the staggering cuts in IRS staff, this could have the effect of allowing tax avoidance planners to develop new strategies to drive wealth into Roth IRAs, knowing that the delayed reaction time for the IRS will preclude identification of many wealthy taxpayers who implement those strategies during the period their tax return positions are subject to IRS challenge.
In a recent CNBC article, reporter Robert Frank makes the point that budget cuts at the IRS tend to cause an increase in the development of aggressive tax avoidance strategies. Interestingly, he cites the IRS budget cuts in the early 2000s as one such occasion. That was the precise period when the Roth-stuffing strategy identified in IRS Notice 2004-8 was developed. Some early adopters of that strategy likely escaped detection and now have accumulated significant wealth in their Roth IRAs. With even worse cuts at the IRS and a lengthier identification process, new strategies to stuff Roth IRAs may result in many more massive Roth IRA accumulations.
Turbocharging the Avoidance Strategies
Not only could legislative proposals weaken the guardrails against potentially boundless tax avoidance by the ultra-rich, they could increase the maximum avoidance potential of those strategies as well. The following are three examples.
Buy-borrow-die without dying. The shortcoming of buy-borrow-die for rich Americans is that they have to die for the benefits to be realized. Their kids reap the benefits, but they don’t. But tucked into the Death Tax Repeal Act is a potential solution to that problem.
The Death Tax Repeal Act largely leaves the federal gift tax in place, retaining the current exemption level. This means rich Americans will avoid transfers of wealth during their lifetimes, since the transfer of wealth upon death will escape tax.
But the Death Tax Repeal Act includes a special provision for transfers to grantor trusts. Those transfers are excepted from the general rule that a transfer in trust is considered a taxable gift. It seems that leaves the door open for America’s richest to repurpose those grantor trusts used to transfer wealth free of transfer tax to their children. Instead, a rich person can transfer the wealth to a parent in trust, and give that parent just enough control of the disposition of that trust-held wealth on their death to cause it to be included in the parent’s estate for purposes of applying the stepped-up basis rule. The parent then could cause the wealth to return to the rich person or perhaps her children. That could eliminate the taxable gain on all those appreciated assets in the trust, decades before the rich person’s death.
Gains tax avoidance for existing trusts. Avoiding capital gains tax on the sale of appreciated assets through stepped-up basis requires a person to die with those assets included in their estate or with a level of control over the assets sufficient to cause them to be included in the estate for tax purposes. That poses a problem for families whose wealth already is lodged in dynasty trusts. Those trusts will shield them from wealth transfer tax at the turn of each generation, but under current law will deny them the benefit of stepped-up basis on the passing of each generation.
With passage of the Death Tax Repeal Act, however, those ultra-rich families may find a solution to that problem. Estate planning lawyers draft trusts with maximum flexibility and over the past several decades state trust statutes have been amended to allow for modification of trusts that on their face are unamendable. The ability to modify an existing dynasty trust will allow for the inclusion of dynasty trust assets in the estate of a beneficiary for tax purposes. Under current law, that would be a bad result, because the beneficiary’s estate would be subject to estate tax, which typically would exceed any income tax savings from stepped-up basis. But with no estate tax to pay, the ability to modify existing trusts could mean substantially increased income tax avoidance through qualification of trust-held assets for stepped-up basis.
Universal Savings Accounts – supercharged Roths. Included in Project 2025 is a proposal for Universal Savings Accounts, or USAs. These would essentially be supercharged Roth IRAs. As outlined in Project 2025, every taxpayer could contribute up to $15,000 per year to a USA. The income flowing to a USA would be exempt from federal income tax. As proposed in Project 2025, a USA could hold a closely held business of the account owner. That could allow for massive accumulations of income exempt from tax, as Morris Pearl and I outlined in an article for Fortune last year. Think of a future Bill Gates or Jeff Bezos lodging the initial ownership of a corporation in a USA.
Legislation to create USAs has been reintroduced this session by Sen. Cruz and Rep. Harshbarger. Their version of the USA apparently does not include the ability to invest in a closely held business and limits the benefit to taxpayers with incomes below $400,000, but does provide for contributions starting at $10,000 per taxpayer ($20,000 for a married couple filing jointly) and increasing by $500 per year until reaching $25,000.
If a USA proposal is included in this year’s tax legislation, it will increase the ability of the rich to avoid substantial amounts of income tax. The avoidance will be practically limitless if the final structure is as outlined in Project 2025, and far more modest if in the form of the Cruz / Harshbarger proposal. Unless of course the Cruz / Harshbarger proposal is just a first step towards the goal of the Project 2025 USA proposal. Time will tell.
Conclusion
For nearly half a century, the American anit-tax movement has gradually weakened the federal tax system as it applies to the ultra-rich. Recent developments and pending legislative proposals could be the blow that renders the tax system virtually defenseless against tax avoidance by the ultra-rich.