Democrats want wealthy households to pay more taxes to help fund their effort to expand the social safety net, and one proposal in Congress calls for lowering the threshold for the estate tax to $5 million.
That prompted CNBC’s Greg Iacurci to take a look at how many Americans currently pay the estate tax. And the answer is: very few.
According to IRS data reviewed by Iacurci, just 0.2% of U.S. adults who died between 2011 to 2016 paid the estate tax. That’s well below the historical norm of 1% to 2%.
The falling rate is due in large part to the increase in the threshold for the estate tax. Twenty years ago, the threshold was $1 million, rising to $3.5 million in 2009 and then to $5 million in 2010. In 2017, Republicans more than doubled the threshold to the current levels of $11.7 million for single people and $23.4 million for couples. Above those levels of wealth, the estate tax of 40% applies.
In raw numbers, just 2,570 returns owed estate tax in 2019, Iacurci reports. The money owed was substantial, though, totaling $13.2 billion.
According to the Joint Committee on Taxation, the Democratic plan to lower the estate tax threshold to $5 million won’t significantly increase the percentage of people who owe the tax, bumping the share up to 0.3% or 0.4%, but it will raise a lot of money, bringing in about $52 billion over the next five years.
Mind the GRAT: A new report from ProPublica highlights a method some ultrawealthy households use to avoid paying estate taxes altogether.
“The estate tax can be easily avoided by exploiting a loophole unwittingly created by Congress three decades ago,” ProPublica’s researchers write. “By using special trusts, a rarefied group of Americans has taken advantage of this loophole, reducing government revenues and fueling inequality.”
The special trusts are called grantor retained annuity trusts, or GRATs, and they’ve been used by more than half of the country’s 100 wealthiest individuals, ProPublica reports.
Here’s how they work: “A typical GRAT entails putting assets, like stocks, in a trust that ultimately benefits a person’s heirs. The trust pays back an amount equal to what the trust’s creator put in plus a modest amount of interest. But any gains on the investments above that amount flow to the heirs free of gift or estate taxes.”
The GRAT structure has helped the likes of Michael Bloomberg, Oprah Winfrey and Charles Koch ensure that their families and in some cases friends receive millions from their estates, tax-free.
“I don’t blame the taxpayers who are doing it,” Daniel Hemel, a professor at the University of Chicago Law School, told ProPublica. “Congress has virtually invited them to do it. I blame Congress for creating the monster and then failing to stop the monster once it became clear how much of the tax base the GRAT monster would eat up.”
