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February 6, 2023

All This Focus on Mitt Romney’s Taxes Could Ruin Things for All the Wealthy People

Today, a Bloomberg article by Jesse Drucker called attention to Mitt Romney's "intentionally defective grantor trust" aka "IDGT" or "I Dig It" trust. For the seasoned estate tax planning or wealth preservation professional, this is old hat, but for many people this is quite exciting. And by exciting I mean, "Holy shit, they can do that?" 

Basically, it works like this (I'll try to keep it brief) – A wealthy couple sets up a trust that is separate from their estate to benefit themselves during their lifetimes, but also to benefit their children and grandchildren. They put some assets that are illiquid or have little value into the trust to get things going, that way as Drucker notes, "[the grantors] can claim the gift tax obligation is low or non-existent since the declared value is low or zero." When a taxable event occurs – let's say, shares of stock are sold because they've appreciated a bazillion percent – the grantor (in this case, the wealthy couple) pays the tax owed but the trust gets the proceeds and can re-invest it from there for the future. Not bad, huh? 

What Drucker only mentions in passing but was explained to me in a little more detail by estate and trust expert Hal Terr of WithumSmith + Brown, is that "the payment of the income tax liability of the trust reduces the donor’s taxable estate." In other words, the wealthy couple's estate will take a deduction for the taxes they paid on behalf of the trust they created, so that the estate taxes owed will be lower after they die. Yep, I know.

There are A LOT of other details around these defective grantor trusts (and please read Drucker's entire article for specific details on the Romneys), but the bottom line is that they are a commonly-used planning strategy with high net-worth individuals. And according to Stephen Breitstone, a wealth preservation expert that Drucker talked to for his article, all this attention to IDGTs may RUIN everything:

Romney “uses every trick in the book,” Breitstone said. “It’s going to be harder to do tax planning in the future. He’s bringing attention to things that weren’t getting attention.”

Terr agrees, telling me that "most life insurance trusts are grantor trusts and all those life insurance agents would not be happy if this tax benefit of grantor trusts was removed from the Code," and "this publicity may help garner support for eliminating the ability of wealthy individuals to take advantage of this estate planning technique." The crux is, if these strategies get axed, it could make estate planning much more difficult.

However, if elected, Mitt Romney has said he would lower the gift tax and eliminate the estate tax as part of to simplifying the tax code. That would, theoretically, allow the wealthy people that use these tax strategies to keep even more of their money without all the fancy games. But what's the fun in that?

Romney ‘I Dig It’ Trust Gives Heirs Triple Benefit [Bloomberg]

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