Mitt Romney and the “I Dig It” Trust
Yesterday, Bloomberg’s Jesse Drucker published a piece detailing Mitt Romney’suse of an Intentionally Defective Grantor Trust (IDGT or “I Dig It” Trust) to pass tens — or perhaps hundreds — of millions to his heirs free of estate and gift taxes.
The story quickly caught the eye of the tax community, including TaxProf and Going Concern, with Caleb Newquist at GC describing the technique as follows:
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 Druckernotes, “[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?
Newquistgot much of the detail surrounding IDGT trusts from WS+B’s own estate and trust expert Hal Terr, who was quoted throughout the piece on GC:
What Druckeronly 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.
When Newquistreached out to Terr, he wasprimarily concerned with the effect the publicity surrounding Romney’s use of the IDGTtrust might have on tax advisor’s use of the technique, since until recently, the trusts had largely flown under the radar. Of specific concern was the following quote in the original Drucker article:
…According to Stephen Breitstone, a wealth preservation expert that Druckertalked 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.”
WS+B’s Terr saw things the same way:
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.
In a separate email to me, Terr added that the use of IDGTtrusts, whether related to Romney or not, has recently become a target of President Obama:
The Obama administration, in its 2012 legislative proposal, is attacking grantor trusts and wants to eliminate the tax benefit of the grantor paying the income tax liability of the trust.The IRS is also well aware of the technique of a Sale to a Defective Trust. The general public and Congress may not have been aware of the transfer tax benefit of this technique prior to the release of the Romney returns, however, and this publicity may help garner support for eliminating the ability of wealthy individuals to take advantage of this estate planning technique.The Romney return is creating exposure to a perceived tax loophole, and if it gets enough attention that support for its closure swells, it would reduce the techniques available to estate planning accountants and attorneys to help clients manage their estate tax liabilities.
This begs the questions: how far will we have to go into the presidentialdebates before Romney’s use of IDGT trusts becomesa talking point?Once it does, itwill become the same useless conversation as the one that surrounds Romney’s effective tax rate, becausein usingthe trust, Romney has done nothingillegal; rather, he’ssimply employed shrewd tax planning to minimize his income, estate, andgift taxes. And as I’ve mentioned before, while you may not like it, these are common rich guy solutions to rich guy problems.
Update: in response to Drucker’s article, Josh Barro authored an opinion piece atBloomberg this morningdefending Romney’s use of the trust on the same grounds that I do, stating:
We shouldn’t expect rich people to pass on perfectly legal opportunities to avoid taxes, any more than we would expect middle-class people to do so. And we shouldn’t expect to make transfer taxes work well given their long-standing track record of being ripe for avoidance. We should find a way to tax Mitt Romney, and others like him, without waiting around for them to transfer their assets.
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