The Trump administration took a step toward blocking stricter enforcement of estate and gift taxes Friday, describing a set of proposed rules as overly burdensome.
The new rules, put forward last year by the Obama administration, would increase the taxes owed by some wealthy families. Lawyers and experts on the estate tax say that taxpayers have substantial leeway in determining how much their estates are worth and, as a result, how much they have to pay.
The Obama administration's rules were intended to enforce the tax more strictly, but the new administration might prevent them from going into effect. The rules were among eight regulations put forward under Obama that Trump's Treasury Department will try to modify or rescind, according to an interim report published last week.
Wealthy Americans pay estate and gift taxes when they die or when they pass wealth on to their heirs. The tax is primarily paid by the very richest families. Just 0.18 percent of people who died last year paid estate taxes, according to the nonpartisan Tax Policy Center. The center also estimates that 88 percent of the total estate taxes that are paid comes from people in the richest 10 percent of the income distribution.
Very few Americans are rich enough to pay the estate tax, but the tax could affect many of Trump's wealthy advisers. The majority of Trump's Cabinet, including 13 of the 24 members, are potentially subject to the estate tax, according to an analysis by The Washington Post.
Republicans have long argued that the estate tax creates unacceptable burdens on middle-class taxpayers who have substantial assets, such as farmers or owners of small businesses. Trump has also proposed eliminating the tax entirely, although doing so would require an act of Congress.
"This hurts a lot of farmers. It hurts a lot of people who have businesses that they want to pass on," Treasury Secretary Steven Mnuchin told CNBC in May. "Many people have to sell their family business. Many people have to sell their family farm."
Mnuchin's reported net worth of $621 million would make his estate liable for the tax if he were to pass away. Whether the Obama administration's new rules would increase his estate's bill if his department allowed them to take effect depends on whether he is using a certain legal strategy to save money. That information is not publicly available.
The maneuver in question relates to how small businesses and similar entities are appraised for purposes of the estate tax. When a person dies and divides up a business to give each heir a stake, authorities allow the heirs to mark down the value of their share in the business, because each stake might be difficult to sell individually.
Yet some wealthy taxpayers have exploited this rule by putting stocks, bonds or other securities under the control of a legal entity and then claiming that the entity represents a family-owned business in order to bring down the value. When the heirs take control of the entity, they can easily sell off their individual stakes in the assets.
"This is a pretty common technique for the very wealthy," said attorney Beth Shapiro Kaufman, the president of Caplin and Drysdale in Washington.
Kaufman said that the rules the Obama administration proposed were overly broad and could negatively affect legitimate businesses as well, but she also said that the loophole will be costly if it is not closed. Taxpayers using this approach could reduce the value of their estates by roughly one-third, she said.
"If you think that the estate tax is evil, then anything that pokes giant holes in it is a good thing," Kaufman said.
Last week's report is a response to an order from Trump, who instructed his deputies to identify regulations proposed or implemented under Obama that were excessively costly or beyond the authority of the executive branch. The Treasury Department will issue proposals for scaling back or throwing out the regulations in a final report to Trump in September.
That process could be complicated by the fact that the Treasury Department is severely understaffed, said Mark Mazur, who served as assistant treasury secretary for tax policy under Obama.
The posts for the officials who would ordinarily be responsible for writing the rules in this area are still vacant. For instance, Trump has nominated David Kautter, an attorney, to serve in Mazur's position as assistant secretary, but Kautter has not yet been confirmed. The delays are part of a pattern of unusually slow confirmations across Trump's new administration.
Among the other regulations slated to be modified or eliminated is a rule designed to prevent foreign companies from stripping the earnings out of their U.S. subsidiaries to avoid federal taxes.
A common practice among foreign firms that own U.S. subsidiaries is to make loans to the subsidiaries just so that the subsidiaries can pay the owners back. The interest paid is not subject to tax in the United States, reducing the subsidiary's tax bill. While that interest counts as income for the foreign owner, foreign companies often pay taxes at lower rates than they would in the United States.
The Obama administration hoped the rule would prevent companies from using this technique to shift income abroad, out of the reach of U.S. tax authorities.
The rule was scheduled to take effect next year, which would make buying U.S. firms less attractive to foreign investors, said Mazur, who now directs the Tax Policy Center. "We all knew that there was a lot of angst about this from the business community, especially some of the groups that lobby for offshore companies, and so — not surprised to see it on the list," he said.