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Financial Planning > UHNW Client Services > UHNW Client Advice

Senate Finance Bones Up for Brutal Budget Debates

By Allison Bell

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Bob Lord, a longtime estate planning lawyer and tax advisor for Patriotic Millionaires, opposes the current tax rules that help ultra-high-net-worth clients save money.

But, after briefing members of the Senate Finance Committee last week on how wealthy families have used strategies like grantor-retained annuity trusts and private placement life insurance policies to cut their taxes, he issued a warning to Democrats that sounded like a challenge for other estate planners.

“These are just the known loopholes,” Lord said. “As a tax lawyer, I can tell you: Tax lawyers do not share our more ingenious avoidance strategies.”

Lord appeared at a hearing the Senate Finance Committee organized to prepare for upcoming battles over the fate of the Tax Cuts and Jobs Act tax breaks that are set to expire Jan. 1, 2026 — at a time when the Congressional Budget Office is estimating the country will report budget deficits of more than $2 trillion per year.

What it means: For now, the Tax Cuts and Jobs Act tax breaks, including the provision that doubled the estate tax exemption, are the law of the land, and supporters appear to be preparing to mount a strong defense.

The Democrats’ views: Senate Finance Chairman Ron Wyden opened the hearing with a somber warning about the upcoming fight over the fate of the 2017 tax overhaul.

“In a matter of months, the Congress will begin a tax debate unlike any in recent memory,” the Oregon Democrat said. “This will be a make-or-break moment for the federal budget and America’s middle class.”

Many Democrats on the committee talked about the programs Congress could fund if ultra-high-net-worth taxpayers paid more taxes.

But Wyden did not unveil a bill focusing on his concerns about use of life insurance in tax planning.

No one presented any other big new proposals for changing U.S. tax rules.

Democrats on the committee expressed frustration about the partisan opposition stalling consideration of proposals introduced by people like Wyden; Sen. Elizabeth Warren, D-Mass.; and Sen. Bernie Sanders, an independent from Vermont.

The Tax Cuts and Jobs Act supporters’ case: Sen. John Barrasso, R-Wyo., blasted the possibility of an expansion of the “death tax.”

Jeff Brabant, a vice president at the National Federation of Independent Business, emphasized the impact any changes could have on family-owned businesses.

“There’s a real concern that family businesses will more often than not be sold, and usually to larger businesses who don’t have the same footprint in the community,” Brabant said.

Barrasso shook his head over Brabant’s remarks.

“We have a celebration each year for those that have kept the ranch in the family for a hundred years,” Barrasso said. “There are families that have been through drought, fire, terrible winters, all of it, and yet their biggest thread is the federal government.”

Bunn presented data suggesting is that the U.S. tax code is much more “progressive,” or tougher on higher-income taxpayers and easier on lower-income taxpayers, than critics say it is.

“In 2021, the top 1% of taxpayers paid 45.8% of the taxes owed,” Bunn said.

In 2019, he said, the bottom fifth of U.S. taxpayers had a negative 127% effective tax rate and the top fifth had a 30.7% effective tax rate.

“So the U.S. tax system is incredibly progressive,” Bunn said.

Finseca’s view: Finseca is one of the financial services groups that’s been in suspense about what would happen at the hearing.

Marc Cadin, Finseca’s chief executive officer, said in a statement that Finseca believes that life insurance is taxed appropriately and is the foundation of a holistic financial plan.

“The Joint Committee on Taxation recognized the appropriateness of the tax treatment of inside build-up when they removed it from the tax expenditure list in 2015,” Cadin said. “Over the past several months, Finseca has had multiple discussions with the Senate Finance Committee members, including Chair Wyden and his staff making our position clear. Finseca has also given hundreds of presentations to thousands of members of the profession over that same time period and can unequivocally state that the industry is unified in our position.”

Senate Finance Committee members skirmished at a hearing last week over the next big battle over tax policy. Credit: Senate Finance Committee

Allison Bell

Think_Allison

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