The proposed changes to grantor trusts included in the Build Back Better Act (H.R. 5376) are a serious threat to Main Street employers nationwide. The authors claim these changes would ensure billionaires “pay their fair share,” but in reality they would fall most heavily on family-owned businesses, making it all but impossible for some of them to survive from one generation to the next.

To highlight this threat, S-Corp sent a letter today to the House’s top tax writers detailing the history of grantor trusts, the flaws in the proposals in H.R. 5376, and the harm they would inflict on Main Street. As the letter states:

…It is important to point out that the grantor trust rules were created by Congress and have been in place for more than fifty years.  The practices described above are in full compliance with the rules and, in fact, have been blessed by the courts and by Congress multiple times.  Moreover, these tools would need to exist with or without an estate tax.  Trusts are used to facilitate the transfer of ownership of a business and to give younger generations a stake in the business while also protecting the business’ assets from creditor claims, claims of a spouse in divorce, etc.   There are many non-tax reasons why trusts are necessary.  

Given this background, it is one thing for Congress to change these rules looking forward.  It is entirely different, and wrong, to retroactively apply the changes to grantor trusts created in the past.  Considering the length of time some of these plans have been in place, Congress should take great pains to ensure that established grantor trusts that have relied on rules in place for decades are not upended now, just before they are called upon to preserve a family business. 

The proposed changes to existing grantor trust rules will unfairly punish family businesses at a very difficult time, driving many of them into forced liquidations or sales, while stacking the deck in favor of the large, multinational corporations who have thrived throughout the pandemic.  From the letter:

These changes are a private company challenge only.  Public corporations like Amazon and Apple are effectively immune from the estate tax and have no use for grantor trusts.  While some small portion of their owners may pay the tax, the company itself is largely unaffected.  Public companies don’t engage in estate tax planning, they don’t have to pay for life insurance or to otherwise set aside resources to pay the eventual tax, they have access to massive pools of capital that also don’t pay the estate tax (or any tax for that matter), and they don’t have to reorganize their ownership to ensure a smooth transition of leadership and control. 

Meanwhile, every single successful family business or farm in this country struggles with the estate tax.  As one of our members observed, the estate tax forces families to buy back a large portion of the business from the federal government every generation.  The changes to the treatment of grantor trusts included in H.R. 5376 will make these challenges much more acute, resulting in fewer successful transitions and fewer family businesses.

Taken as a whole, the tax increases included in H.R. 5376 represent a grave threat to millions of Main Street businesses. They would raise taxes on these businesses to unprecedented levels and tilt an already uneven playing field even further in favor of large, publicly-traded corporations. The changes to the grantor trust rules are particularly harmful, as they would hit the affected businesses at a particularly difficult time (the death of their owner) and they would undo years if not decades of careful planning to ensure the company survives the transition.

As the letter notes, if Congress wants to address concerns regarding grantor trusts, it should consider those changes carefully and transparently, and it should do so in a targeted manner that preserves the value of these trusts to families.  S-Corp is willing to participate in that process.