Which tax avoidance strategies allow ultrawealthy individuals to lower their reported tax rates?
Executive summary
Ultrawealthy taxpayers lower reported tax rates mostly by not realizing gains and by using legal vehicles that convert taxable income into non-taxable or later-taxed events — for example, holding appreciated assets instead of selling them and borrowing against those assets (the “buy, borrow, die” pattern) and using trusts and valuation techniques such as GRATs, dynasty trusts and grantor trusts [1] [2] [3]. Congressional and investigative reporting show these strategies shift tax burdens across time or generations and exploit features like the step‑up in basis and estate‑planning trusts [3] [2].
1. Buy, Borrow, Don’t Sell: How unrealized gains become a tax advantage
Wealth tied up in appreciating stocks, real estate or businesses is often untaxed until it is sold; billionaires frequently avoid selling large holdings so gains remain “unrealized,” and instead they borrow against those assets for cash — loans are not treated as taxable income — allowing access to funds without triggering capital gains tax (ProPublica’s reporting and congressional summaries outline this pattern) [1] [4]. Some academic and policy researchers note the buy/hold element alone — simply not selling appreciated assets — is a primary way the very richest avoid annual income tax on wealth gains [5] [1].
2. Borrowing as a liquidity strategy — and why it matters to reported rates
Borrowing against appreciated assets converts latent wealth into spendable cash without an income tax event; critics call this “tax arbitrage,” and lawmakers have proposed taxing such debt‑backed withdrawals to blunt the advantage (Rep. Dan Goldman’s ROBINHOOD Act targets loans and lines of credit backed by capital assets) [4]. ProPublica’s IRS file reporting documents how borrowing plus retention of assets can push reported effective tax rates for some billionaires to fractions of a percent on annual wealth increases [1] [3].
3. Trusts and estate tools: moving wealth across generations
Sophisticated trust structures — Intentionally Defective Grantor Trusts (IDGTs), zeroed‑out Grantor Retained Annuity Trusts (GRATs), dynasty trusts and valuation discounts — are standard devices to transfer assets while minimizing gift and estate taxes and to preserve valuation techniques that shrink taxable transfers (Senate Finance materials catalog these avoidance strategies) [2]. ProPublica and other outlets emphasize that the federal “step‑up in basis” at death lets heirs inherit assets with unrealized gains effectively erased for capital gains purposes, neutralizing large tax liabilities that would otherwise crystalize over a lifetime [3].
4. Philanthropy, family offices and deductions: legal sheltering available only at scale
Donations, family foundations and the use of family offices can yield tax deductions and expense structures inaccessible to most taxpayers; outlets note family offices may deduct fees or structure activities in ways ordinary filers cannot, and wealthy families use charitable giving and private philanthropy to reduce taxable income while directing resources as they wish (USA Today; Wealth planning coverage) [6] [7]. These are lawful planning options, but they require scale, specialized counsel and administrative apparatus that create practical barriers for typical taxpayers [6].
5. Disagreements and nuance in the evidence: magnitude and mechanisms
Investigative reporting (ProPublica) documents extremely low effective tax rates for some billionaires and links those outcomes to these strategies [1] [3]. But academic work cited by Yale economics researchers stresses nuance: borrowing plays a smaller role than headlines sometimes imply and the richest often have substantial taxable income too; for many wealthy households the main effect comes from simply not realizing gains rather than pervasive borrowing [5]. These differences matter for policy: should reform tax loans, realizations, estates, or all three? The sources present both emphatic examples and more measured empirical analyses [1] [5].
6. Policy responses under discussion and implicit agendas
Proposals include taxing unrealized gains, limiting step‑up basis, narrowing valuation discounts, and levying excise taxes on debt‑backed loans (Rep. Goldman’s proposal is one explicit example) [4] [2]. Advocates for reform frame these changes as closing loopholes that let wealth compound tax‑free; defenders of current law argue these mechanisms encourage investment, liquidity and lawful planning (Senate testimony and policy briefs show the push for neutralizing specific instruments) [2] [3]. Political agendas are explicit: reform proponents seek revenue and redistribution; wealth‑management industry voices emphasize compliance costs and capital formation [2] [7].
Limitations: available sources document the common strategies and debates but do not list every tactic used by every family, nor do they provide exhaustive empirical shares for each technique; specific taxpayer outcomes vary and depend on asset mix, timing and bespoke legal structures [1] [2] [5].