The Senate’s top Democratic tax writer has introduced legislation to prevent use of private placement life insurance (PPL), GRATs, and carried interest as tax shelters. These bills are part of a package of what the bill’s author, Sen. Ron Wyden (D-OR), calls anti-tax-cheat loophole closers. Sen. Wyden is the ranking member of the tax writing Finance Committee, and the committee’s likely chairman if the Democrats take control of the Senate in 2027.
PPL: The Protecting Proper Life Insurance from Abuse Act, S.4279, would amend the tax definition of life insurance to exclude certain private placement policies owned by the very rich. These owners, Sen. Wyden says, are using PPL as a tax favored hedge fund or private equity investment and not for the death protection that is the foundation of life insurance tax rules. A PPL policy that falls within the proposal's impact would no longer qualify for tax free death benefits, tax deferred inside buildup, and life insurance company reserve tax rules.
The bill applies to both new and existing PPL policies, although there are provisions in the legislation that provide a 180-day window during which the policyowners could convert or liquidate their policies before the new tax rules apply. The bill also includes reporting requirements. The bill would impose a $1 million per 30-day period penalty on insurers that fail to report PPL policies to the Internal Revenue Service (IRS).
GRATS: The Getting Rid of Abusive Trust Schemes (GRATS) Act, S.4287, would restrict use of grantor retained annuity trusts (GRATs) as a mechanism for avoiding tax. The bill mandates a minimum 15-year term and a trust lifespan that cannot exceed the annuitant’s life expectancy plus 10 years, bans use of decreasing annuities, and requires a minimum remainder value of $500,000 or 25 percent of the value of assets transferred into the GRAT. If a GRAT fails to meet these requirements, its income would be treated as a taxable gift (unless reimbursed). Plus, transactions between the trust and the deemed owner would be treated as sales for income tax purposes.
Carried Interest: The Ending the Carried Interest Loophole Act, S.4330, would eliminate carried interest. Carried interest is the label for the characterization of some investment manager compensation as capital gains rather than as ordinary income. The bill would count an investment manager’s carried interest as part of the manager’s annual compensation rather than taxing it when investment gains are realized. It would then be taxed under ordinary income tax rates rather than under the much lower capital gains rate.
All three of these bills are likely to be scored as significant revenue raisers. They have not yet been officially scored, but previous versions suggest that carried interest and GRATs bills could generate $113 billion or more over 10 years. The PPL bill is also likely to raise significant new revenue.
Prospects: The hunt for revenue is already intense and likely to get even more so when Congress turns its attention to a tax bill and/or raising revenue. However, the current GOP-controlled Congress is more focused on spending cuts than on new taxes, although “loophole closers” could come into play. So, these three bills pose some risk to impacted NAIFA members and their clients in the short run, but the risk increases substantially if and when Democrats take control of the Senate, House, and/or White House.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.