This story was originally published by ProPublica.
Secret IRS records show billionaires use trusts that let them pass fortunes to their heirs without paying estate tax. Will Congress end a tax shelter that has cost the Treasury untold billions?
It’s well known, at least among tax lawyers and accountants for the ultrawealthy: The estate tax can be easily avoided by exploiting a loophole unwittingly created by Congress three decades ago. By using special trusts, a rarefied group of Americans has taken advantage of this loophole, reducing government revenues and fueling inequality.
There is no way for the public to know who uses these special trusts aside from when they’ve been disclosed in lawsuits or securities filings. There’s also been no way to quantify just how much in estate tax has been lost to them, though, in 2013, the lawyer who pioneered the use of the most common one — known as the grantor retained annuity trust, or GRAT — estimated they may have cost the U.S. Treasury about $100 billion
over the prior 13 years.
As Congress considers cracking down on GRATs and other trusts to help fund President Joe Biden’s domestic agenda, a new analysis by ProPublica based on a trove of tax information about thousands of the wealthiest Americans sheds light on just how widespread the use of special trusts to dodge the estate tax has become.
More than half of the nation’s 100 richest individuals have used GRATs and other trusts to avoid estate tax, the analysis shows. Among them: former Democratic presidential candidate Michael Bloomberg; Leonard Lauder, the son of cosmetics magnate Estée Lauder; Stephen Schwarzman, a founder of the private equity firm Blackstone; Charles Koch and his late brother, David, the industrialists who have underwritten libertarian causes and funded lobbying efforts to roll back the estate tax; and Laurene Powell Jobs, the widow of Apple founder Steve Jobs.
(Powell Jobs’ Emerson Collective is among ProPublica’s largest donors.)
More than a century ago amid soaring inequality and the rise of stratospherically wealthy families such as the Mellons and Rockefellers, Congress created the estate tax as a way to raise money and clip the fortunes of the rich at death. Lawmakers later added a gift tax as a means of stopping wealthy people from passing their fortunes on to their children and grandchildren before death. Nowadays, 99.9% of Americans never have to worry about these taxes. They only hit individuals passing more than $11.7 million, or couples giving more than $23.4 million, to their heirs. The federal government imposes a roughly 40% levy on amounts above those figures before that wealth is passed on to heirs.
For her part, Powell Jobs has decried as “dangerous for a society” the early 20th century fortunes of the Mellons, Rockefellers and others. “I’m not interested in legacy wealth buildings, and my children know that,” she told The New York Times
last year. “Steve wasn’t interested in that. If I live long enough, it ends with me.”
Nonetheless, after the death of her husband in 2011, Powell Jobs used a series of GRATs to pass on around a half a billion dollars, estate-tax-free, to her children, friends and other family, according to the tax records and interviews with her longtime attorney. By using the GRATs, she avoided at least $200 million in estate and gift taxes.
Her attorney, Larry Sonsini, said Powell Jobs did this so that her children would have cash to pay estate taxes when she dies and they inherit “nostalgic and hard assets,” such as real estate, art and a yacht. (At 260 feet, Venus
is among the larger pleasure ships in the world.) Without the $500 million or so passed through the trusts, he said, Powell Jobs’ heirs would have to sell stock that she intends to give to charity to pay her estate tax bill.
Sonsini said Powell Jobs, whose fortune is pegged at $21 billion by Forbes, has already given billions away to charity and paid $2.5 billion in state and federal taxes between 2012 and 2020. “When you look at an estate that may be worth multiple billions, and all the rest is going to charity, and you put it in perspective, what is the problem we’re worried about here?” Sonsini asked. “This is not about creating dynasty wealth for these kids.”
In a written statement, Powell Jobs said she supports “reforms that make the tax code more fair. Through my work at Emerson Collective and philanthropic commitments, I have dedicated my life and assets to the pursuit of a more just and equitable society.”
Others whose special trusts ProPublica identified, including Bloomberg and the Kochs, declined to comment on why they’d set up the trusts or their estate-tax implications. Representatives for Lauder didn’t respond to requests to accept questions on his behalf. Schwarzman’s spokesperson wrote that he is “one of the largest individual taxpayers in the country and fully complies with all tax rules.”
A typical GRAT entails putting assets, like stocks, in a trust that ultimately benefits a person’s heirs. The trust pays back an amount equal to what the trust’s creator put in plus a modest amount of interest. But any gains on the investments above that amount flow to the heirs free of gift or estate taxes. So if a person puts $100 million worth of stock in a GRAT and the stock rises in value to $130 million, their heirs would receive about $30 million tax-free. Continue Reading