Gift and Estate Tax Shelters Have Saved $100 Billion in Federal Taxes for the Wealthy Since 2000
Accidental Tax Break Saves Wealthiest Americans $100 Billion
"How many times do you have to pay taxes on money?" the casino magnate asks, leaning on a blue cane on the cobblestones of Wall Street on a crisp October morning.
By shuffling his company stock in and out of more than 30 trusts, he's given at least $7.9 billion to his heirs while legally avoiding about $2.8 billion in U.S. gift taxes since 2010, according to calculations based on data in Adelson's U.S. Securities and Exchange Commission filings.
Hundreds of executives have used the technique, SEC filings show. These tax shelters may have cost the federal government more than $100 billion since 2000, says Richard Covey, the lawyer who pioneered the maneuver. That's equivalent to about one-third of all estate and gift taxes the U.S. has collected since then.
Easy Bypass
The popularity of the shelter, known as the Walton grantor retained annuity trust, or GRAT, shows how easy it is for the wealthy to bypass estate and gift taxes. Even Covey says the practice, which involves rapidly churning assets into and out of trusts, makes a mockery of the tax code.
"You can certainly say we can't let this keep going if we're going to have a sound system," he says with a shrug.Covey's technique is one of a handful of common devices that together make the estate tax system essentially voluntary, rendering it ineffective as a brake on soaring economic inequality, says Edward McCaffery, a professor at the University of Southern California's Gould School of Law.
Since 2009, President Barack Obama and some Democratic lawmakers have made fruitless proposals to narrow the GRAT loophole. Any discussion of tax shelters has been drowned out by the debate over whether to have an estate tax at all, McCaffery says.
‘Campaign Donors'
"From the Republican side of the aisle, you're committed to killing the thing," he says, adding that Democrats don't want to tackle an issue affecting a handful of people. "And that handful are all in the class of campaign donors."Facebook Inc. Chief Executive Officer Mark Zuckerberg and Lloyd Blankfein, the CEO of Goldman Sachs Group Inc., are among the business leaders who have set up GRATs, SEC filings show.
JPMorgan Chase & Co. helps so many clients use the trusts that the bank has a special unit dedicated to processing GRAT paperwork, says Joanne E. Johnson, a JPMorgan private-wealth banker.
"I have a client who's done 89 GRATs," she says.Goldman Sachs disclosed in a 2004 filing that 84 of the firm's current and former partners used GRATs. Blankfein has transferred more than $50 million to family members with little or no gift tax due, according to calculations based on data in his SEC filings.
Charles Ergen, chairman of Dish Network Corp., and fashion designer Ralph Lauren passed more than $300 million each, calculations from SEC filings show.
Blankfein, Ergen, Lauren and Zuckerberg declined to comment.
For as long as such levies have been on the books, lawyers have been devising strategies to get around them.
Growth Stocks
Then, the trust could invest in growth stocks that paid low dividends so that most of the returns still ended up going to his kids.
Six years after Covey started promoting this technique, Congress termed it abusive and passed a law to stop it. The 1990 legislation replaced the GRIT with the GRAT, a government-blessed alternative that allowed people to keep stakes in gifts to their children while forbidding the abuse Covey had devised.
Covey studied the law and found an even bigger loophole.
"The change that was made to stop what they thought was the abuse, made the matter worse," he says.Fredric Grundeman, who helped draft the bill while he was an attorney at the U.S. Treasury Department and is now retired, says the framers didn't recognize the new law's potential for abuse.
Flawed Thinking
"How do I say it?" Grundeman says. "When Congress enacts a law, it isn't always well thought out."Covey, 84, a Missouri native and former U.S. Marine Corps basketball player who earned a law degree from Columbia Law School in 1955, uses the words "romantic" and "beautiful" to describe the most elegant tax maneuvers.
Zeroed-Out
Three years after the new law took effect, Covey created a pair of $100 million zeroed-out GRATs for Audrey Walton, the former wife of the brother of Wal-Mart Stores Inc. founder Sam Walton. The IRS, which had banned such GRATs through regulation, demanded taxes and took her to court.
In 2000, the U.S. Tax Court found in Walton's favor, determining the 1990 law didn't prohibit a "zeroed-out" GRAT. Covey had won a rare prize: an official seal of approval for a tax shelter.
Two years after Covey's court victory, Adelson set up a GRAT called the "Sheldon G. Adelson 2002 Two Year LVSI Annuity Trust," Adelson's SEC filings show. By 2009, he was juggling chunks of his fortune in as many as 10 GRATs at a time, filings show.
Adelson once discussed his approach to inheritance taxes in a legal deposition.
"Listen, the law says you can avoid taxes but you can't escape taxes," Adelson testified as part of a 1997 lawsuit over an unrelated business dispute. "We just want to do what is right, but it is prudent and it's wise to prepare your estate to save taxes."Political Donations
In November 2010, Adelson sat for an interview with a Bloomberg News reporter in Las Vegas Sands' corporate boardroom, tucked inside the palatial Venetian resort. He spoke of the perks of being gambling's richest man: His weekend home in Malibu, California; the homes in Israel and the south of France; the six jets that ferry his family between them.
‘Extremely Gratifying'
Adelson had recently rescued Las Vegas Sands from the brink of bankruptcy. His company's stock, which lost more than 90 percent in 2008, had recovered almost half of its value. That was good news for his place on the list of the world's richest people, a ranking that he follows closely.
"I don't need to pat myself on the back to say, look at all the good things I did," he said. "But the success and the comeback that I've enjoyed, and the company's enjoyed, have been extremely gratifying."
25 GRATs
The titles of some of those trusts start with the first letters of his children's names. Later, more GRATs added another $3 billion to the heirs' trusts.
Outside the stock exchange in October, Adelson declined to comment on GRATs. Later, he passed a message along through Ron Reese, his publicist.
Lawyers Tweak"Mr. Adelson did tell me to tell you that he has no intention of ever dying," Reese says. ‘So the estate-planning conversation is moot.''
Since Covey's triumph in the Walton case, lawyers have tweaked his technique to generate even more tax savings. One idea, used by former Aetna Inc. CEO John W. Rowe, puts corporate stock options into a GRAT.
"It's very common," Rowe says, referring to the use of GRATs. "It's become standard practice in estate planning."Charles Dolan, whose family controls the New York Knicks basketball team and who is chairman of Cablevision Systems Corp., has repeatedly swapped Cablevision shares out of his GRATs and replaced them with IOUs, his SEC filings show.
The technique multiplies the potential tax savings, according to a 2008 report by analysts at AllianceBernstein Holding LP. Through a spokeswoman, Dolan declined to comment.
Not Pressing
The GRAT loophole is unlikely to be plugged anytime soon. President Obama has included a proposal to limit the GRAT technique in each of his annual budget plans but hasn't pressed Congress to act on it, says Kenneth Kies, a Republican tax lobbyist.
Committees in the House and Senate are working on what they call comprehensive tax overhaul bills. Neither plans to address estate or gift taxes.
Covey suggests one reason for the lack of action: Wealthy donors to politicians, both Democratic and Republican, want to keep the loophole in place.
"I've done a lot for Democratic contributors," he says with a smile.No one knows for sure how much all of these GRATs cost the U.S. government. The IRS estimates the number of gift-tax returns filed in connection with new GRATs each year; there were about 1,946 in 2009, according to the most recent publicly available data.
Taxpayers don't have to report how much each GRAT ultimately passes to heirs.
"It boggles the mind," he says.
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