GRAT Allows Billionaires to Avoid U.S. Estate and Gift Taxes

Posted on Feb 07, 2014

Federal estate tax laws require America’s wealthiest citizens, who want to leave their fortunes to their children, to pay estate or gift taxes equal to 40% of their value. This includes Sheldon Adelson, the 80-year-old founder of Las Vegas Sands Corp., currently worth more than $30 billion. Adelson, however, took advantage of a loophole unintentionally created by Congress to minimize the amount of tax his estate will pay to the government.

Records show that Adelson moved his company stock in and out of more than 30 different trusts and has given at least $7.9 billion to his heirs—avoiding roughly $2.8 billion in U.S. gift taxes since 2010. He is not alone. SEC filings show that hundreds of other executives have done the same thing, costing the Federal government more than $100 billion since 2000.

The specific shelter utilized by these billionaires is a grantor retained annuity trust, or GRAT. The creator of this method, Richard Covey, agrees that the practice makes the tax code look foolish. He states, “You can certainly say we can’t let this keep going if we’re going to have a sound system.”

Covey’s technique, combined with a handful of others, has essentially made the estate tax system voluntary. Edward McCaffery, a professor at the University of Southern California’s Gould School of Law, notes that the system is ineffective at curbing economic inequality in our country. President Obama has attempted to narrow the GRAT loophole since 2009, with no success.

Wealthy citizens taking advantage of this loophole include Facebook CEO Mark Zuckerberg, Goldman Sachs Group CEO Lloyd Blankfein, Chairman of Dish Network Charles Ergen, and fashion designer Ralph Lauren. The practice is so popular that JP Morgan Chase reportedly has its own special unit dedicated to processing GRAT paperwork.

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