How The Super-Rich Ducked $100 Billion In Estate Taxes Since 2000

GOP megadonor Sheldon Adelson attends 2012 fundraiser CREDIT: AP
GOP megadonor Sheldon Adelson attends 2012 fundraiser CREDIT: AP

Wealthy executives have avoided around $100 billion in taxes since 2000 by exploiting loopholes that “make the estate tax system essentially voluntary” for people of means, Bloomberg reports.

Billionaires like Sheldon Adelson, the casino magnate and major conservative political donor, can shift their stock holdings into and out of various legal structures in ways exempt the transfers from federal taxes. Adelson has passed nearly $8 billion to his heirs through a series of these transactions, bypassing $2.8 billion in taxes in the process. The $100 billion in tax savings that Adelson and people like him have amassed through the tactic over the past dozen years would be enough to pay for every American child to go to preschool for a decade.

That $100 billion estimate comes from Richard Covey, the attorney who came up with one of the most common maneuvers the hyperwealthy use to duck tax liability. Covey’s tactic has its own tax law jargon nickname — the Walton grantor-retained annuity trust, or “Walton GRAT” — and was born out of a congressional crackdown on Covey’s previous innovation in estate tax avoidance. GRATs work by rapidly shifting large volumes of stock into a trust fund that is legally required to return that initial investment after two years. The stocks in the trust gain enough value that when it comes time to repay the initial investment there is a substantial amount of stock left over that can be transferred on to some third party without triggering the gift tax. The government sued one of Covey’s first high-profile GRAT clients, Walmart heir Audrey Walton, in 1993. A judge ruled in Walton’s favor, giving the tax shelter both legal approval and that “Walton GRAT” nickname.

Bloomberg provides a helpful graphic breaking down one of Adelson’s most successful Walton GRAT gambits that turned about $31 million in stock holdings into more than half a billion untaxed dollars for his heirs:

The above scheme was unusually successful because shares in Adelson’s casino company had collapsed in the wake of the recession, and the Walton GRAT in question captured the stock’s dramatic rebound from 2009 to 2011. But because more mundane versions of the transaction happen by the thousands, the total amount of tax avoided is staggering. Covey estimates that his loophole has cheated the government out of $100 billion over the past 13 years, suggesting that there has been a much higher total loss to Walton GRATs since that 1993 court case that gave them their name. “No one knows for sure how much all of these GRATs cost the U.S. government,” Bloomberg notes, but the Internal Revenue Service (IRS) estimates that there were close to 2,000 separate GRAT filings in 2009 alone.

Adelson, an irascible gambling magnate whose business dealings in China lead to allegations of bribery and prostitution and who gives much more in political donations than the typical plutocrat, makes a compelling lead character in the Walton GRAT story. But the tactic is so widespread that JP Morgan “has a special unit dedicated to processing GRAT paperwork,” according to Bloomberg. Other banks and tax lawyers add flourishes to the technique to multiply the tax savings it provides.

The tactic is an entirely legal form of tax avoidance, unlike many forms of tax evasion that have drawn legal heat in recent years. Individual and corporate tax dodging costs taxpayers $300 billion each year, and the IRS is in the process of cracking down on individual tax evasion conducted through offshore bank accounts. But Walton GRATs have the legal system’s stamp of approval, and Congress declines to close the loophole in part because donors love it.