Tax Break Saves Wealthiest Americans $100 Billion

February 21st, 2014

Some of America’s wealthiest residents have managed to find a loophole that has saved them millions ─ and in some cases even billions in estate tax payments.

In an attempt to curb U.S. economic inequality, billionaires are required by federal law to pay estate or gift taxes of 40 percent on funds left to their children. For example, 80-year-old billionaire Sheldon Adelson, has legally navigated his way out of paying about $2.8 billion in gift taxes since 2010, by moving the roughly $7.8 billion he’s given to his children in and out of more than 30 trusts.

Adelson is not alone in this tactic. SEC filings reveal that hundreds of major executives have utilized these tax shelters. In fact, Bloomberg reported that Richard Covey, the lawyer who discovered the loophole, estimates his discovery may have cost the federal government more than $100 billion since 2000. This represents approximately one-third of all estate and gift taxes the U.S. has collected in the past 14 years since then.

Is the Estate Tax System Voluntary?
It seems the estate and gift tax has become an optional fee for those impacted by it. The popular tax shelter, called the Walton grantor retained annuity trust or GRAT, makes it easy for the wealthiest people in the country to avoid the tax.

The practice discovered by Covey is one of a few methods that work together to make this tax essentially voluntary.

While meager efforts have been underway by President Obama and other Democratic lawmakers to mend the loophole since 2009, no real progress has been made.

In fact, there’s even a strong argument to do away with the tax all together.

GRATs a Common Estate Planning Practice
GRATs have become a common estate planning practice for America’s wealthiest citizens. JPMorgan Chase & Co. even has a special unit dedicated to processing GRAT paperwork.

Bloomberg reported that both Facebook CEO Mark Zuckerberg has set up a GRAT. Lloyd Blankfien, head of Goldman Sachs Group Inc., has also done so.

It seems unlikely that the GRAT loophole is going away anytime soon. In each of his annual budget plans, President Obama has included a proposal to limit the GRAT practice, but hasn’t made it a pressing issue.

Both the House and the Senate have committees working on comprehensive tax overhaul bills, yet neither has plans to address estate or gift taxes.

Campaign donations is largely believed to be a main reason the issue isn’t pushed. Wealthy donors don’t want the loophole to be eliminated and politicians want to please them.

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