Ultra-Wealthy Dodge Billions in Taxes Using “GRAT” Loophole

A new Bloomberg report describes how billionaires have dodged an estimated $100 billion in gift and estate taxes since 2000, according to the lawyer who perfected the practice.

The trick involves temporarily putting corporate stocks (or similar assets) into a “Grantor Retained Annuity Trust” (GRAT), where the grantor gets the stocks back after two years, plus a small amount of interest, while any appreciation of the stock goes to the grantor’s heirs tax-free.

Because the initial gift has no inherent value (it’s essentially a gift to oneself), there is no gift tax at the time the GRAT is set up. The loophole is that the appreciation of the stock that goes to the heirs is not subject to gift tax either. As a result, extremely wealthy individuals avoid billions of dollars in gift and estate tax.

This is what Sheldon Adelson did (to take just one example) when he put much of his Las Vegas Sands stock in GRATs when the stock had plummeted during the recession. Adelson knew that the stock was likely to rise significantly from that low point. If Adelson had simply given his heirs the stock, the gift tax would have  applied to the value of the stock at the time it was given. Or if he bequeathed the stock upon his death, the estate tax would apply.

But by using GRATS, neither the value of the stock at the time it was temporarily put into the GRAT nor the subsequent appreciation was subject to gift or estate tax. See the graphic below from Bloomberg for how the shelter works in practice.

Many well-known figures, such as Facebook CEO Mark Zuckerberg, Goldman Sachs CEO Lloyd Blankfein and fashion designer Ralph Lauren, have set up GRATs to shelter their assets from gift and estate tax. Bloomberg estimates that Adelson, whose net worth is more than $30 billion, has already avoided at least $2.8 billion in US gift taxes using at least 25 different GRATs over time.

For his part, Adelson has not just sought to follow (or exploit) whatever law is on the books, but has actually taken an active role in trying to shape the law and the government that enacts it. In 2012, Adelson spent an astonishing $150 million to support conservative candidates and has said that he’s ready to “double” his donations to candidates going forward. Considering the billions that Adelson has at stake, this exuberant campaign spending may actually be a prudent investment if it works to preserve the GRAT loophole and the plethora of other massive tax breaks for the wealthy individuals embedded in the tax code.

To their credit, the Obama Administration has proposed to curb (PDF) the use of GRATs by requiring that a GRAT have a minimum term of 10 years. As the Treasury explains (PDF, pg. 142), this would create some downside risk to using a GRAT because it increases the likelihood that the grantor will die before the GRATs paid out the appreciation to the heirs, at which point that appreciation would be subject to the estate tax. Unfortunately, this proposal has been brushed aside by Republicans who seek to eliminate the estate tax entirely and by some Democrats who are not enthusiastic about taking on a tax break used by the large campaign donor class.