Cheating Death Taxes

Dec 19 2013 @ 10:38am

Zachary R. Mider shines a spotlight on the GRAT, “one of a handful of common devices that together make the estate tax system essentially voluntary”:

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 US has collected since then. 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.

Sheldon Adelson, one of the many tax dodgers cited by Mider, has saved $2.8 billion using the GRAT. The Bloomberg editorial board is not pleased:

In its current form, the estate tax requires the rich to pay a 40 percent levy on wealth they leave to their heirs, after an exemption of $5.25 million (rising to $5.34 million in 2014). That’s the theory, anyway. In practice, for the wealthiest families, the estate tax is largely optional. … The Tax Policy Center estimates that only 3,780 households (0.14 percent of all estates) will owe any estate taxes this year. Their average payment will be $3.8 million on estates worth $22.7 million – an effective rate of 16.6 percent.

Keep in mind, too, that most wealth escapes tax as it accumulates. Appreciation of property, securities and art isn’t subject to capital-gains tax until the assets are sold. When they are passed along, much of this unrealized profit remains untaxed, thanks to the optional estate tax. The oft-repeated charge that estate taxes amount to double taxation is doubly wrong. Congress ought to close the GRAT and other loopholes.

And it might note that the voluntary estate tax exemplifies a wider issue: The U.S. tax code is insanely complicated. This favors the rich because, unlike ordinary taxpayers, they can afford to find loopholes amid the complexity. Simpler tax systems are fairer – and they distort decisions less.