Tax loophole saves money for America’s wealthy

by | Dec 24, 2013 | Estate Planning |

Federal law demands that very wealthy people who wish to leave money to their children pay gift or estate taxes of up to 40 percent on those assets. Many of America’s wealthy are getting around that tax mandate through means of a loophole that Congress didn’t mean to create, and that the Internal Revenue Service could not change.

This loophole, called a tax shelter, is used for estate planning by hundreds of businesspeople. The shelter, known as the Walton grantor retained annuity trust or GRAT, makes it relatively simple for the wealthy to get around estate and gift taxes. One billionaire uses this method, which is used to quickly move assets in and out of trusts.

According to data in the man’s U.S. Securities and Exchange Commission filings, he has moved his company stock in and out of more than 30 trusts. He’s given almost $7.9 billion to his heirs while legally dodging approximately $2.8 billion in U.S. gift taxes since 2010.

Congress created the estate tax in 1916. It was created to apply those who had large fortunes at death. It established the similar gift tax eight years later to also include transfers made before death. The first $5.25 million of an individual’s assets is exempt. The amount is $10.50 million for couples.

Congress established the GRAT while trying to prevent another tax-avoidance trick that an attorney developed. In 1984, the lawyer touted an estate-tax shelter he’d created known as a grantor retained income trust, or GRIT. Congress thought the GRIT was abusive and passed a law to block it six years after it was created. However, as the attorney studied the new law, he found an even greater technicality. Lawyers have been fine-tuning techniques of his to achieve even more tax savings. One idea puts corporate stock options into a GRAT.

Investment companies have helped many clients use the trusts, and many companies have a special department dedicated to processing GRAT paperwork.

Finding the right attorney to plan your estate is crucial. You may be able to avoid paying an exorbinant amount of taxes with the right estate plan in place.

Source:, “Accidental Tax Break Saves Wealthiest Americans $100 Billion” Zachary R. Mider, Dec. 17, 2013