President Biden promised chicken soup for our envious souls in the form of taking money away from rich people. But the inflation associated with Big Government and Bigger Government is already making rich corporate executives richer (easier to meet targets expressed in nominal dollars; see Is Elon Musk one of the bigger winners from inflation?). A recent Bloomberg article makes it look as though inflation also makes it much easier to work around the estate tax. From “The Hidden Ways the Ultrarich Pass Wealth to Their Heirs Tax-Free”:
First, Knight cycled millions of Nike shares through a series of trusts that effectively moved billions of dollars’ worth of stock price gains from his estate to his heirs, tax-free. Then he put most of his remaining shares into a vehicle called Swoosh LLC and let a trust controlled by his son, Travis, purchase a stake at a big discount. The chain of trusts let hundreds of millions of dollars in dividends flow to Knight’s heirs with him covering the income taxes. All this planning also ensured his family would retain control of his sneaker empire.
The foundation of Knight’s strategy is the grantor-retained annuity trust, or GRAT. His first step was to set up nine GRATs, which successfully transferred Nike shares now worth $6.1 billion to heirs tax-free from 2009 to 2016. Two other GRATs that show up in public filings received about $970 million of unspecified assets from Knight. The filings don’t disclose the ultimate beneficiaries, but Lord says that, based on how family wealth transfers usually work, they might include the family of Knight’s late son, Matthew, who died in 2004.
Officially, gifts are taxable: If you send someone more than $15,000 per year, you’re supposed to file a separate gift tax return, with the total counting toward your $11.7 million lifetime estate-and-gift-tax exemption. (Double that for married couples.) Once you reach that threshold, you must pay a 40% levy. But giving heirs the right to profit, risk-free, from your investments? Not a taxable gift if you route it through a GRAT. “It looks like the heirs didn’t receive anything of value, but in fact they have been given all of the upside growth potential,” says Ray Madoff, a law professor at Boston College.
[section on the grantor-retained annuity trust machinery]
Put in assets, such as stocks, that have a good chance of making money over time. Technically this isn’t a taxable gift, as long as the GRAT is set to repay you the initial value of the assets in the form of an annuity, usually over two or three years.
If the assets go up in value during this period, the gains can stay in the GRAT, minus a (usually low) minimum rate tied to interest rates. Whatever’s left goes to the heirs tax-free.
If the assets drop in value during that time, your heirs are unaffected. You can pretend the GRAT never existed and try again. The more GRATs you set up—and some of the ultrarich open one monthly—the higher the chance some will succeed.
In our current inflationary environment, it is a lot more likely that assets in the trust will go up in value (expressed in nominal dollars rather than real (inflation-adjusted)). Thus, the more money President Biden and the Democrats promise to spend, the richer the children and grandchildren of today’s super rich should become. American tax law in general and estate-/trust-related law in particular are so complex that it takes a $600/hour lawyer to figure it all out and a layperson’s head will be left spinning, but I think the Bloomberg article is worth reading.