One of the world’s richest men has a simple and blunt explanation for how he maintains his exorbitant wealth: a glaring tax loophole. Sheldon Adelson, the 80-year-old Las Vegas Sands Corp. owner whose valuation surpasses $30 billion, spoke to Bloomberg regarding a tax shelter that easily and successfully avoids the estate tax.
The tax shelter was conceived by a lawyer named Richard Covey and is commonly referred to as the “grantor retained annuity trust,” or “GRAT.” It allows individuals to avoid the estate tax, which currently takes 40% of fortunes transferred to heirs both before and after death. The estate tax only exists for those with wealth accumulated above $5.25 million.
The GRAT works by allowing corporation owners to put shares of their business into trusts, which rise in value over the span of a certain number of years. When the trust expires, the original amount is repaid to the owner and the excess is given to heirs. If the trust does not gain in value, the only associated cost is legal fees, creating a seemingly foolproof method of gifting money to heirs without losing any of it to the government.
As long as taxes exist, there will be people attempting to find loopholes in the code. The trouble occurs, however, when a nation’s wealthiest individuals are the only ones with the time and money to find and exploit these loopholes, and the lawmakers creating the tax code are funded by those wealthy individuals. As the wealthy get wealthier, money that could be spent on government programs that benefit the poor gets reshuffled back into the hands of the nation’s most elite. The estate tax was created to prevent an aristocracy from occurring in the United States, but the GRAT makes that attempt unsuccessful.
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Even those that readily exploit tax code loopholes understand that their actions are detrimental to the system that has been put in place. Covey himself mentioned he was cognizant of this phenomenon.
“You can certainly say we can’t let this keep going if we’re going to have a sound system,” Covey said to Bloomberg, claiming that the government has lost more than $100 billion since 2000 as a result of the loophole.
Gawker explains that this loophole has been widely used by several prominent billionaires, claiming that Mark Zuckerberg, Ralph Lauren, Lloyd Bankfein and Sheldon Adelson all have set up GRATs in order to avoid estate taxes.