Paul L. Caron

Monday, February 22, 2021

Hemel & Lord: Jeffrey Epstein’s Billionaire Tax Avoidance Assistance Business

Following up on my previous post, NY Times: College Dropout Jeffrey Epstein Earned Hundreds Of Millions As His Cut Of Billions Of Taxes Saved By Clients Using His Strategies — Typically GRATs:  Daniel Hemel (Chicago; Google Scholar) & Bob Lord (Institute for Policy Studies), Beyond Lucrative: Jeffrey Epstein’s Billionaire Tax Avoidance Assistance Business:

The sex-trafficking scandal surrounding the late Jeffrey Epstein already has tarnished the reputations of prominent politicians, businessmen, and the British royal family. Now it’s casting a dark shadow on an estate tax-avoidance strategy popular among Wall Street CEOs and tech entrepreneurs.

The strategy exploits a loophole that Congress unintentionally left open when it passed provisions related to grantor retained annuity trusts, or GRATs, in 1990. Use of these trusts already has cost the IRS—by one estimate—well over $100 billion in just the last two decades. A recent filing with the Securities and Exchange Commission by the private equity firm Apollo Global Management reveals that the firm’s longtime CEO, Leon Black, relied on Epstein’s assistance to extract more than $500 million of tax savings from GRATs.

GRATs—which combine a trust and an annuity to generate supercharged tax benefits—are entirely legal. But they make no sense from a policy perspective, and they only work because Congress in 1990 enacted a valuation formula that defies economic reality. While GRATs aren’t responsible for Epstein’s predation, the appearance of GRATs in the most recent Epstein revelations is one more reminder that Congress and the Biden administration should scrap this tax shelter.

According to the report of an outside law firm hired by Apollo, Epstein advised Black on a range of matters between 2012 and 2017, generating $158 million in fees. The “most valuable piece of work Epstein provided Black,” according to the report, concerned a GRAT that Black had set up several years earlier.

Epstein wasn’t the only financial advisor helping high-net-worth individuals set up GRATs, and Black isn’t the only one to take advantage. The strategy surged in popularity after a 2000 decision by the U.S. Tax Court rejected an IRS challenge to the Walton family’s aggressive use of GRATs. Following the Waltons’ lead, thousands of others—including Facebook founder Mark Zuckerberg and JPMorgan Chase CEO Jamie Dimon—have used GRATs to cut their gift tax and eventual estate tax liabilities.

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