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Outside the Box: Billionaires and the 1% are using ‘dynasty trusts’ to avoid estate and gift taxes — forever. Congress needs to stop them.

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The fate of President Joe Biden’s Build Back Better plan to help working American families afford the necessities of life and combat the climate crisis — all paid for with fairer taxes on the rich and corporations — remains uncertain. 

But even in the plan’s original, most robust form, proposed tax hikes failed to confront a serious threat to America’s economy and society: trusts that multiply the fortunes of mega-rich families tax-free — forever. Congress still has a chance to correct this omission. 

The rich have always passed their money down to heirs, but a “dynasty trust” is a relatively new and highly troubling mechanism. This trust ensures huge family fortunes grow faster over generations by avoiding estate and related taxes meant to guard against economic oligarchy. Exploiting estate- and gift-tax loopholes, America’s billionaires and other super-rich are poised to transfer, largely tax-free, an estimated $21 trillion of wealth to their descendants over the next 25 years.

The rest of us will lose out on trillions of dollars (our rough estimate is $8 trillion) in revenue that otherwise would be collected if the U.S. system of taxing the intergenerational transfer of great wealth worked as originally intended. Those trillions will be unavailable for schools, housing, healthcare, childcare and fighting the climate crisis that threatens us all, rich and poor. 

Ultrarich families first gained iconic status during the 19th century’s Gilded Age. The Rockefellers, DuPonts, Mellons and other wealthy clans founded by early industrialists are still with us. Those original dynasties benefited early on from the absence of federal income and estate taxes, allowing their wealth to at first accumulate unimpeded and then flow unchecked to the first generations that followed. 

That buildup of dynastic wealth was curbed a bit in the middle of the 20th century by robust taxation of high incomes and large estates. But over the past 40 years, and especially recently, trends have combined to supercharge the creation and almost unlimited growth of family dynasties. The top five dynastic families saw their inflation-adjusted wealth increase 34-fold between 1983 and 2020, to $528 billion from $15.5 billion.

But these old-line family dynasties pale in comparison to the new breed of uber-wealthy. The five richest billionaires in the U.S. at the end of 2021 — including Tesla’s Elon Musk and Amazon.com’s Jeff Bezos — were worth a combined $845 billion, according to Forbes. 

Each of the five was worth more than $100 billion, an unimaginable accumulation of wealth aided by lower taxes on both the rich and corporations. With such seed money, the family fortunes of these centi-billionaires are making the old-money dynasties look quaint. Unless the U.S. rehabilitates its hobbled estate-tax system soon, some family fortunes could pass the trillion-dollar mark within a generation.

“ States  —  most notably South Dakota  —  have loosened their laws to allow wealth-protecting trusts to go on forever.”

Tax reform will face resistance, since an entire industry now shields these dynasties from estate and gift taxes. Accountants and tax lawyers have developed exotically named vehicles such as the Intentionally Defective Grantor Trust to avoid federal taxes on the intergenerational transfer of great wealth, sometimes in perpetuity. States — most notably South Dakota — have loosened their laws to allow wealth-protecting trusts to go on forever, rather than requiring them to close up shop after a few generations as was true in the past. 

The results are disturbing. Bloomberg, with our assistance, recently showed how Nike founder Phil Knight (worth $61 billion in December 2021) used loopholes to transfer, tax-free, more than $6 billion of Nike shares to a trust for his descendants.  

The techniques used to build these fortresses of wealth are complicated, but the ways of breaching them are not. Congress must change the rules so that wealthy creators of trusts can no longer easily manipulate their money and the law to dodge taxes. That means ending the rampant lowballing of assets; the fiction of multiple parties controlling the same fortune, switching who’s in charge depending on what avoids the most taxes, and other accounting sleights of hand. 

More than a century ago, President Theodore Roosevelt warned of the pernicious effects of accumulating family fortunes and proposed the estate tax as a solution. Now we must confront the same problem, grown many times worse than anything Roosevelt imagined. The otherwise worthy tax reforms in the original Build Back Better legislation failed to address the issue. Congress must ensure that the version of the Build Back Better law which finally passes takes this challenge head on. 

Bob Lord is senior advisor, tax policy at Tax Policy at the Patriotic Millionaires. Frank Clemente is executive director of Americans for Tax Fairness.

Also read: ‘Democrats love proposing taxes on the wealthy’: Can Biden turn his ‘billionaire minimum income tax’ into law? Don’t count on it, analysts say

Plus: Here’s the charitable-giving strategy that helps the 1% cut their tax bills

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