Note: these are my show notes – a general outline of the episode. If you want all of the information, you MUST listen to the episode.

“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

– Learned Hand

Before we get started, some ground rules.

First, this is not a political show.

Second, this is not a show about whether or not Trump is a good person.

Third, what we’re here to do today is look at the ways that Trump avoided estate taxes. We’re doing this for three reasons:

1. so you can learn a little about how estate taxes work;

2. so you can see the value in using a good estate planning attorney; and

3. I think it’s interesting, and this is my show.

Fourth, before we get into all of it I do want to point out one key factor that made a lot of this possible for the Trumps – they are business owners. This afforded them the flexibility to do some of the things they wanted to do.

Fifth, here we go! This information comes from a New York Times article published earlier this week (October 2018). I thought it would be fun to break down exactly what they were talking about for you…

To begin, let’s start at the end.

Fred and Mary Trump’s estate valued at 1 billion. With 55% tax rate should have paid 550MM. But they ended up paying $52.2MM, or about 5% (one-tenth of the max they could pay).

Method 1 – transfer of wealth via salary (income tax going to be significantly lower than 55%). Donald was Fred’s employee, property manager, landlord, banker, and consultant…

Method 2 – create companies in kids’ names – dad runs them (build the assets from the beginning with kids involved) – this is where All County Building Supply & Maintenance issue comes up.

Important note with first two methods – this takes PLANNING. You have to think about this and work on it – it doesn’t just happen. If you can find some way to get interested in this, to make it a game, to make it fun, you’ll make a lot more progress, and pass down a lot more wealth.

I was going to say save more on taxes – but it’s not really about that…

Method 3 – “loans” that were never repaid and never pursued by Fred and Mary

Method 4 – GRATs = Grantor Retained Annuity Trust. Okay, we’re about to get in the weeds on this one…

First, it’s an irrevocable trust. Once created and funded, there is no going back.

Second, the goal is to shift wealth to the next generation with ZERO estate or gift tax ramifications.

Third, here’s how it works:

– the creator of the trust moves a specific asset into the trust and gets back an annual payment for a certain number of years (plus interest). When the term of the annuity payments end, what is left in the trust is out of the creator of the trust’s estate and passes on without estate or gift tax.

– the amount of the annuity payment interest is based on a rate created by the IRS (or can be zeroed out).

– once out all growth is estate tax free.

Method 5 – yearly gift allowance ($15K/year per person – $30K/year if married)

Method 6 – gifting shares of businesses to create fractional interests, thereby reducing the value of the asset.

Method 7 – other trust planning (ground trusts – buy land, move into trust with kids as beneficiaries, and then lease the ground to Trump companies for $$$$$ – all going to the kids).

Method 8 – created “family mortgages” with higher interest rates that were purchased by trusts and partnerships Fred set up and seeded with money

Method 9 – “buying” interests in kids’ businesses for huge money and then “selling” back shares at low valuations (or exchanging old debts for shares and doing the same thing)…

THE KEY – most of these didn’t amount to huge shifts in interest. But each of these methods was employed again and again and again, adding up to huge shifts in interest.

THE STICKING POINT – property valuations…

If you want to learn more about this, give me a call.

Cheers.

Christopher Small

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