In January 1999, a trust set up by Mitt Romney for his children and grandchildren reaped a 1,000 percent return on the sale of shares in Internet advertising firm DoubleClick Inc.
If Romney had given the cash directly, he could have owed a gift tax at a rate as high as 55 percent. He avoided gift and estate taxes by using a type of
generation-skipping trust known to tax planners by the nickname: “I Dig It.”
The sale of DoubleClick shares received before the company went public, detailed in previously unreported securities filings reviewed by Bloomberg News, sheds new light on Romney's estate planning -- the art of leaving assets for heirs while avoiding taxes. The Republican presidential candidate used a trust considered one of the most effective techniques for the wealthy to bypass estate and gift taxes. The Obama administration proposed cracking down on the tax benefits in February.
While Romney's tax avoidance is both legal and common among high-net-worth individuals, it has become increasingly awkward for his candidacy since the disclosure of his remarks at a May fundraiser. He said that the nearly one-half of Americans who pay no income taxes are “dependent upon government” and “believe that they are victims.”
Trust's Funds
Romney's effective income tax rate in 2011 was about 14 percent. He has also enhanced his family's wealth by moving assets worth $100 million into a trust while taking steps to avoid paying any gift taxes. The trust's value isn't counted in the $250 million that his campaign cites as Romney's net worth.
The bulk of the trust's income comes from Romney's interests in Bain Capital funds, hedge funds and other investments, according to his 2011 tax return. The return doesn't show how much Romney paid for these holdings, nor the value assigned to them when he gave them to the trust, so it's unclear how much in total the trust has saved in gift and estate taxes.
“People like Mitt Romney make a lot of money, but they pay very little income tax,” said Victor Fleischer, a tax law professor at the University of Colorado who has written extensively about private equity and taxes. “Then by dodging the estate and gift tax, they are able to build dynastic wealth. These DoubleClick documents really show that tax planning in action.”
The Obama administration estimates that closing the loophole Romney used would bring the federal government almost $1 billion in the coming decade.
'Laughable' Estimate
That's a “laughable” under-estimate, said Stephen Breitstone, co-head of the taxation and wealth preservation group at law firm Meltzer, Lippe, Goldstein & Breitstone LLP. A single billionaire could pay $500 million more in estate taxes if these trusts are shut down by the Obama administration, Breitstone said.
Romney or his trust received shares in DoubleClick eight months before the company went public in 1998. The trust sold them less than a year after the IPO. The trust's sale of the DoubleClick stake made it possible to save hundreds of thousands of dollars in estate and gift taxes.
Multimillionaires use such trusts to avoid those taxes in three ways. First, they can assign a low value to assets they donate to the trust. Second, when the trust sells assets at a profit, the donors can pay the relatively low capital gains taxes on behalf of the trust. By doing so, they leave more money in the trust, untouched by the much higher gift tax. Third, by paying those taxes, they can reduce the pile of wealth eventually subject to an estate tax when they die.
Giving Money
High net-worth individuals often use trusts as a legal means of giving money to their children while incurring the least possible taxes. In 2010, about 3 million U.S. trusts and estates reported more than $91 billion in income.
The type of trust used by Romney is so important to the wealthy that ending its tax benefits “would put an end to much of estate planning as we know it,” Breitstone said.
Romney has vowed as president to cut the gift tax rate and repeal the federal estate tax altogether -- calling it the “Death Tax.” In its “Believe in America” jobs plan released last year, the Romney campaign said that this tax “creates a series of perverse incentives that encourages the most complicated and convoluted tax-avoidance schemes at tremendous cost to all involved.”
The Romney campaign did not respond to a list of questions about the tax avoidance transactions.
'Scrupulously Complied'
When it released his 2011 tax returns last week, the Romney campaign said in a statement that the Republican nominee “has scrupulously complied with the U.S. tax code, and his income is reported and taxed at the applicable rates, and he has paid 100 percent of what he has owed.”
Use of these types of trusts has grown as the wealthy employ increasingly sophisticated techniques to avoid both estate and gift taxes on money they transfer to their families.
A longtime target of Republicans, the estate tax currently imposes a 35 percent rate on estates greater than $10.24 million for a married couple. The gift tax -- intended to prevent individuals from avoiding the estate tax by giving away assets before death -- imposes a 35 percent tax on a married couple's transfers above $26,000 in a year or $10.24 million over a lifetime. The top estate and gift tax rates were 55 percent during the 1990s, when Romney's trust was established, and they are scheduled to rise to 55 percent again next year.
Romney Trust
The formal name for Romney's shelter is the Ann and Mitt Romney 1995 Family Trust. Capital gains, interest and dividends from its holdings accounted for about a quarter of Romney's 2011 income of $13.7 million.
Romney set up his trust in 1995 when he was chief executive officer of Bain Capital. At the time, trusts were a common estate planning device at the buyout firm, securities filings show. Other executives establishing trusts that same year included Joshua Bekenstein, one of the original Bain Capital directors, and Robert F. White, one of Romney's closest political advisers, who described himself as the nominee's “wingman” in a speech at the Republican National Convention last month.
Bain Capital directed questions for Bekenstein and White to a spokesman who didn't respond to them.
Digging It
Romney's vehicle is known as an “intentionally defective grantor trust” or by the acronym IDGT -- hence the nickname: “I Dig It.” Such trusts permit donors to give potentially unlimited amounts to children free of estate and gift taxes.
Here's how they work: the person setting up the trust, like Romney, contributes assets such as an interest in a fund or shares in a company. If he makes that contribution before those assets appreciate -- particularly when they are privately held and difficult to value -- he can claim the gift tax obligation is low or non-existent since the declared value is low or zero.
If the trust generates any income -- such as by selling stock -- the eventual tax bill is the responsibility of Romney, not the trust. By paying the capital gains tax, which was 20 percent in the late 1990s and is now 15 percent, he can avoid depleting the funds in the trust -- in essence making an additional donation that's free of gift taxes.
That benefit in particular makes this type of trust “a more powerful driver of wealth transfer in estate planning than almost anything else,” said Breitstone, the wealth preservation attorney.
Wealth Transfer
In 2008, a presentation by an attorney at Boston law firm Ropes & Gray LLP, which represents Bain and Romney, laid out a strategy for avoiding gift taxes by conservatively stating the value of assets put into a trust. The firm's chairman, R. Bradford Malt, is the manager of Romney's family trusts.
In the 2008 presentation at a legal education conference in Boston, a partner at the firm, Marc J. Bloostein, outlined various strategies to minimize the estate and gift tax bills for private-equity executives.
Bloostein, who didn't respond to a request for comment, said it was common during the 1990s for lawyers to advise clients to value their stake in a fund's future profits -- called carried interest in the private equity world -- at zero for gift tax purposes, according to his presentation reviewed by Bloomberg News. This could permit the donors to avoid a gift tax on the contribution, even if that compensation became very valuable. In 2005, proposed regulations from the IRS discouraged the practice.
Big Profit
Romney, Bekenstein, and White all had DoubleClick shares wind up in trusts. In June 1997, DoubleClick announced a $40 million investment by a group including Bain Capital, eventually giving the buyout firm a 17.7 percent stake in the Internet marketing company.
Like at other private-equity firms, Bain managers were permitted to co-invest personally in the firm's deals. Romney's DoubleClick filings with the Securities and Exchange Commission inidcate that he or his trust received some of the company's shares as a co-investor, and others as his stake in Bain's future profits, or carried interest.
Romney did make a big profit for his heirs. Romney, or his trust, received the first batch of DoubleClick shares in June of 1997, when Bain made its initial investment in DoubleClick.
In February of 1998, DoubleClick went public. Its shares nearly quintupled over the next 12 months.
In January 1999, Romney's trust sold $746,000 worth of DoubleClick shares, for a gain of about $674,000, or an almost 1,000 percent return, according to an attachment to an April 30, 1999, filing by Romney with the SEC. The three-page attachment contains the details of trades by dozens of Bain investors that got DoubleClick shares.
No Tax
Because those shares were already in the trust before the sale, no gift or estate tax would be owed on the trust's receipt of that cash. And according to the tax law governing an “I Dig It” trust, Romney, not the trust, would be responsible for paying any capital gains tax triggered by the sale, potentially as high as $140,000. Gains in the trust for Romney's heirs remain free of gift taxes and potential estate taxes.
Romney sold additional DoubleClick shares in at least two other transactions, securities filings show.
DoubleClick was purchased by Google Inc. (GOOG) for $3.2 billion in 2008.
Public exposure of Romney's various tax avoidance tactics may spur legislation cracking down on them, according to Breitstone.
Romney “uses every trick in the book,” Breitstone said. “It's going to be harder to do tax planning in the future. He's bringing attention to things that weren't getting attention.”
--Bloomberg News--
