Romney Tax Returns Show Strategy for Moving Money to Kids

Republican presidential candidate
Mitt Romney and his wife, Ann, have used sophisticated estate-
planning techniques for more than a decade to minimize taxes and
amass at least $100 million for their family outside of their
estate.

The couple created trusts as early as 1995, when Romney was
building wealth as chief executive officer of Bain Capital LLC.
They packed one for their children with investments that stood
to appreciate and set up another for charity that provides a tax
deduction and income. The candidate?s retirement account, valued
at as much as $87.4 million, also may benefit his heirs for
decades.

?It?s beneficial for your kids and grandkids to push the
money downstream,? said David Scott Sloan, chairman of the
national private wealth services estate-planning practice at the
law firm Holland Knight LLP in Boston. ?The Romneys appear to
be doing things that are similar to what other high-net-worth
families do.?

Wealthy couples use strategies allowed under the federal
tax system such as moving assets to trusts so that the money may
be subject to little or no gift and estate taxes, Sloan said.
The Romney family trust is worth $100 million, according to the
campaign. That money isn?t included in the couple?s personal
fortune, which the campaign estimates at as much as $250
million.

Estate Tax

The Romneys would pay higher taxes under the estate-tax
proposals of President Barack Obama and would pay less under
Romney?s plan. Obama has proposed increasing the estate tax from
current levels and curtailing wealth-transfer strategies. The
Republican presidential candidate wants to eliminate the estate
tax, which currently applies a top rate of 35 percent and a
$10.24 million exemption on a married couple?s combined assets.

A repeal of the levy may save the Romneys about $70 million
in federal estate taxes after they both die, assuming the
couple?s combined taxable estate was $200 million after
deductions for items such as administrative expenses and
charitable contributions. Compared with today?s rates, Obama?s
proposal may cost the Romneys an additional $20 million.

At the core of the Romneys? estate-planning strategy is a
family trust. The technique pushes money out of their taxable
estate and lets the couple pay the annual taxes on their
family?s investment income.

Future Generations

The Romneys frequently spend time with their five adult
sons and their families; the candidate and his wife have 18
grandchildren. The couple established the family trust in
November 1995 for their children and other heirs, according to
the entity?s 2010 tax return, which was made public by the
candidate. Romney released an estimated 2011 income-tax return
and he has said he will release the final documents when they
are completed.

?Their family trusts are set up to provide for future
generations,? Andrea Saul, a spokeswoman for the Romney
campaign, said in a statement.

Brad Malt, a partner at the law firm Ropes Gray LLP in
Boston, manages Romney?s investments and is the trustee of the
family trust. He declined to comment on the family?s estate
planning.

The Romneys have transferred assets into the family trust
and invested them, amassing a substantial and diversified
portfolio of stocks, bonds and alternative investments such as
private-equity and hedge funds that generate income. In 2010
alone, the trust realized more than $7 million in long-term
capital gains, about $1.5 million in ordinary dividends and
$741,407 in U.S. government interest, according to the trust?s
tax return.

Gains or Losses

The family trust realized gains or losses from more than
100 securities including those in JPMorgan Chase Co. (JPM), Bank of
America Corp. (BAC), Nike Inc. (NKE) and PepsiCo Inc. (PEP) in 2010. It also
reported investments in Goldman Sachs Group Inc. (GS) hedge funds as
well as interests in hedge funds and private-equity funds
managed by Bain Capital, including Sankaty Advisors LLC and an
affiliate based in Munsbach, Luxembourg. Because the candidate
doesn?t own the trust, he isn?t required to detail its holdings
on federal disclosure forms.

Romney co-founded Bain Capital in 1984. When he retired, he
entered into an agreement with the Boston-based private equity
firm to retain the right to make passive investments in certain
Bain Capital entities until 2009, according to financial
disclosures filed by his campaign.

Lifetime Limit

The Romneys could have contributed as much as $1.2 million,
or $600,000 each, into the family trust in 1995 and invested it
in securities or funds they expected to appreciate. They
wouldn?t have paid transfer taxes because that was the lifetime
limit on tax-free gifts at the time. Even if they contributed
more money over time as Congress lifted the gift-tax exemption
to the current $10.24 million for a couple, the amount they
invested in securities and other assets would have grown at
least 10 times to reach $100 million.

Bain Capital has seen its assets under management rise more
than 16 times to $65 billion from $4 billion in 1999 when Romney
left to run the Winter Olympics in Salt Lake City. Private-
equity funds pool money from so-called limited partners such as
pensions, endowments and wealthy families and use that money,
usually paired with debt, to buy companies they later sell. The
profits are split between the limited partners, who get 80
percent, and the fund?s managers, who receive the remaining 20
percent. That portion, known as the carried interest, is
considered a capital gain under current tax law.

Romney?s Wealth

Romney?s estimated $250 million in wealth is less than some
of his peers who founded private-equity firms at about the same
time. Stephen Schwarzman, who created New York-based Blackstone
Group LP (BX) in 1985 with Peter G. Peterson, earned $398.3 million
in 2006 ? the year before the firm sold shares to the public ?
and held 232 million shares of the firm at the end of 2011 worth
an estimated $3.14 billion as of Aug. 23. The three founders of
Washington-based Carlyle Group LP (CG) each have stakes of about $1.2
billion. The trio earned $134 million each in distributions last
year, according to government filings.

Wealthy investors typically will put their interests in
hedge funds or private equity in a trust, or use that entity to
invest in such deals directly, said Bobbi Bierhals, an estate-
planning partner at the law firm of McDermott Will Emery LLP
in Chicago. They usually do it when the fund has a low value
because it hasn?t made investments or they haven?t prospered.
That way, any future appreciation they anticipate would belong
to the trust and be free of estate taxes or additional gift
taxes.

?Freeze the Value?

Families of such wealth usually consider whether to invest
with their personal money or through entities such as a trust or
retirement account depending on how big a ?home run? they
think the venture may be and its time frame, Bierhals said.

?You want to freeze the value,? she said. ?Put it into a
pot where when you get that pop from a sale or IPO, all that
additional value goes to the kids.?

In some cases, the Internal Revenue Service has challenged
valuations of non-publicly traded property transferred to
trusts, which can result in significant penalties and back
taxes, Bierhals said. Obama?s most recent budget plan included a
proposal to require consistency in valuations and restrict
discounts taken when taxpayers make gifts.

?They Are Private?

It isn?t possible to determine from tax documents released
by Romney?s campaign the terms of the family trust, assets
gifted to it and their initial value, said Jonathan Mintz, chief
operating officer at WealthCounsel LLC, a group supporting
estate and business planning attorneys.

?That?s one of the real benefits of certain types of
trusts and why families use them,? Mintz said. ?They are
private.?

Trusts generally serve people with at least $15 million in
assets because of the costs involved in setting them up,
Bierhals of McDermott Will Emery said. Other political
families have set up trusts to benefit future generations,
including the Kennedys, according to financial disclosures.

The Romneys structured their family trust as a so-called
grantor trust so they pay the tax bill on income generated
inside the entity. That?s a strategy wealthy families often use,
said Sloan of Holland Knight. The assets inside the trust
aren?t depleted by money paid to the government and have more
potential to grow outside of the estate.

The payments aren?t considered an additional wealth
transfer for gift-tax purposes, and because the Romneys have
paid the levies over the years, current distributions to the
children aren?t subject to income tax, he said.

Obama?s Proposal

Transactions like the one used by the Romneys have drawn
scrutiny in Obama?s proposals to raise revenue. The president?s
2013 budget plan would reduce many of the benefits of such
trusts by coordinating income and transfer tax rules including
how taxes are paid and when gift-and-estate levies apply. That?s
because current law ?can result in the transfer of significant
wealth by the deemed owner without transfer-tax consequences,?
according to the Treasury Department?s explanation of the
proposals.

Romney?s individual retirement account, which he said in a
financial statement filed in June is worth between $18.1 million
and $87.4 million, may be used to benefit his children, said
John Olivieri, a partner in the private clients group at the law
firm White Case LLP in New York.

?So Valuable?

?IRAs make great estate planning tools because heirs can
stretch out the required distributions over their life
expectancies,? Olivieri said. ?This is so valuable, in fact,
that there was a proposal to stop it.?

When beneficiaries inherit an IRA, they are required to
take distributions based on IRS tables that use life
expectancies. The younger the beneficiary, the less they have to
withdraw each year from the account. That can benefit children
or grandchildren because assets in the IRA can continue to grow
tax-deferred, said William Schmidt, a partner at the law firm
Schmidt Federico, P.C. in Boston specializing in estate
planning.

Romney, 65, must take distributions from his IRA after he
turns age 70? and pay ordinary income tax rates on that money he
withdraws, Schmidt said. The account also is subject to estate
taxes, which means it?s not as tax-efficient of a wealth-
transfer tool unless donated to charity, he said.

Senate Finance Committee Chairman Max Baucus, a Montana
Democrat, proposed in February to require younger beneficiaries
who inherit IRAs to pay taxes over five years instead of
spreading them over their lifetime, which would raise an
estimated $4.6 billion for the Treasury over the next decade.
The plan didn?t advance.

Other Romney Trusts

The Romneys also set up a charitable remainder unitrust in
1996, according to state financial disclosure documents. The
trust, also known as a CRUT, moves money out of an estate by
donating it to charity and has two additional benefits for the
creator, said John O. McManus, principal at the law firm McManus
Associates in New Providence, New Jersey, and New York.

The maker of the trust receives some tax deduction for the
value that is expected to go to charity and receives payments
from the trust for a set period before the assets transfer,
McManus said.

?The Romneys have been extraordinarily generous in their
charitable giving,? Saul, the spokeswoman, said. ?They set up
a charitable trust to make a gift to charity.?

The Romneys made $7 million in charitable contributions in
2010 and 2011 combined. The couple gave $1.5 million cash in
2010 and $2.6 million cash in 2011 to the Church of Jesus Christ
of Latter-day Saints, tax documents show.

Families who consistently pass money on through a variety
of legal estate-planning vehicles like the Romneys can minimize
taxes for their estate and future generations, Bierhals said.

?You want to combine all of those strategies to get the
most runs,? Bierhals said. ?A lot of estate planning is small
ball. It?s singles and doubles and every once and a while you
hit a home run.?

To contact the reporter on this story:
Margaret Collins in New York at
mcollins45@bloomberg.net
Richard Rubin in Washington at
Rrubin12@bloomberg.net

To contact the editor responsible for this story:
Jodi Schneider at
Jschneider50@bloomberg.net

Article source: http://www.businessweek.com/news/2012-08-26/romney-tax-returns-show-strategy-for-moving-money-to-kids

Tagged as: refunds, tax

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