(Bloomberg Businessweek) -- The elite tax attorneys were supposed to be at a sunny Orlando resort, swapping ideas for outsmarting the Internal Revenue Service. But the omicron surge had canceled January’s 56th annual meeting of the Heckerling Institute on Estate Planning, put on by the University of Miami Law School. So instead more than 1,000 advisers to America’s wealthiest families were stuck on Zoom, many up north in unusually cold late-March weather.
Just as the conference opened, Democrats were once again trying to get the superwealthy to pay what President Joe Biden frequently calls their “fair share.” The U.S. Department of the Treasury’s latest salvo was a 120-page packet of proposals that would raise $2.5 trillion in all. A levy dubbed the Billionaire Minimum Income Tax grabbed the headlines, but the estate lawyers soon looked past that and dived into the finer details of Biden’s plans. They didn’t like what they found.
“We’re going to be facing another season of worry with our clients,” Carlyn McCaffrey, a partner at McDermott Will & Emery in New York, said on the first day of the conference on March 28, just as the Treasury Department’s “Greenbook” of revenue proposals was posted online. “I’m not much looking forward to that, but it’s a path we’ve been down before, and I guess we’re not done yet.”
For advisers such as McCaffrey, last year was a scramble to get ahead of similar proposals by Biden and congressional Democrats. Anxious clients were told to open trusts and make other moves to transfer fortunes to heirs before legislation passed and loopholes closed. The rush proved unnecessary when West Virginia Senator Joe Manchin, Democrats’ crucial 50th vote in the chamber, effectively killed Biden’s “Build Back Better” package in December.
Many of the tax luminaries at Heckerling expect the same thing to happen with the Greenbook ideas. By the end of the conference, Ellen Harrison, a veteran attorney in McDermott’s Washington office, had concluded that “the prospects for enactment are reported by my contacts to be not very great.” The so-called billionaire levy—a 20% minimum income tax on households worth at least $100 million that would include unrealized capital gains—was immediately knocked by Manchin.
Still, the advisers at Heckerling couldn’t afford to be complacent. Although the Greenbook ideas may not pass in this Congress or the next, advisers who defend dynastic fortunes are paid to think in decades. They’re up against the U.S.’s century-old estate and gift tax, a 40% levy on the intergenerational transfer of the largest fortunes, currently hitting married couples with assets of more than $24 million.
But the richest Americans, with the help of the right advisers, can avoid billions of dollars in estate taxes, along with other levies such as income taxes on capital gains and state-level taxes. That’s one reason estate tax revenue has plunged to an imperceptible share of the federal budget. Year after year, Heckerling attendees learn how to do their part. Many of the conference’s speakers take an almost artistic pride in drafting elegant and elaborate estate-planning documents. “Drafting is like glass blowing: a beautiful art when done right but can lead to the plan completely shattering if there’s a flaw,” Austin Bramwell, a partner at Milbank in New York, told the conference.
Heckerling is all about following the law, not violating it. But rich taxpayers can save much more money by exploiting the rules’ many gray areas—if, that is, they and their attorneys can tolerate the risks of triggering an audit and a legal challenge.
On one end of the spectrum is famed New York City tax lawyer Jonathan Blattmachr, legendary at Heckerling for his creative and innovative tax-saving strategies. At this year’s conference he talked about combining a charitable trust with a limited liability company, or LLC, to defer taxes on the inheritance of a retirement account. That gets around a new federal law that requires the pretax money to be distributed to heirs—and thus taxed—within 10 years.
Some of Blattmachr’s other, bolder tax-avoidance ideas got pushback from McCaffrey and Harrison, who didn’t think they’d work. But the consensus on which moves are safe can shift from year to year at Heckerling, as the IRS and, more important, the courts weigh in.
For superwealthy Americans who want an aggressive estate plan, the good news is that the IRS has been starved of funding for decades. Audit rates have plunged, and the agency struggles to hire lawyers with the sophistication to go up against the well-paid pros at Heckerling. At one session titled “A View From the Trenches,” listeners learned how to defend against an audit. One suggestion: When you set up a strategy, write long memos to your clients documenting all the nontax—and thus arguably more legitimate—reasons for the plan’s complexity.
Avoiding taxes isn’t the only way Heckerling attendees can help the people they work for. Some clients want to set up family foundations for charitable giving. Others want to keep a business in the family, protect their assets from creditors, or make sure heirs and their spouses don’t blow the fortune on frivolous spending.
The primary topic at Heckerling, though, is helping wealthy heirs inherit and enjoy their windfalls without a large tax bill. Luckily for those heirs, that doesn’t necessarily require much creativity. Planners have tried-and-true tools, especially the grantor trust and its cousin—the grantor-retained annuity trust, or GRAT—that can move billions of dollars to heirs tax-free. Dynasty trusts can protect a family’s assets from taxes for not just one generation but indefinitely.
These strategies were dreamed up and debated in past decades at Heckerling, named after the University of Miami professor Philip Heckerling, who founded the conference in 1967. By now they’re clearly legal: GRATs went mainstream after heirs to Walmart Inc. founder Sam Walton—the world’s wealthiest family—won a case against the IRS in 2000. Dynasty trusts got popular after Blattmachr and others encouraged several states, aiming to attract the wealth management industry, to change their trust laws. Congress unintentionally opened the door to grantor trusts—“the cat’s meow from an estate planner’s perspective,” according to Blattmachr—when it was closing another loophole.
Now the Biden administration is trying again to tighten the rules. Last year’s proposals were “very draconian,” McCaffrey said. Most of the new provisions in the Greenbook are more subtle. Dynasty trusts wouldn’t be allowed to avoid estate-and-gift taxes for more than a couple of generations. Grantor trusts and GRATs would face stricter rules.
As inequality has surged in the U.S., Democrats have wavered between two different approaches to limiting the growth of large multigenerational fortunes. The first is to come up with new taxes, like a direct tax on wealth, which Biden rejected as a candidate, or a tax on the growth in wealth, such as the minimum tax on unrealized gains. The other approach, evident in the Greenbook’s plan for GRATs and the other trusts, is to change rules so it isn’t so easy for the superwealthy to avoid existing taxes.
Heckerling’s planners have already started to imagine what they might do if that happened. The first two days’ sessions began with Paul Lee, chief tax strategist at Northern Trust Corp., speaking for a total of three hours on partnership tax rules and the possibility that a carefully constructed partnership could transmit wealth in the same tax-free way that a grantor trust can now.
No matter what happens to tax laws, the Heckerling conference should thrive. The demand for sophisticated tax advice has soared along with the wealth of the top 0.1%. In the event that the wealthy face strict new rules and higher tax bills, their advisers can always return to Heckerling to commiserate and strategize. Next year they might even be able to reunite in person.
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