Devising Strategies
Congress enacted the estate tax in 1916 to apply to large fortunes at death. Eight years later, it added the related gift tax to cover transfers made before death. Both rates are currently 40 percent, and the first $5.25 million of an individual’s wealth is exempt; the amount is $10.50 million for couples.
For as long as such levies have been on the books, lawyers have been devising strategies to get around them.
Congress created the GRAT while trying to stop another tax-avoidance scheme that Covey developed. In 1984, Covey, a lawyer at Carter Ledyard & Milburn LLP in New York, publicized an estate-tax shelter he’d invented called a grantor retained income trust, or GRIT.
Covey figured out how to make a large gift appear to be small. He would have a father, for example, put investments into a trust for his children, with instructions that the trust should pay any income back to the father. The value of that potential income would be subtracted from the father’s gift-tax bill.