How Jeffrey Epstein made his millions

[Number Six]

Mystery solved: https://www.nytimes.com/2021/01/26/busi ... pollo.html

Tax Shelters known as GRATS were his money machine.

Is there any way to close these tax shelters?

Remember how the Paytriots were pushing "Pure" trusts as having no income requirements?

They were arrested for that among other things: https://www.justice.gov/archive/tax/usa ... 02067.html
https://www.quatloos.com/taxscams/contrusts.htm

[Cpt Banjo]

A GRAT is a legitimate, well-known technique for transferring wealth at no or low transfer tax cost. They are used to avoid estate and gift taxes, not income taxes.

The idea is this: property is put into an irrevocable trust for a fixed term during which the person creating the trust (the "settlor") receives an annuity of a certain amount. At the end of the trust term whatever remains in the trust passes to other beneficiaries, usually members of the settlor's family. The term of the trust and the annuity amount are chosen such that the value of the interest passing to the ultimate beneficiaries (determined at the time the trust is set up and using IRS annuity tables and federally-determined interest rates) is zero or as close to zero as possible. A zeroed-out GRAT triggers no gift tax cost, and if the settlor outlives the trust term the property isn't subject to estate tax. If he doesn't then all or a portion of the trust assets will be potentially subject to estate tax.

A GRAT will work if (a) the trust's rate of return on its assets exceeds the interest rate that was used in the initial calculation of the value of the interest passing to the ultimate beneficiaries, and (b) the settlor outlives the trust term. Because of the latter factor, many GRATs are short-term trusts, say 1 to 3 years.

There have been proposals in the past to prohibit zeroed-out GRATs by requiring the value of the interest passing to the ultimate beneficiaries be at least either a specified amount or a percentage of the value of the assets contributed to the trust (thereby triggering an up-front gift tax) and to require a minimum trust term of 10 years.

As the article points out, the real abuse in the Epstein story wasn't his use of GRATs but the outrageous fees he was able to collect for doing so.

[jcolvin2]

A GRAT is a legitimate, well-known technique for transferring wealth at no or low transfer tax cost. They are used to avoid estate and gift taxes, not income taxes.

....

As the article points out, the real abuse in the Epstein story wasn't his use of GRATs but the outrageous fees he was able to collect for doing so.

I have seen very aggressive GRAT strategies - some of which the IRS took issue with - employing complicated financial products (private options, derivatives, etc.) as the corpus. The goal was to transfer far more than traditional appreciation on a stock or a business free of the estate and gift taxes. It is possible Epstein designed the financial side of similar GRAT transactions.

[JamesVincent]

If memory serves wasn't Epstein one of the big ones using off-shore accounts in the Caymans and charging people to help structure their finances?

[jcolvin2]

If memory serves wasn't Epstein one of the big ones using off-shore accounts in the Caymans and charging people to help structure their finances?

The following is from a report on a presentation at the 2016 Heckerling Institute by Kirkland & Ellis attorney David Handler

Naked Derivatives and Other Exotic Wealth Transfers
Presenter: David A. Handler
Reporter: Michelle Mieras

This session discussed what Mr. Handler described as “off the grid” and “outside the box” wealth transfer options for clients with assets that do not lend themselves to traditional estate planning techniques.

***

Mr. Handler then turned to another alternative, the private option. In contrast to stock options, which put the initial investment at risk, a private option retains the wealth within the family structures regardless of the “success” of the option - it’s just a matter of who ends up with the wealth at the end of the option period. A significant amount of assets can be transferred in this manner, as funding a GRAT with options amplifies the effect of the GRAT.

Mr. Handler gave an example calculation to show that a private option used in conjunction with a GRAT can accomplish significant wealth transfer, even if the underlying asset appreciation could not beat the hurdle rate. Using the private option essentially permits the client to multiply the benefits of a GRAT due to the reduced value of the option in comparison to the value of the actual asset.

He then posed the question of how the client can avoid the potential downside of a private option (i.e., how does the client guarantee that the other party to the contract will end up with anything, and that wealth won’t be flowing back to the client and potentially negating the effect of prior transfers of assets out of the client’s estate). Alternative solutions were presented for married and unmarried clients. If married, the client could sell a private option to her spouse, and the spouse contributes the asset to a GRAT with a trust for their children as the remainder beneficiary, at little or no gift tax consequences. If the option proceeds can pay the GRAT annuities, the structure has been successful and wealth will ultimately be transferred to the trust for children. If the options are unsuccessful, the GRAT won’t be able to pay out and will collapse. Alternatively, if the client is not married, consider a similar transaction using an incomplete gift trust, buying the option from the trust, and then transferring it to a GRAT.

Mr. Handler reminded the audience that the GRAT alone only transfers appreciation, but coupling a GRAT with these techniques can transfer actual underlying wealth.

***

Mr. Handler reminded the audience that these techniques are not for every client, but are options to consider with aggressive clients for whom traditional techniques do not work.