Mnuchin May Have Used Tax Loophole Obama Attacked

  • Steven Mnuchin’s dynasty trust has at least $32.9 million
  • Such trusts are typically used to avoid estate tax bills

Mnuchin Holds More than $50M in CIT Group: Disclosure

Steven Mnuchin, Donald Trump’s nominee to lead the U.S. Treasury Department, may be taking advantage of a loophole that allows the nation’s richest families to shield their wealth from estate taxes for generations into the future.

Mnuchin placed assets worth at least $32.9 million into the Steven Mnuchin Dynasty Trust I, according to a disclosure to federal ethics officials made public Wednesday, as well as securities filings by a company where he used to work. The assets include corporate stock and interests in a Willem de Kooning painting and a three-engine corporate jet.

Dynasty trusts are designed to foil the estate tax, which in its current form takes a 40 percent bite of a person’s fortune at death. Because the first $5.5 million of wealth is exempt from the tax, and there are ample opportunities to avoid it, in 2013 only one in 555 estates paid anything at all.

Structured properly, dynasty trusts comply with the law and are common among the wealthiest Americans, tax professionals say. Tara Bradshaw, a spokeswoman for Mnuchin, declined to comment.

Later Generations

Even among people wealthy enough to feel the estate tax’s sting, only an elite few have need of dynasty trusts. They’re typically designed to convey wealth not to one’s children and grandchildren, but to later generations, according to Jerome Hesch, a tax lawyer in Miami and the director of the Notre Dame Tax & Estate Planning Institute.

Such trusts aren’t much use to “most people who are middle class -- and I define middle class to be under $20 million,” Hesch said. “Twenty million, when you dissipate it among your children and grandchildren, it’s probably already going to be consumed.”

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Mnuchin’s net worth is about $620 million, after a trading career at Goldman Sachs Group Inc. and profitable investments in Hollywood movies and a California bank, according to the Bloomberg Billionaires Index. The 54-year-old is twice divorced and has three children from his second marriage, the oldest of whom is 14.

President Barack Obama’s administration has repeatedly called on Congress to close the loophole allowing dynasty trusts, made possible when some states overturned centuries-old trust law to enable federal tax avoidance. Trump, who succeeds Obama on Jan. 20, has called for the elimination of the estate tax altogether, making tax planning like Mnuchin’s obsolete. As Treasury secretary, Mnuchin would be in charge of the administration’s tax policy.

‘Death Tax’

The modern estate tax was first put in place a century ago, amid fears that the vast fortunes amassed during the Gilded Age might spawn a permanent plutocracy. Even though few now pay it, the tax is unpopular with Americans and Republicans have labeled it the “death tax.

Contributions to a dynasty trust are theoretically limited in size to the amount of a person’s estate-tax exemption, now $5.5 million. Judging from the size of Mnuchin’s trust, he’s likely to have used a combination of other legal tax-planning techniques to slip more assets into his dynasty trust without triggering a tax, according to Hesch and Edward McCaffery, a University of Southern California law professor.

One of the most common techniques is an installment sale to an intentionally defective grantor trust, sometimes known as an “I dig it” trust, McCaffery said. The transaction amounts to giving the trust “the mother of all sweetheart deals” to guarantee that its assets will grow quickly, he said.

The Obama administration has also called for tax-law changes to close the “I dig it” loophole. Mnuchin’s disclosure doesn’t say whether the dynasty trust used such an arrangement or any other technique to boost its growth.

Legal Mismatch

Dynasty trusts owe their existence to a mismatch between federal and state law. The federal estate-tax system had its last major revision in 1986, at a time when most states, drawing on English common law, limited the term of trusts to the lifetime of a living heir, plus 21 years. Congress worked out a system that policed transfers to children and grandchildren, and didn’t contemplate the possibility of a trust lasting 100 years or more.

Later, a few states saw an opportunity to attract wealthy out-of-state clients: scrap rules governing trust terms. Now, a half-dozen states including South Dakota, Delaware and Alaska vie to offer dynasty trust services and tout trusts that can last forever.

The Obama Treasury Department last February, in its proposed budget, recommended a law change that would cap such trusts at 90 years.

Dynasty trusts aren’t used exclusively for avoiding estate taxes, according to McCaffery. They might help protect a family’s assets against lawsuits or divorces, or help prevent heirs from getting huge sums before they’re mature enough to manage them. But, he added, “I’ve never seen one that didn’t have a major tax dimension.”

Charles T. Dowling, a lawyer at Sullivan & Cromwell LLP in New York, is the trustee of Mnuchin’s dynasty trust, according to securities filings by CIT Group Inc., which employed Mnuchin as a vice chairman until last year. Dowling didn’t respond to requests for comment.

A CIT securities filing last year shows that Mnuchin’s dynasty trust owned CIT stock worth $22.8 million, based on Wednesday’s closing price. The ethics filing shows 22 other assets held by the trust, including nine whose value is stated as more than $1 million.

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