Avoiding $8 Billion in Taxes

Take-Away: Nvidia has been in the news a lot these days, receiving lots of attention by the investment community. It’s CEO, Jensen Huang, worth about $127 billion, recently received (probably) some unwanted attention at the same time from some SEC filings.

Background: Mr. Huang is supposedly the 10^th richest person in the U.S. It was recently reported that by using a couple of estate planning steps often exploited by the wealthy, he and his wife have probably avoided roughly $8 billion in future federal transfer taxes. While the strategies that Mr. Huang used are not explicitly authorized in the Tax Code, by navigating the Regulations and relying on a handful of court decisions known to estate planners, the Huangs are guesstimated to have avoided billions in future federal transfer taxes. How?

Private Foundation: In 2007 Mr. Huang and his wife formed a private foundation. Transfers to the foundation provided to them an immediate charitable income tax deduction to offset their taxable income. While a private foundation is required by the Tax Code to distribute 5% of its assets each year to charity, the Huangs got around this requirement by regularly distributing the 5% from their private foundation to a donor advised fund (DAF.) Under current law, a donor advised fund is not required to currently give or grant any money to charitable organizations. When the donor dies, control of the DAF can pass to the DAF donor’s heirs- without incurring any estate or transfer tax.

This is why the ACE Act is currently being studied by Congress. The ACE Act would prevent a private foundation from ‘end-running’ the 5% distribution requirement by disqualifying the foundation’s distribution to a DAF, where the foundation’s distributed funds are otherwise ‘warehoused’ to a much later date before benefiting charities.

IDGTs: In 2012 Mr. Huang and his wife created intentionally defective grantor trusts (IDGTs), which were used to shift the future appreciation of transferred assets out of their estates gift tax-free. It is unclear if the appreciating assets were sold or gifted to the IDGTs, but we know from the grantor trust rules that the sale of the appreciated assets to a IDGT avoids any capital gain recognition by the seller. Then you have the ‘estate burn’ associated with a grantor trust, where the grantor pays the income tax liability associated with the irrevocable IDGT, but the payment of the trust’s income tax liability is not treated as a taxable gift by the grantor.

Many proposals were made during the Biden Administration years to restrict the use of grantor trusts, including a change to treat a sale to an IDGT as a tax-recognition event for the seller, and treating the grantor payment of the grantor’s trust income tax liability as a taxable gift. The proposals never were implemented by Congress, but Congressional committees are still looking at closing what it considers to be grantor-trust-abuses.

GRATs:  In 2026 Mr. and Mrs. Huang set up grantor retained annuity trusts (GRATs). In doing so, they exploited the 2000 Tax Court decision in Wall v. Commissioner, (Walmart stock transferred to GRATs by one of the Walmart heirs) which sanctioned a ‘zeroed-out-GRAT’ where the gift of the remainder interests in the GRAT (by increasing the value of the retained annuity) is valued at $1.00 (meaning no gift tax is incurred when the GRAT is funded.) Consequently, if the GRAT’s assets appreciate faster than the applicable federal rate (AFR) of interest that is used to value the grantor’s retained annuity interest [IRC 2702], at the end of the GRAT’s annuity payment period, the ‘excess’ growth in the GRAT assets pass to the remainder beneficiary of the GRAT gift-tax-free.

The Biden Administration also focused on curbing what it thought were GRAT abuses, by requiring a minimum value of 10% of the transferred assets value assigned to the GRAT remainder interest, imposing a minimum duration of a GRAT’s annuity period, e.g., 10 years, and restricting how the grantor’s retained annuity right was calculated to eliminate some perceived ‘gaming’ with adjusting formulae. As with the IDGTs, these suggested changes were not particularly important to Congress to make them a priority.

Conclusion: The current Tax Bill before Congress would not eliminate or curtail the use of GRATs, IDGTs, or stop transfers by private foundations to donor advised funds. These effective estate planning strategies and techniques could still be used to avoid transfer taxes.  The large applicable exemption amount will continue. Apparently,  some of the perceived estate planning ‘loopholes’ will also continue as the deficit continues to grow.

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