Mitt Romney tax returns show strategies for moving money to kids

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Republican presidential candidate Mitt Romney and his wife, Ann, have used sophisticated estate- planning techniques for more than a decade to minimize taxes and amass at least $100 million for their family outside of their estate.

The couple created trusts as early as 1995, when Romney was building wealth as chief executive officer of Bain Capital LLC. They packed one for their children with investments that stood to appreciate and set up another for charity that provides a tax deduction and income. The candidate's retirement account, valued at as much as $87.4 million, also may benefit his heirs for decades.

"It's beneficial for your kids and grandkids to push the money downstream," said David Scott Sloan, chairman of the national private wealth services estate-planning practice at the law firm Holland & Knight LLP in Boston. "The Romneys appear to be doing things that are similar to what other high-net-worth families do." Wealthy couples use strategies allowed under the federal tax system such as moving assets to trusts so that the money may be subject to little or no gift and estate taxes, Sloan said. The Romney family trust is worth $100 million, according to the campaign. That money isn't included in the couple's personal fortune, which the campaign estimates at as much as $250 million.

Estate Tax The Romneys would pay higher taxes under the estate-tax proposals of President Barack Obama and would pay less under Romney's plan. Obama has proposed increasing the estate tax from current levels and curtailing wealth-transfer strategies. The Republican presidential candidate wants to eliminate the estate tax, which currently applies a top rate of 35 percent and a $10.24 million exemption on a married couple's combined assets.

A repeal of the levy may save the Romneys about $70 million in federal estate taxes after they both die, assuming the couple's combined taxable estate was $200 million after deductions for items such as administrative expenses and charitable contributions. Compared with today's rates, Obama's proposal may cost the Romneys an additional $20 million.

At the core of the Romneys' estate-planning strategy is a family trust. The technique pushes money out of their taxable estate and lets the couple pay the annual taxes on their family's investment income.

Future Generations The Romneys frequently spend time with their five adult sons and their families; the candidate and his wife have 18 grandchildren. The couple established the family trust in November 1995 for their children and other heirs, according to the entity's 2010 tax return, which was made public by the candidate. Romney released an estimated 2011 income-tax return and he has said he will release the final documents when they are completed.

"Their family trusts are set up to provide for future generations," Andrea Saul, a spokeswoman for the Romney campaign, said in a statement.

Brad Malt, a partner at the law firm Ropes & Gray LLP in Boston, manages Romney's investments and is the trustee of the family trust. He declined to comment on the family's estate planning.

The Romneys have transferred assets into the family trust and invested them, amassing a substantial and diversified portfolio of stocks, bonds and alternative investments such as private-equity and hedge funds that generate income. In 2010 alone, the trust realized more than $7 million in long-term capital gains, about $1.5 million in ordinary dividends and $741,407 in U.S. government interest, according to the trust's tax return.

Gains or Losses The family trust realized gains or losses from more than 100 securities including those in JPMorgan Chase & Co., Bank of America Corp., Nike Inc. and PepsiCo Inc. in 2010. It also reported investments in Goldman Sachs Group Inc. hedge funds as well as interests in hedge funds and private-equity funds managed by Bain Capital, including Sankaty Advisors LLC and an affiliate based in Munsbach, Luxembourg.

Because the candidate doesn't own the trust, he isn't required to detail its holdings on federal disclosure forms.

Romney co-founded Bain Capital in 1984. When he retired, he entered into an agreement with the Boston-based private equity firm to retain the right to make passive investments in certain Bain Capital entities until 2009, according to financial disclosures filed by his campaign.

Lifetime Limit The Romneys could have contributed as much as $1.2 million, or $600,000 each, into the family trust in 1995 and invested it in securities or funds they expected to appreciate. They wouldn't have paid transfer taxes because that was the lifetime limit on tax-free gifts at the time. Even if they contributed more money over time as Congress lifted the gift-tax exemption to the current $10.24 million for a couple, the amount they invested in securities and other assets would have grown at least 10 times to reach $100 million.

Bain Capital has seen its assets under management rise more than 16 times to $65 billion from $4 billion in 1999 when Romney left to run the Winter Olympics in Salt Lake City. Private- equity funds pool money from so-called limited partners such as pensions, endowments and wealthy families and use that money, usually paired with debt, to buy companies they later sell. The profits are split between the limited partners, who get 80 percent, and the fund's managers, who receive the remaining 20 percent. That portion, known as the carried interest, is considered a capital gain under current tax law.

Romney's Wealth Romney's estimated $250 million in wealth is less than some of his peers who founded private-equity firms at about the same time. Stephen Schwarzman, who created New York-based Blackstone Group LP in 1985 with Peter G. Peterson, earned $398.3 million in 2006 -- the year before the firm sold shares to the public -- and held 232 million shares of the firm at the end of 2011 worth an estimated $3.14 billion as of Aug. 23. The three founders of Washington-based Carlyle Group LP each have stakes of about $1.2 billion. The trio earned $134 million each in distributions last year, according to government filings.

Wealthy investors typically will put their interests in hedge funds or private equity in a trust, or use that entity to invest in such deals directly, said Bobbi Bierhals, an estate- planning partner at the law firm of McDermott Will & Emery LLP in Chicago. They usually do it when the fund has a low value because it hasn't made investments or they haven't prospered. That way, any future appreciation they anticipate would belong to the trust and be free of estate taxes or additional gift taxes.

'Freeze the Value' Families of such wealth usually consider whether to invest with their personal money or through entities such as a trust or retirement account depending on how big a "home run" they think the venture may be and its time frame, Bierhals said.

"You want to freeze the value," she said. "Put it into a pot where when you get that pop from a sale or IPO, all that additional value goes to the kids." In some cases, the Internal Revenue Service has challenged valuations of non-publicly traded property transferred to trusts, which can result in significant penalties and back taxes, Bierhals said. Obama's most recent budget plan included a proposal to require consistency in valuations and restrict discounts taken when taxpayers make gifts.

'They Are Private' It isn't possible to determine from tax documents released by Romney's campaign the terms of the family trust, assets gifted to it and their initial value, said Jonathan Mintz, chief operating officer at WealthCounsel LLC, a group supporting estate and business planning attorneys.

"That's one of the real benefits of certain types of trusts and why families use them," Mintz said. "They are private." Trusts generally serve people with at least $15 million in assets because of the costs involved in setting them up, Bierhals of McDermott Will & Emery said.

Other political families have set up trusts to benefit future generations, including the Kennedys, according to financial disclosures.

The Romneys structured their family trust as a so-called grantor trust so they pay the tax bill on income generated inside the entity. That's a strategy wealthy families often use, said Sloan of Holland & Knight. The assets inside the trust aren't depleted by money paid to the government and have more potential to grow outside of the estate.

The payments aren't considered an additional wealth transfer for gift-tax purposes, and because the Romneys have paid the levies over the years, current distributions to the children aren't subject to income tax, he said.

Obama's Proposal Transactions like the one used by the Romneys have drawn scrutiny in Obama's proposals to raise revenue. The president's 2013 budget plan would reduce many of the benefits of such trusts by coordinating income and transfer tax rules including how taxes are paid and when gift-and-estate levies apply. That's because current law "can result in the transfer of significant wealth by the deemed owner without transfer-tax consequences," according to the Treasury Department's explanation of the proposals.

Romney's individual retirement account, which he said in a financial statement filed in June is worth between $18.1 million and $87.4 million, may be used to benefit his children, said John Olivieri, a partner in the private clients group at the law firm White & Case LLP in New York.

'So Valuable' "IRAs make great estate planning tools because heirs can stretch out the required distributions over their life expectancies," Olivieri said. "This is so valuable, in fact, that there was a proposal to stop it." When beneficiaries inherit an IRA, they are required to take distributions based on IRS tables that use life expectancies. The younger the beneficiary, the less they have to withdraw each year from the account. That can benefit children or grandchildren because assets in the IRA can continue to grow tax-deferred, said William Schmidt, a partner at the law firm Schmidt & Federico, P.C. in Boston specializing in estate planning.

Romney, 65, must take distributions from his IRA after he turns age 70½ and pay ordinary income tax rates on that money he withdraws, Schmidt said. The account also is subject to estate taxes, which means it's not as tax-efficient of a wealth- transfer tool unless donated to charity, he said.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, proposed in February to require younger beneficiaries who inherit IRAs to pay taxes over five years instead of spreading them over their lifetime, which would raise an estimated $4.6 billion for the Treasury over the next decade. The plan didn't advance.

Other Romney Trusts The Romneys also set up a charitable remainder unitrust in 1996, according to state financial disclosure documents. The trust, also known as a CRUT, moves money out of an estate by donating it to charity and has two additional benefits for the creator, said John O. McManus, principal at the law firm McManus & Associates in New Providence, New Jersey, and New York.

The maker of the trust receives some tax deduction for the value that is expected to go to charity and receives payments from the trust for a set period before the assets transfer, McManus said.

"The Romneys have been extraordinarily generous in their charitable giving," Saul, the spokeswoman, said. "They set up a charitable trust to make a gift to charity." The Romneys made $7 million in charitable contributions in 2010 and 2011 combined. The couple gave $1.5 million cash in 2010 and $2.6 million cash in 2011 to the Church of Jesus Christ of Latter-day Saints, tax documents show.

Families who consistently pass money on through a variety of legal estate-planning vehicles like the Romneys can minimize taxes for their estate and future generations, Bierhals said.

"You want to combine all of those strategies to get the most runs," Bierhals said. "A lot of estate planning is small ball. It's singles and doubles and every once and a while you hit a home run."

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