The Man Who Saves CEOs Billions in Taxes

InfoGraphic IRS -Tax Time
Getty Images
If populist propaganda is to be believed, the true power brokers in this country reside not in Congress or the White House, but in the executive suites of America's largest corporations. CEOs are currently seen as the modern-day equivalent of "The Great Oz," pulling the levers and turning the dials that drive policy, law and the economy, all while shielded from view -- the oak walls of the boardroom their green curtain.

Their power in the mortal world seems endless; however, with the exception of Walt Disney, they haven't yet figured out how to cheat death. But thanks to one man, Richard B. Covey, they're now able to avoid that previously unavoidable consequence of death: the estate tax.

The concept of an estate tax, or death tax, can be traced to Egypt as early as 700 B.C., and was used by Caesar Augustus nearly 2,000 years ago to finance the Roman Empire's imperialist policies.
The precursor to the estate tax arrived in the United States in the form of the Stamp Tax of 1797, which required federal stamps on wills offered for probate. Not unlike the Roman tax, this tariff was used to raise revenue in order to underwrite naval expansion and engage in the Pirate Wars with France.

For the next 120 years, estate taxes were approved and repealed in lockstep with periods of war and peace until the the Revenue Tax of 1916, which created a transfer tax on wealth from an estate to its beneficiaries, ushered in the era of the modern estate tax. Assuming you're still awake, you'll be glad to know that reading this last paragraph counts as one college credit toward a degree in finance.

Despite the relatively modest 10 percent top rate of the inaugural estate tax, newly wealthy industrialists, undoubtedly sporting stovepipe hats, soon figured out that they could avoid the tax altogether by transferring their wealth to their heirs during their lifetimes.

In response, Congress began a long campaign aimed at closing inheritance loopholes and, in the process, raised the top rate to 77 percent, where it remained until 1977 when it began a gradual decline, leveling off to 55 percent during most of the 1980s and 1990s. And this is where Covey enters the picture, creating a tax-avoidance strategy in 1984 that began his assault on the estate tax code.

Covey, an attorney with New York powerhouse law-firm Carter, Ledyard & Milburn, created a revolutionary type of tax shelter he called a "grantor retained income trust," or GRIT. A GRIT was created when an individual put investments into a trust, and then the income generated by those investments was used to pay back the individual, thus lowering his gift-tax bill.

Congress deemed GRITs abusive and replaced them in 1990 with GRATs, or grantor retained annuity trusts.
Though usually known for their efficient, thoughtful, and well-reasoned legislation, in establishing the GRAT, Congress actually created a larger loophole in the tax code, which Covey exploited with great success.

However, it was a tax-avoidance strategy that he employed with a client in 1993 that, to this day, is still spoken of in hushed tones and with high reverence wherever tax advisers gather.

Covey's client was the son of a wealthy industrialist who had died and left half his fortune -- in the form of his family owned company's stock -- to his wife; and half to a trust, the beneficiaries of which were his children.The problem was that both the value of the stock left to his widow -- and the stock in the trust -- would be taxed at the then 55 percent estate-tax rate, necessitating the sale of significant amounts of the stock in order to pay the tax bill, causing the family to lose control of their company. But Covey, a graduate of Harvard and Columbia Law School and a former Marine, was not about to give in so easily.

Instead, he proposed that the widow purchase from her children their right to inherit the trust, in essence handing over her share of the inherited stock as payment for the future rights to her children's stock. Though not a tax-free transaction -- both the widow and her children would be subject to the standard 28 percent capital gains tax, and still subject to challenge from the IRS -- Covey's client elected to go forward with the plan. The IRS did ultimately challenge the move, but ended up settling for an amount that Covey anticipated would save his client millions.

According to a recent report by Bloomberg, SEC filings show that since then, hundreds of executives have used the techniques pioneered by Covey, including Las Vegas Sands (LVS) CEO Sheldon Adelson, Facebook's (FB) Mark Zuckerberg, Goldman Sachs (GS) CEO Lloyd Blankfein, as well as heirs of the Walmart (WMT) fortune. According to that same report, Covey himself estimates that his tax shelters have cost the IRS more than $100 billion in lost revenue since 2000.

I recently spoke by phone with Covey, who at 84 and semi-retired, still serves as senior counsel for Carter, Ledyard & Milburn. He speaks in a convivial manner, and it's immediately obvious that his mind is still sharp as a tack. I asked him what his personal feelings were about the estate tax, and though I expected a hard-line, somewhat dogmatic reply; with a chuckle in his voice that suggested the answer was common sense, he simply said, "There's got to be a better way to extract wealth from a society."

No man is an island, or even a peninsula, so I encourage you to give me your feedback in the comments below. I also want to hear what else you'd like me to write about, so please let me know either via Twitter or email.

More from Brian Lund

Increase your money and finance knowledge from home

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

What is Inflation?

Why do prices go up?

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

I read on here someone posted that the economy is not zero sum. Well mostly the economy is a zero sum game. You can have some production of wealth in a given year but overall the amount of wealth is pretty much the same. If the government has more debt than Americans have more money. If the American government gives out more money than they get from taxes then it is beneficial to the Americans. The people who get the most benefits are the families that cannot afford food or education for their children. Poor people pay less taxes and get financial aid.

It is good for businesses to pay less taxes. This will attract more businesses in America. People get mad at the rich who make money off of investing and not really adding anything to society. One of the best investments you can make is in the company that you own. I like a free market economy with a bottom line for the lower class. This means that people who cannot make enough to pay for their children will live off of the government but people will still be motivated to work hard. Nobody wants the lower class to suffer especially not the children of the lower class. America is somewhat like this.

Some people want a socialism type economy. The problem is that the economy will suck if it is socialism. People would not be working hard for their college degrees or businesses if the government is going to screw them and take all their money.

February 18 2014 at 10:55 PM Report abuse rate up rate down Reply

The real culprits are the Republican Congress who refuse to take action against tax loop holes and rediculous tax breaks for big companys .

December 26 2013 at 11:16 AM Report abuse -2 rate up rate down Reply

I can understand how anyone thinks they have the right to take someone’s assets.
If they earned it, paid tax on those earnings, then they should be able to leave it to whom they want without being penalized for success. If someone lives their life irresponsible, decides to use drugs, society provides hand outs, treatment that they usually don’t want anyway and sympathy as if they didn’t make the choice to use drugs and it was unavoidable like cancer.

December 26 2013 at 9:22 AM Report abuse +1 rate up rate down Reply

The so called poor and middle class pay more taxes then the rich if you factor in the State Lottery rip-off. I also believe this type of tax is the same as stealing.

December 25 2013 at 8:42 PM Report abuse +1 rate up rate down Reply

Can't say I disagree with the haves paying their fair share..It's too bad the Congress/Senate finds wasteful ways to piss these taxes away when they do get what they "suppose" is coming to them..them meaning us.
But this much I can say I like Daily Finance. It's enlightening and seeming for the most part unbiased.. The writers do expose some of the wrong doing in the world of finance and lean towards what many would consider the left..which is fine with me..
Keep up the good work Dialy Finance and have a good new year along with all the readers and posters

December 25 2013 at 1:30 PM Report abuse rate up rate down Reply

Let me say it again. There is no tax on the appreciated assets these families have accumulated. There is a tax on the sale, if the asset is sold by the owner. (Most likely capital gains at 20% + the surtax of 3.8% in 2013 and thereafter.) But the families in this story have accumulated millions and millions of dollars in wealth without any type of tax having been applied. The transfer tax system currently also exempts over $5 million per person. So one could inherit (or be gifted) over $5 million from mother and over $5 million from father without a tax.

December 25 2013 at 12:49 PM Report abuse -2 rate up rate down Reply
2 replies to stephanie1040law's comment

You are not entirely correct. Your gross estate for estate tax purposes is, in fact, figured by using the fair market value of items at the date of death (the total of your assets, not what is actually sold). You reduce that by certain deductions, add back certain lifetime gifts and the remainder , if over $5,250,000 (in 2013) can indeed be taxed using estate tax rates. As this article points out there are various (perfectly LEGAL) ways to circumvent what is included in the gross estate value that can reduce that tax, including special rules that apply to spouses. In regards to gift tax, the annual exclusion to each individual is only $14K in 2013 but that would apply to each person so two parents could give a child $28K tax free. If they give more than that the parents or their estate eventually is liable for the tax not the child who receives the gift.

December 25 2013 at 1:46 PM Report abuse rate up rate down Reply

No sir, wrong, um, kind of tax....

December 25 2013 at 4:09 PM Report abuse rate up rate down Reply

Military men can't find jobs and are loosing their pensions the minimum wage isn't enough to sustain a family of 1 and this bastard is proud that he screwed All American's out of 100 billion , Yes even You who aree with this piece of Sh << lawyer got screwed also , If You aren't part of the solution than You are part of the problem

December 25 2013 at 12:42 PM Report abuse -2 rate up rate down Reply
crazy ray

Seems like you have to be some kind of criminal or moral degenerate to be successful in business or politics anymore.

December 25 2013 at 11:59 AM Report abuse +1 rate up rate down Reply


December 25 2013 at 11:30 AM Report abuse rate up rate down Reply
Dan Embody

The estate tax is unfair to begin with. Tax was paid on that money during one's lifetime. It is not fair tax it be taxed a second time when there are people on the lower end who don't pay any tax at all. How about making them pay taxes at least once?

December 25 2013 at 11:28 AM Report abuse rate up rate down Reply
3 replies to Dan Embody's comment