Mitt Romney’s strategic use of the tax code has enabled him to significantly lower his tax obligation on gifts to a trust set up for his children and grandchildren, according to Bloomberg News.
The tactic is legal and a favorite of wealthy Americans trying to maximize the amount of money they can leave to their offspring, but the Obama administration has proposed banning it, saying the loophole closure would generate about $1 billion in new tax revenue over the next decade.
When Romney makes a gift to the trust, the money is subject to a gift tax as high as 35 percent. The top gift tax rate was 55 percent in the 1990s, when Romney established the trust.
A non-cash gift to the trust can be difficult to value, especially if it is shares of a private company that, unlike a publicly traded company, does not have a published stock price. Romney can declare the value of such a gift to be low—or even zero—and pay a small gift tax.
If the trust later sells the shares, Romney pays taxes on the profit—but at the capital gains tax rate, not at the gift tax rate. The capital gains tax rate is 15 percent and was 20 percent in the 1990s.
According to Bloomberg, the strategy worked well for Romney when he gifted shares of the Internet advertising firm DoubleClick to the trust in 1997, eight months before the company’s initial public offering. Romney gave the shares to the trust at the same time that his private equity firm, Bain Capital, was investing in DoubleClick.
DoubleClick’s stock value rose quickly, and when Romney’s trust sold shares less than a year after the IPO, its profit was about $674,000—a return of more than 900 percent. Romney would have been responsible for paying about $135,000 in capital gains taxes, far less than the roughly $370,000 he might have owed if the profit had been subject to a gift tax.