Jensen Huang, the CEO of Nvidia, is the 10th-richest person in the United States, worth $127 billion. In theory, when he dies, his estate should pay 40% of his net worth to the government in taxes.
But Huang, 61, is not only an engineering genius and Silicon Valley icon whose company, the world’s second-most valuable, makes the chips that power much artificial intelligence. He is also the beneficiary of a series of tax dodges that will enable him to pass on much of his fortune tax free, according to securities and tax filings reviewed by The New York Times.
The savings for his family are on a pace to be roughly $8 billion. It likely ranks among the largest tax dodges in the United States.
The types of strategies Huang has deployed to shield his wealth have become ubiquitous among the ultrawealthy. It is just one sign of how the estate tax — imposed on a sliver of the country’s multimillionaires — has been eviscerated.
Revenue from the tax has barely changed since 2000, even as the wealth of the richest Americans has roughly quadrupled. If the estate tax had kept pace, it would have raised around $120 billion last year. Instead it brought in about a quarter of that.
The story of Huang’s tax avoidance is a case study in how the ultrarich bend the U.S. tax system for their benefit. His strategies were not explicitly authorized by Congress. Instead, they were cooked up by creative lawyers who have exploited a combination of obscure federal regulations, narrow findings by courts and rulings that the IRS issues in individual cases that then served as models for future tax shelters.
“You have an army of well-trained, brilliant people who sit there all day long, charging $1,000 an hour, thinking up ways to beat this tax,” said Jack Bogdanski, a professor at Lewis & Clark Law School and the author of a widely cited treatise on the estate tax. “Don’t expect anyone in Congress to stop this.”
The richest Americans are able to pass down approximately $200 billion each year without paying estate tax on it, thanks to the use of complex trusts and other avoidance strategies, estimated Daniel Hemel, a tax law professor at New York University.
Enforcement of the rules governing the estate tax has eased in part because the IRS has been decimated by years of budget cuts. In the early 1990s, the agency audited more than 20% of all estate tax returns. By 2020, the rate had fallen to about 3%.
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The trend is likely to accelerate with Republicans controlling both the White House and Capitol Hill. They are already slashing funding for law enforcement by the IRS. The incoming Senate majority leader, John Thune, and other congressional Republicans for years have been trying to kill the estate tax, branding it as a penalty on family farms and small businesses.
Yet Huang’s multibillion-dollar maneuver — detailed in the fine print of his filings with the Securities and Exchange Commission and his foundation’s disclosures to the IRS — shows the extent to which the estate tax has already been hollowed out.
An Nvidia spokesperson, Stephanie Matthew, declined to discuss details of the Huangs’ tax strategies.
The United States adopted the modern estate tax in 1916. In recent decades, congressional Republicans have successfully watered it down, cutting the rate and increasing the amount that is exempt from the tax. Today, a married couple can pass on about $27 million tax free; anything more than that is generally supposed to be taxed at a 40% rate.
In 2012, Huang and his wife, Lori, took one of their first steps to shield their fortune from the estate tax.
They set up a financial vehicle known as an irrevocable trust and moved 584,000 Nvidia shares into it, according to a securities disclosure Huang filed. The shares at the time were worth about $7 million, but they would eventually generate tax savings many times greater.
The Huangs were taking advantage of a precedent set nearly two decades earlier, in 1995, when the IRS blessed a transaction that tax professionals affectionately nicknamed “I Dig It.” (The moniker was a play on the name of the type of financial vehicle involved: an intentionally defective grantor trust.)
One of the beauties of I Dig It was that it had the potential to largely circumvent not only the estate tax but also the federal gift tax. That tax applies to assets that multimillionaires give to their heirs while they’re alive and essentially serves as a backstop to the estate tax; otherwise, rich people could give away all their money before they die in order to avoid the estate tax.
In Huang’s case, the details in securities filings are limited. But multiple experts, said it was almost certainly a classic I Dig It gift, loan and sale transaction.
The $7 million of shares Huang moved into his trust in 2012 are today worth more than $3 billion. If those shares were directly passed on to Huang’s heirs, they would be taxed at 40% — or well over $1 billion. Instead, the tax bill will probably be no more than a few hundred thousand dollars.
The Huangs soon took another big step toward reducing their estate-tax bill. In 2016, they set up several vehicles known as grantor retained annuity trusts, or GRATs, securities filings show.
They put just over 3 million Nvidia shares into their four new GRATs. The shares were worth about $100 million. If their value rose, the increase would be a tax-free windfall for their two adult children, who both work at Nvidia.
That is precisely what happened. The shares are now worth more than $15 billion, according to data from securities filings compiled by Equilar, a data firm. That means the Huang family is poised to avoid roughly $6 billion in estate taxes.
If the Huangs’ trusts sell their shares, that will generate a hefty capital gains tax bill — more than $4 billion, based on Nvidia’s current stock price. The Huangs can pay that bill on behalf of the trusts, without it counting as a taxable gift to their heirs.
Starting in 2007, Huang deployed another technique that will further reduce his family’s estate taxes. This strategy involved taking advantage of his and his wife’s charitable foundation.
Huang has given the Jen Hsun & Lori Huang Foundation shares of Nvidia worth about $330 million at the time of the donations. Such donations are tax-deductible, meaning they reduced the Huangs’ income tax bills in the years that the gifts took place.
Foundations are required to make annual donations to charities equal to at least 5% of their total assets. But the Huangs’ foundation is satisfying that requirement by giving heavily to what is known as a donor-advised fund.
Such funds are pools of money that the donor controls. There are limitations on how the money can be spent. Buying cars or vacation homes or the like is off limits. But a fund could, say, invest money in a business run by the donor’s friend or donate enough money to name a building at a university that the donor’s children hope to attend.
There is a gaping loophole in the tax laws: Donor-advised funds are not required to actually give any money to charitable organizations. When the donor dies, control of the fund can pass to his heirs — without incurring any estate taxes.
In recent years, 84% of the Huang foundation’s donations have gone to their donor-advised fund, named GeForce, an apparent nod to the name of an Nvidia video game chip. The Nvidia shares the Huangs have donated are today worth about $2 billion.
The fund is not required to disclose how its money is spent, though the foundation has said the assets will be used for charitable purposes. Matthew said those causes included higher education and public health.
But there is another benefit. Based on Nvidia’s current stock price, the donations to the fund have reduced Huang’s eventual estate-tax bill by about $800 million.
This story was originally published at nytimes.com. Read it here.
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