Writing in The Atlantic last month, the granddaughter of Roy O. Disney launched a withering attack on the estate planning that her family, and other similarly situated families, have had in place for generations.
Noting that all methods employed by her ancestors to minimize taxes were perfectly legal, Abigail Disney nevertheless questions the morality of going to such great lengths to outsmart the tax man. She posed the question in these terms: “What motivates people with so much money to try to withhold every last bit of it from the public’s reach?”
According to Disney, families like hers have a visceral disdain for government. They believe that the government cannot be trusted to put to good use the kind of money generated by companies like Disney. So it is far better for the ultra wealthy to engage in philanthropy and other private enterprises for the benefit of society than to entrust bureaucrats with tax dollars that will inevitably be misused.
Perhaps even more important than philanthropy is adopting structures that keep as much of the family wealth in place for future generations as is possible within the law. Techniques such as generation skipping trusts are therefore employed. These allow wealth to be passed down to future generations without children and grandchildren ever having to pay estate taxes.
While there is no doubt that these kinds of aggressive tax avoidance structures were implemented by families such as Disney in the past, and continue to be deployed by some families today, there has been a discernible shift in attitude in recent years. Wealthy families have discovered that doggedly focusing on how best to shield assets from the IRS does not adequately address the aspirations they have for future generations. When they take the time to consider what they want their legacy to be, families are increasingly coming to the realization that there is more to legacy than money.
This is why the notion of “values based” planning has captured people’s imaginations. This kind of planning begins by considering the life lessons that you want passed on to future generations. It is designed to spark conversations around what you would want a family gathering to look like in 30 years’ time, how you want your children all to remain on good terms, how you want your family business to be run. Structures that only seek to reduce taxes without considering the family dynamics and objectives can end up harming relationships within the family.
One example of this is a technique sometimes used in estate planning whereby one sibling will have control of the assets placed in trust by the parents for another sibling. There are sometimes sound reasons to do this, mostly relating to asset protection. However, this is a technique that entirely disregards an overarching goal that most parents have, which is for their children to get along.
Having one child in charge of another child’s trust thrusts those children into a relationship and power dynamic that previously had not existed. In many cases this leads to fractured relationships. Sacrificing some of the protections of the trust in order to safeguard the relationship between siblings would be considered by many parents to be a price worth paying.
Abigail Disney criticizes the laws that permit complex tax planning. She is equally critical of the people who take full advantage of those legal loopholes without regard for anyone outside of the immediate family. She might consider the trend towards values based planning to be welcome but not sufficient to dent the impact of tax avoidance structures in a significant way.
What if the laws were changed? It just so happens that the Biden administration has proposed sweeping measures to overhaul the U.S. tax code. Aside from bringing many more families within the threshold of assets that will be subject to estate tax, there are also plans to eliminate the rules that allow children to inherit appreciated assets from their parents without paying tax on capital gains (known as step-up in basis).
Some of the complex techniques used by families such as the Disneys have also been marked out as targets of the legislation. How far any new legislation will go is unclear at this point and whatever new laws are ultimately passed will be the result of political compromise in both houses of Congress.
In some respects, the ultra wealthy have been able to regulate themselves, taking advantage of favorable tax laws and legal loopholes. If the law were to change as dramatically as has been proposed by the Biden administration, a reckoning with the IRS for ultra wealthy families, either at this generation or the next, will be more difficult to avoid. Taxation of such families would potentially move from voluntary to mandatory (albeit with the caveat that sophisticated techniques to soften the blow will inevitably be developed before the ink is dry on the new legislation).
Nevertheless, for Abigail Disney and others who share her viewpoint, these law changes cannot come soon enough.
Daniel R. Weiner is a trusts and estates attorney and holds a masters degree from Duke Law School. He lives in the Del Mar area of San Diego with his wife, Miriam, and two young children, Aiden and Emma.