New Yorker: The Getty Family’s Trust Issues (Good read in how the wealthy hide money in the new Gilded Age)

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This will be horrifying to some, or inspiring and aspirational to others. Long read in the New Yorker about how the wealthy get wealthier:

The Getty Family’s Trust Issues

Heirs to an iconic fortune sought out a wealth manager who would assuage their progressive consciences. Now their dispute is exposing dynastic secrets.

www.newyorker.com

Marlena Sonn entered the wealth-management industry in 2010, and found a niche working with what she called “progressive, ultra-high-net-worth millennials, women, inheritors, and family offices.” She sought to create a refuge from jargon and bro culture. “Women and young people are talked down to,” she told me. “A level of respect for people is refreshing.”

Sonn didn’t come from money. She was born in Queens, to parents from South Korea, who she says were determined to see her “fulfill the American Dream—go to Ivy League schools and become a doctor or a lawyer.” As a student at Barnard College, she was drawn to the punk and goth scenes and to progressive politics. After school, she moved to San Francisco, campaigned for a higher minimum wage, and planned on a career in activism. But in 2005, while working at a nonprofit, she developed an unexpected fascination with her retirement account. She took to listening to analyst calls with C.E.O.s, buying stocks on E-Trade, and watching exultantly as some of her picks spiked in value. Within a few years, she had left the nonprofit world for finance. “That was where the real levers of power were,” she said, adding, “My parents were so relieved.”

She started out at a small firm in lower Manhattan, working as a receptionist and studying at night to become a financial planner. Once she was certified, she signed up clients who wanted to “align their wealth with their values.” Her new role obligated her to master a shifting vocabulary of noblesse oblige. “They keep changing the name,” she said. “It went from ‘socially responsible investing’ to ‘E.S.G.’ ”—environmental, social, and governance. “Now it’s what we call ‘impact investing.’ ” What firms like hers offered was not charity; it was capitalism with progressive characteristics. “We would work out tax-efficient strategies to move clients out of legacy positions and into a new portfolio that was more simpatico with their conscience,” she said. For clients who had investments in “offender industries,” such as fossil fuels or private prisons, she could help them sell the stock and plant trees in the Amazon, structuring the trades to minimize the cost in taxes.

In the spring of 2013, a lawyer told her about a potential client who might benefit from Sonn’s expertise: a young woman in line to inherit part of an iconic American fortune. The lawyer was cagey about specifics, but eventually identified the prospect as Kendalle P. Getty, a granddaughter of the oil tyc00n J. Paul Getty. In the nineteen-fifties, Getty was declared the richest living American.

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Nothing exhibited his relationship to money more than his management of a family tragedy. In 1973, his sixteen-year-old grandson, John Paul Getty III, who had left school to be a painter in Rome, was kidnapped by Calabrian gangsters, who stashed him in the mountains and demanded $17 million for his safe return. The grandfather, by then known as Old Paul, suspected that it was a charade orchestrated by family members to extract money. He eventually relinquished that theory, but insisted he would never pay a ransom. “I have fourteen other grandchildren,” he told the press, “and if I pay one penny now, I’ll have fourteen kidnapped grandchildren.”

After three months, the kidnappers, growing impatient, cut off the boy’s right ear and mailed it to a newspaper, to broadcast their warning. They reduced their demand to about three million dollars, but threatened to cut off other body parts, too, if they got no reply. Ultimately, Old Paul consented to pay $2.2 million of the requested sum—the maximum, according to his biographer John Pearson, that advisers had told him was tax deductible. He made up the balance by loaning his son the money at four per cent interest.

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And yet, in recent times, the fortunes of many prominent American clans have soared. Between 1983 and 2020, the net worth of the Kochs, who prospered in fossil fuels and became right-wing mega-donors, grew twenty-five-fold, from $3.9 billion to $100 billion. The Mars-family fortune, which began in the candy business, grew by a factor of thirty-six, to $94 billion. The Waltons, of Walmart, expanded their fortune forty-four-fold, to $247 billion. The financial triumph of such clans helps explain how the imbalance of wealth in the United States has risen to levels unseen in a century. In 1978, the top 0.1 per cent of Americans owned about seven per cent of the nation’s wealth; today, according to the World Inequality Database, it owns eighteen per cent.

A century ago, American law handled the rare pleasure of a giant inheritance with suspicion. Instead of allowing money to cascade through generations, like a champagne tower, we siphoned off some of the flow through taxes on estates, gifts, and capital gains. As the Supreme Court Justice Oliver Wendell Holmes wrote in 1927, “Taxes are what we pay for civilized society.” But, since the late seventies, American politics has taken a more accommodating approach to dynastic fortunes—slashing rates, widening exemptions, and permitting a vast range of esoteric loopholes for wealthy taxpayers. According to Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley, the average tax rate on the top 0.01 per cent has fallen by more than half, to about thirty per cent, while rates for the bottom ninety per cent have climbed slightly, to an average of twenty-five per cent.

Some advisers to ultra-rich families describe the current era as a golden age of tax avoidance. Last May, Marvin Blum, a Texas lawyer and accountant, gave a seminar for fellow-accountants who were figuring out how to profit from the influx of wealth that needed protecting. Blum told his colleagues, “Conditions for leaving large sums have never been better,” noting that “Congress has not closed an estate-planning loophole in over thirty years.” In a report from 2021, the Treasury Department estimated that the top one per cent of taxpayers are responsible for twenty-eight per cent of the nation’s unpaid taxes, amounting to an annual shortfall of more than $160 billion.

When it comes to taxes, there have always been advantages in certain lines of work. If your money comes from complex investments, it is easier to avoid taxes than if your employer regularly reports your income to the Internal Revenue Service. The same is true of tips and cash, which is how many low-income workers receive their wages. But the wealthiest Americans have access to ever more creative dodges—most of them legal, some illegal, and some on the murky border in between.

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Scholars of wealth and taxes say that the golden age of élite tax avoidance has contributed to the turbulence in American politics, by hardening social stratification; reducing public resources for education, health, and infrastructure; and eroding trust in America’s mythologies of fairness and opportunity. Edward McCaffery, a tax professor at the U.S.C. Gould School of Law, said, “Tax, which is supposed to be a cure, is in fact one of the problems. This is a pattern that recurs throughout history. Capital keeps getting more and more unequal, until there’s a crash.”

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Nothing exhibited his relationship to money more than his management of a family tragedy. In 1973, his sixteen-year-old grandson, John Paul Getty III, who had left school to be a painter in Rome, was kidnapped by Calabrian gangsters, who stashed him in the mountains and demanded $17 million for his safe return. The grandfather, by then known as Old Paul, suspected that it was a charade orchestrated by family members to extract money. He eventually relinquished that theory, but insisted he would never pay a ransom. “I have fourteen other grandchildren,” he told the press, “and if I pay one penny now, I’ll have fourteen kidnapped grandchildren.”

After three months, the kidnappers, growing impatient, cut off the boy’s right ear and mailed it to a newspaper, to broadcast their warning. They reduced their demand to about three million dollars, but threatened to cut off other body parts, too, if they got no reply. Ultimately, Old Paul consented to pay $2.2 million of the requested sum—the maximum, according to his biographer John Pearson, that advisers had told him was tax deductible. He made up the balance by loaning his son the money at four per cent interest.

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[mastermind]

The delicate arbitrage of state taxes is governed less by the constraints of the physical world than by the dream palace of accounting innovation. The original Getty trusts were established in California, but advisers had moved Gordon’s to Nevada in 1995. In an effort to spur the local economy, Nevada had taken to promoting itself as the “Delaware of the West,” with no taxes on income, inheritances, or capital gains. The financial upside bordered on the supernatural. Consider a typical Nevada trust scenario: as a planner at a family office, you put the maximum sum allowed, tax-free, into a trust; under current laws, that’s a meaty $12.9 million. By simply entering a long-term trust, that sum becomes immune to the forty-per-cent tax that applies to ordinary assets at the turn of every generation. After seventy-five years, your $12.9 million will balloon to approximately $502 million, according to calculations by the Northern Trust Institute, a wealth-management firm based in Chicago. That’s more than quadruple the growth it would experience outside the trust.

To enjoy the financial advantages of Nevada, the Gettys did not have to move there. The Pleiades Trust was officially administered from a small office complex a block from the Reno-Tahoe airport: Airport Gardens, which shared a parking lot with a private investigator and a hobby shop selling electric trains. In all the years Sonn worked with Kendalle and Sarah, they had never, as far as she was aware, set foot in Airport Gardens.

One particular ritual was sacrosanct: four times a year, to maintain the claim that their trust was not run from California, they boarded jets to some locale beyond the state border, before casting their official votes on investment decisions. “It would be a different place every quarter,” Sonn said. “New York, Seattle. Once a year, it would be in Nevada, usually in Las Vegas, because none of the family members wanted to go to Reno.” Buried in the details of California law was a statute that said that, as long as they could make the case that they never did the “major portion” of their business in California, they might each be able to dodge tens of millions of dollars in taxes on the inheritance.

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In the nineteen-nineties, conservatives, pressing to eliminate the estate tax, condemned it as a “death tax,” and insisted that it imperilled family farms. The evidence was always elusive; in the early two-thousands, Neil Harl, a prominent economist at Iowa State University, searched for family farms that had been killed by the tax, and concluded, “It’s a myth.” But the effort never really had much to do with farmers; according to a 2006 study by the nonprofit groups Public Citizen and United for a Fair Economy, it was financed by eighteen ultra-wealthy dynasties, including the founding families of Gallo wine and Campbell’s soup.

The campaign succeeded spectacularly. In 1976, about 139,000 American households were eligible for the estate tax; by 2020, it had been punctured by so many exemptions that only 1,275 households nationwide had to pay. Gary Cohn, Trump’s economic adviser who helped engineer the most recent loosening of the provision, was heard to tell members of Congress, “Only morons pay the estate tax.”

So how, exactly, do the well-to-do find a way around taxes? There are functional concerns and ethical ones. The line between avoidance and evasion is not mysterious. It’s perfectly legal to avoid taxes by honestly reporting losses and deducting expenses, and it’s perfectly illegal to evade them with lies (by understating income or bartering to avoid sales, among many other techniques). The more intriguing terrain is where most Americans dwell, between avoidance and acquiescence. Researchers who study I.R.S. data chart our behavior on a continuum, from “flagrantly defiant” (people who cheat even at great risk) through “strategic” (calculators of costs and benefits) to “conflicted” (moral agonists) and “pathologically honest” (bless their hearts).

The simplest way to avoid income taxes is to avoid “income.” If you run a company, alert the press that your salary is a dollar a year; then, for walking-around money, summon your banker to provide a “portfolio loan,” which uses your stock as collateral. Because it’s a loan, you’ll owe no taxes on the cash. Better yet, if you cling to your winning stocks until you die, the moment that your soul departs your body it will take your capital-gains obligations with it. Whatever taxes you would have had to pay on the rising value of the stock vanish into a loophole known as the “stepped-up basis”—or, as admirers call it, the “angel of death.”

A vestige of a time when paper records made it difficult to pinpoint how much an asset had grown, the angel-of-death loophole endures today as a giveaway to the rich, estimated to cost the Treasury as much as $54 billion a year. If Jeff Bezos died tomorrow, a hundred billion dollars of gains on his Amazon stock would go untaxed. This tidy routine—skip the income, live off loans, and avoid capital gains until you go—can run forever. McCaffery, of U.S.C., calls it “buy, borrow, die.”

The wealth-management industry prefers a gentler vocabulary; it makes fewer mentions of money and taxes than of creating “meaningful legacies” and of fending off “wealth attrition” and “dilution.” In 2021, ProPublica deployed leaked tax data to investigate some of the most meaningful legacies of recent years: $205 million for the son of the opioid-maker Mortimer Sackler; $570 million in trust income for William Wrigley, Jr., the great-grandson of the chewing-gum magnate. If you’re strategic enough, even less iconic brands can produce a dynasty. Just ask the princely tribes endowed by Family Dollar, Public Storage, and Hot Pockets microwave pastries.

Managers like to hail the forethought of “first-generation wealth creators” and “patriarchs and matriarchs.” But the industry’s most important concept involves no venture at all; it is simply endurance. When Chuck Collins, a great-grandson of the meatpacker Oscar Mayer, told a fellow-heir that he planned to give away the corpus in his trust, she invoked the goose that lays the golden egg. “You don’t barbecue the goose,” she said. In 2014, not long after the French economist Thomas Piketty warned of the reëmergence of “hereditary aristocracy,” a trade magazine for the wealth-management industry carried an illustration of a medieval knight, bearing a sword and a mace, guarding overflowing bags of cash. The caption read, “Armour for your assets.” Like any combatants, wealth managers gather intelligence: a tax lawyer told me that his firm had used the Freedom of Information Act to obtain a copy of an internal I.R.S. handbook, which lists the thresholds that agents use to determine if a discount is suspiciously large.

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[mastermind]

But perhaps nothing has contributed more to the latest revival of dynastic fortunes than a spate of innovation around trusts, known by such recondite acronyms as slats, cruts, and bdits. (The opacity is no accident. The late U.S. senator Carl Levin, a critic of finance abuses, accused the industry of deflecting attention with megos—“My Eyes Glaze Over” schemes.) The most coveted are grats, or grantor-retained annuity trusts. The recipe requires only two steps: have your lawyer set up a trust on paper with your heirs as beneficiaries, and fill it with assets that you strongly suspect will rise in value—say, the stock of your company about to go public. As soon as the assets grow faster than interest rates, voilà! Your heirs receive almost all the difference, and it’s tax-free. It doesn’t count as a gift, because the trust is, technically, an annuity, which pays you back over two or three years. Best of all, there’s nothing to stop you from setting up a new grat every month. Sheldon Adelson, the late casino owner, sometimes had at least ten at once; in one three-year period, according to Bloomberg, he used them to escape $2.8 billion in taxes. The benefits of the grat are obvious, Handler, the tax lawyer, told me: it’s cheap, simple, and easy to repeat. “Even unsophisticated clients can understand that one.”

Like many tax-avoidance strategies, the grat was dreamed up in a law firm and released into the wild to see if it could survive the courts. In 2000, the I.R.S. challenged its use by the former wife of the brother of the Walmart founder, Sam Walton—and lost. “The tax court’s decision just blew this loophole wide open,” Lord said. “For twenty-two years, everyone has known you can do this. You’ve got a tax-court decision that basically blesses it, and Congress hasn’t done anything about it.” In honor of its first patron, the tactic is often called a Walton grat.

The ethics around avoiding taxes are themselves a form of inheritance. “Families just grow up in it,” McCaffery said. “The patriarch never paid much in taxes. And you’re just in a world in which, four times a year, you’re going to Nevada or wherever.”

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or half a century, Gordon Getty has lived in a grand yellow Italianate mansion in Pacific Heights, with sweeping views of the Golden Gate Bridge and Alcatraz. Over the years, he and Ann, a publisher and a decorator, expanded their living space, buying the house next door (to make room for his work at the piano) and then the house next door to that. They hosted charity events, opera stars, and fund-raisers for politicians, including Kamala Harris and Gavin Newsom. (Newsom’s father, William, one of Gordon’s friends since high school, managed the family trust for years.)

Sonn became accustomed to the rhythms of life in the Getty orbit: the talk of political allies, the family’s trips on their Boeing 727, known as “the Jetty.” And yet, by 2018, after four years of crisscrossing the country to attend to the Gettys’ finances, elements of the job were making her increasingly uncomfortable. For one thing, she said, her employers had refused to contribute to her health insurance or her payroll taxes, to avoid the appearance of operating in New York, where she lived. For another, helping to manage a family’s most sensitive financial deliberations could be an emotional process; these are “blood-sucking” jobs, as one finance professional put it. Sarah Getty told me, “My anxiety mind will take over sometimes and be, like, Should I spend less? Should I spend more? Am I being selfish right now? I didn’t need that massage chair.” (She added, “I didn’t get a massage chair, don’t worry. But I thought about it.”) For Sarah, it complicated matters that Sonn “was also representing Kendalle, who I don’t always get along with.”

There were disputes about the dispensation of funds. Sarah supported animal-advocacy groups, such as the World Wildlife Fund, but Sonn advised her instead to donate to the Amazon Basin, to protect the landscape and its Indigenous people from environmental harm. “I care about those things as well, don’t get me wrong,” Sarah told me. “It’s just the fact that she picked it, and I felt manipulated.” There was also friction over Sonn’s compensation. She had started at a base salary of $180,000, along with her fees as an investment adviser, and though her salary eventually more than doubled, she discovered that some other suppliers of advisory services to Getty trusts had collected at least $1 million a year. She complained to Kendalle and Sarah, who agreed to pay her a hefty bonus when the trust fund opened, a percentage that she calculated would come to about $4 million.

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