Estée Lauder Heir’s Tax Strategies Typify Advantages for Wealthy - NYTimes.com:
To celebrate the 10th anniversary of the Neue Galerie, Mr. Lauder’s museum of Austrian and German art, he exhibited many of the treasures of a personal collection valued at more than $1 billion, including works by Van Gogh, Cézanne and Matisse, and a Klimt portrait he bought five years ago for $135 million.
To celebrate the 10th anniversary of the Neue Galerie, Mr. Lauder’s museum of Austrian and German art, he exhibited many of the treasures of a personal collection valued at more than $1 billion, including works by Van Gogh, Cézanne and Matisse, and a Klimt portrait he bought five years ago for $135 million.
As is often the case with his activities, just beneath the surface was a shrewd use of the United States tax code.
By donating his art to his private foundation, Mr. Lauder has qualified for deductions worth tens of millions of dollars in federal income taxes over the years, savings that help defray the hundreds of millions he has spent creating one of New York City’s cultural gems.
The charitable deductions generated by Mr. Lauder are just one facet of a sophisticated tax strategy used to preserve a fortune.
The charitable deductions generated by Mr. Lauder are just one facet of a sophisticated tax strategy used to preserve a fortune.
From offshore havens to a tax-sheltering stock deal so audacious that Congress later enacted a law forbidding the tactic, Mr. Lauder has for decades aggressively taken advantage of tax breaks that are useful only for the most affluent.
An examination of public documents involving Mr. Lauder’s companies, investments and charities offers a glimpse of the wide array of legal options for the world’s wealthiest citizens to avoid taxes both at home and abroad.
His vast holdings are organized in a labyrinth of trusts, limited liability corporations and holding companies, some of which his lawyers acknowledge are intended for tax purposes. The cable television network he built in Central Europe, CME Enterprises, maintains an official headquarters in the tax haven of Bermuda, where it does not operate any stations.
And earlier this year, Mr. Lauder used his stake in the family business, Estée Lauder Companies, to create a tax shelter to avoid as much as $10 million in federal income tax for years.
Still, the family’s tax planning was effective enough that after Estée Lauder died in 2004, she passed down nearly $4 billion to her heirs, according to tax experts who studied the case and estimated that the estate was taxed at an effective rate of 16 percent — about a third of the top estate tax rate at the time.
Ronald Lauder sublets a full floor of office space from Estée Lauder, on the 42nd story of the General Motors Building in Manhattan, which serves as the hub for the matrix of foundations, investment funds, partnerships and trusts used to control his businesses and personal finances.
His stake in Estée Lauder Companies, according to regulatory filings, is valued at more than $600 million. Nearly $400 million of that stock is pledged to secure various lines of credit. Many financial planners consider it imprudent for principal shareholders in a company to borrow against their stock. But it remains a popular way for wealthy taxpayers to get cash out of their holdings without selling and paying taxes.
There is a certain irony that Mr. Lauder has used $72 million worth of his Estée Lauder shares to carry out his latest state-of-the-art tax reduction tactic.
And there is no limit on the amount of property taxes that can be deducted from federal income. So Mr. Lauder is entitled to deduct the $400,000 he pays annually on his Palm Beach mansion as well as what he pays on his home on Park Avenue and his holdings in the Hamptons.
Mr. Lauder deducts property taxes on all of his holdings, his spokesman said. Mr. Lauder declined to say how much that reduced his federal taxes, but said he did not receive tax benefits in some years because of the alternative minimum tax and other limits.
A Passion for Art
In 1976 his generous donations helped him become the youngest trustee of the Metropolitan Museum of Art. He has donated and lent artwork to an assortment of museums. Part of his collection of lavishly decorated ceremonial armor is on display at the Met, in a gallery named for him.
As all art collectors may, Mr. Lauder is entitled to deduct the full market value of artworks donated to museums. (For years, Mr. Lauder availed himself of a quirk in the tax code that allowed donors to take a deduction for donating a portion of an artwork, without actually turning over the art. That break, known as fractional donation, was eliminated in 2006.) The tax code also allows artwork in offices to be deducted as a business expense.
Some wealthy collectors are criticized for using tax breaks to underwrite private collections that offer little access to the public...
An examination of public documents involving Mr. Lauder’s companies, investments and charities offers a glimpse of the wide array of legal options for the world’s wealthiest citizens to avoid taxes both at home and abroad.
His vast holdings are organized in a labyrinth of trusts, limited liability corporations and holding companies, some of which his lawyers acknowledge are intended for tax purposes. The cable television network he built in Central Europe, CME Enterprises, maintains an official headquarters in the tax haven of Bermuda, where it does not operate any stations.
And earlier this year, Mr. Lauder used his stake in the family business, Estée Lauder Companies, to create a tax shelter to avoid as much as $10 million in federal income tax for years.
In June, regulatory filings show, Mr. Lauder entered into a sophisticated contract to sell $72 million of stock to an investment bank in 2014 at a price of about 75 percent of its current value in exchange for cash now.
The transaction, known as a variable prepaid forward, minimizes potential losses for shareholders and gives them access to cash. But because the I.R.S. does not classify this as a sale, it allows investors like Mr. Lauder to defer paying taxes for years.
In theory, Mr. Lauder is scheduled to pay taxes on the $72 million when the shares are actually delivered in 2014. But tax experts say wealthy taxpayers can use other accounting techniques to further defer their payment.
The tax burden on the nation’s superelite has steadily declined in recent decades ...
The Family Fortune
Mr. Lauder was born into a storied American fortune. His mother, Estée Lauder, the daughter of Eastern European immigrants, began selling homemade beauty creams at a few New York City hair salons in the 1940s and built her product line into a multibillion-dollar global empire.
While the family’s wealth was created by hard work and ingenuity, it was bolstered by aggressive tax planning, a skill that has become Ronald Lauder’s specialty.
In theory, Mr. Lauder is scheduled to pay taxes on the $72 million when the shares are actually delivered in 2014. But tax experts say wealthy taxpayers can use other accounting techniques to further defer their payment.
The tax burden on the nation’s superelite has steadily declined in recent decades ...
The Family Fortune
Mr. Lauder was born into a storied American fortune. His mother, Estée Lauder, the daughter of Eastern European immigrants, began selling homemade beauty creams at a few New York City hair salons in the 1940s and built her product line into a multibillion-dollar global empire.
When Mr. Lauder’s father, Joseph, died in 1983, family members fought the I.R.S. for more than a decade to reduce their estate tax.
The dispute involved a block of shares bequeathed to the family — the estate valued it at $29 million, while the I.R.S. placed it at $89.5 million. A panel of judges ultimately decided on $50 million, a decision that saved the estate more than $20 million in taxes.
Estée Lauder Companies went public in 1995, and Ronald Lauder and his mother cashed in hundreds of millions of dollars in stock but managed to sidestep paying tens of millions in federal capital gains taxes by using a hedging technique known as shorting against the box.
Together, Mr. Lauder and his mother borrowed 13.8 million shares of company stock from relatives and sold them to the public during the offering at $26 a share. Selling borrowed shares in this way is referred to as a short position.
Estée Lauder Companies went public in 1995, and Ronald Lauder and his mother cashed in hundreds of millions of dollars in stock but managed to sidestep paying tens of millions in federal capital gains taxes by using a hedging technique known as shorting against the box.
Together, Mr. Lauder and his mother borrowed 13.8 million shares of company stock from relatives and sold them to the public during the offering at $26 a share. Selling borrowed shares in this way is referred to as a short position.
Since the Lauders retained their own shares, the maneuver allowed them to have a neutral position in the stock, not subject to price swings. Under I.R.S. rules at the time, they avoided paying as much as $95 million in capital gains taxes that might otherwise have been due had they sold their own shares.
Such transactions allowed investors to cash in their shareholdings without paying taxes. But the Lauders’ use of the technique was so aggressive that Congress enacted a law afterward that limited the length of the tax deferral.
Such transactions allowed investors to cash in their shareholdings without paying taxes. But the Lauders’ use of the technique was so aggressive that Congress enacted a law afterward that limited the length of the tax deferral.
Still, the family’s tax planning was effective enough that after Estée Lauder died in 2004, she passed down nearly $4 billion to her heirs, according to tax experts who studied the case and estimated that the estate was taxed at an effective rate of 16 percent — about a third of the top estate tax rate at the time.
Ronald Lauder sublets a full floor of office space from Estée Lauder, on the 42nd story of the General Motors Building in Manhattan, which serves as the hub for the matrix of foundations, investment funds, partnerships and trusts used to control his businesses and personal finances.
His stake in Estée Lauder Companies, according to regulatory filings, is valued at more than $600 million. Nearly $400 million of that stock is pledged to secure various lines of credit. Many financial planners consider it imprudent for principal shareholders in a company to borrow against their stock. But it remains a popular way for wealthy taxpayers to get cash out of their holdings without selling and paying taxes.
There is a certain irony that Mr. Lauder has used $72 million worth of his Estée Lauder shares to carry out his latest state-of-the-art tax reduction tactic.
These contracts emerged as a popular tool about a decade ago and were developed by accountants and tax planners after Congress closed down the loophole on the Estée Lauder public offering. The I.R.S. began cracking down on these contracts in 2008...
Whether or not the I.R.S. agrees with Mr. Lauder’s contention that his contract is legitimate, some tax policy experts say the deal illustrates how the wealthy take advantage of the system.
“There’s real truth to the idea that the tax code for the 1 percent is different from the tax code for the 99 percent,” said Victor Fleischer, a law professor at the University of Colorado. “Any taxpayer lucky enough to have appreciated property is usually put to a choice: cash out and pay some tax, or hold the property and risk the vagaries of the market. Only the truly rich can use derivatives to get the best of both worlds — lots of cash and very little risk.”
While Mr. Lauder’s stock holdings in publicly traded companies show some of his tactics, much of his wealth is harder to examine because it is controlled by a maze of privately held trusts and companies.
Significant portions of his inherited stock are held in family trusts, which reduce the ultimate estate tax. Mr. Lauder and his wife have also established their own family trusts, allowing them to bequeath their wealth to their heirs with minimal taxes.
Other trusts and partnerships control his real estate properties in Palm Beach and the Hamptons and at 740 Park Avenue, a building that was once home to John D. Rockefeller, and is known as one of the world’s wealthiest apartment buildings.
United States tax law allows taxpayers to deduct mortgage interest on one’s homes up to $1.1 million in debt.
Whether or not the I.R.S. agrees with Mr. Lauder’s contention that his contract is legitimate, some tax policy experts say the deal illustrates how the wealthy take advantage of the system.
“There’s real truth to the idea that the tax code for the 1 percent is different from the tax code for the 99 percent,” said Victor Fleischer, a law professor at the University of Colorado. “Any taxpayer lucky enough to have appreciated property is usually put to a choice: cash out and pay some tax, or hold the property and risk the vagaries of the market. Only the truly rich can use derivatives to get the best of both worlds — lots of cash and very little risk.”
While Mr. Lauder’s stock holdings in publicly traded companies show some of his tactics, much of his wealth is harder to examine because it is controlled by a maze of privately held trusts and companies.
Significant portions of his inherited stock are held in family trusts, which reduce the ultimate estate tax. Mr. Lauder and his wife have also established their own family trusts, allowing them to bequeath their wealth to their heirs with minimal taxes.
Other trusts and partnerships control his real estate properties in Palm Beach and the Hamptons and at 740 Park Avenue, a building that was once home to John D. Rockefeller, and is known as one of the world’s wealthiest apartment buildings.
United States tax law allows taxpayers to deduct mortgage interest on one’s homes up to $1.1 million in debt.
... Senator Tom Coburn of Oklahoma, said some wealthy taxpayers even deducted mortgage interest on their yachts.
And there is no limit on the amount of property taxes that can be deducted from federal income. So Mr. Lauder is entitled to deduct the $400,000 he pays annually on his Palm Beach mansion as well as what he pays on his home on Park Avenue and his holdings in the Hamptons.
Mr. Lauder deducts property taxes on all of his holdings, his spokesman said. Mr. Lauder declined to say how much that reduced his federal taxes, but said he did not receive tax benefits in some years because of the alternative minimum tax and other limits.
A Passion for Art
In 1976 his generous donations helped him become the youngest trustee of the Metropolitan Museum of Art. He has donated and lent artwork to an assortment of museums. Part of his collection of lavishly decorated ceremonial armor is on display at the Met, in a gallery named for him.
As all art collectors may, Mr. Lauder is entitled to deduct the full market value of artworks donated to museums. (For years, Mr. Lauder availed himself of a quirk in the tax code that allowed donors to take a deduction for donating a portion of an artwork, without actually turning over the art. That break, known as fractional donation, was eliminated in 2006.) The tax code also allows artwork in offices to be deducted as a business expense.
Some wealthy collectors are criticized for using tax breaks to underwrite private collections that offer little access to the public...
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