If you have a few minutes, have a gander at the well-written article at http://www.bloomberg.com/... The Wal-Mart Walton family (and other super-wealthy families) get benefits from the tax code that enable them to pass wealth to their heirs while avoiding inheritance and gift taxes. Prepare to be outraged.
I'll summarize below.
The article describes the various trusts and other means by which the Walton family is able to avoid inheritance taxes. Inheritance taxes are designed to collect revenue from very large estates, while allowing those who had the fortune to generate the wealth to enjoy their rewards, but prevent children (and other family members) from inherently maintaining super-wealth across generations solely because of the success of their parents (or other relatives.)
There are three mechanisms described in the article for the super-rich to avoid paying inheritance taxes:
Jackie O. Trusts: You make a donation of appreciated assets to a charitable organization, which can sell them without generating capital gains tax. The charitable organization has exclusive access to the generated income for some period of time, after which the assets devolve to the heirs, tax-free.
The fraction of the assets that must be passed to the charity as income is fixed at the time of creation of the trust. (And since interest rates are at historically low rates right now, it's a very good time to set up this kind of trust, for those of you reading this who are billionaires.) Any asset appreciation in excess of that amount will eventually devolve to the heirs. The charity receives the risk-free portion of income, while the heirs get the premium portion.
Holding companies The Waltons (and other wealthy families) hold much of their wealth in private trusts and holding companies. Much of the assets in these holding companies is invested in Wal-Mart stock or other liquid assets, but since the holding companies are not publicly traded and illiquid, the families can claim that illiquid assets are less valuable than the underlying assets. Being able to discount the declared value of the asset allows the family to avoid significant amounts of capital gains taxes, and lowers the amount of asset that will devolve to the charities (and therefore increases the amount that will revert to the heirs.)
Walton GRAT A second type of trust (grantor-retained annuity trust) allowed the asset holder to put assets in a trust that then pays income back to the donor. The rate of income is defined by the interest rates available at the time the trust is created. After the conclusion of the trust, any remaining assets devolve to heirs tax-free.
Because it is possible that all assets are consumed by the income stream, this type of trust has the potential to create no assets for the heirs. But in reality the interest rates are set at a risk-free rate, while the actual assets are invested in risky assets (such as stock) that tend to increase at a faster pace than risk-free assets (think government bonds.) This makes it highly possible that the amount of money passed to heirs at the conclusion of the trust can exceed the amount originally donated, all of which is passed without gift or inheritance taxes. (If the actual rate of return fails to match the risk-free rate, then nothing is received by the heirs, and no taxes are owed.) This is well described as "Heads I win, tails we tie."
Policy Changes
Seemingly these types of tax-avoidance schemes are legal. (And if they skirt the legality of the tax code, the families can afford absolute top legal talent who can argue the legality of their efforts.)
Closing these loopholes has been proposed, but as you can well imagine, the super-wealthy have more than a few advocates among our elected representatives, so changes to these laws would be difficult to pass.
Frankly, the most effective course of action is to describe how these things work in public, so that those of us who don't get these kinds of benefits can be aware. We're getting screwed people, we just never know quite how.