How Super Rich Jensen Huang Avoided $8 Billion in Taxes

According to a recent report by The New York Times, 61-year-old Jensen Huang is not only an engineering genius and a Silicon Valley icon but also the leader of NVIDIA, the second-largest company by market capitalization in the world, whose chips support numerous artificial intelligence systems. Thanks to the soaring stock price of NVIDIA, Huang's net worth has reached $127 billion.

Theoretically, when Jensen Huang passes away, his estate would owe the U.S. government 40% of his net worth in taxes. However, according to disclosed securities and tax documents, Huang has successfully transferred a significant portion of his immense wealth to his family tax-free through a series of complex tax avoidance strategies. Notably, the tax savings Huang achieved for his family amount to approximately $8 billion, which may be one of the largest tax avoidance cases in U.S. history.

The wealth protection strategies employed by Huang have become prevalent among the ultra-wealthy. An in-depth analysis of public securities documents reveals that private equity giant Blackstone Group founder Stephen A. Schwarzman, Meta founder and CEO Mark Zuckerberg, and executives from well-known companies such as Google, Coinbase, Eli Lilly, Mastercard, and AMD have all transferred billions of dollars into specific financial instruments to avoid federal estate taxes.

This phenomenon is merely a reflection of the gradual erosion of the estate tax system, which is already levied only on a small number of the wealthiest Americans. Since 2000, although the wealth of the richest Americans has nearly quadrupled, estate tax revenue has stagnated. If the estate tax had kept pace with wealth growth, the U.S. could have collected about $120 billion in taxes last year. In reality, the tax authorities received only a quarter of that amount in estate taxes.

In 2007, Jensen Huang with his wife Lori and their children

The revenue lost due to tax avoidance is enough to double the budget of the U.S. Department of Justice and could be used to double federal funding for cancer and Alzheimer's research Jensen Huang's tax avoidance measures are a vivid case study of how super-rich individuals cleverly exploit loopholes in the U.S. tax system. His tax avoidance strategy does not stem from explicit permission from Congress, but rather from a group of highly creative lawyers who skillfully utilized the ambiguous wording of federal regulations, limited case law from courts, and rulings issued by the IRS in individual cases, which subsequently became the "unwritten rules" of tax avoidance operations.

Jack Bogdanski, a professor at Lewis & Clark Law School and a widely cited author on estate tax papers, stated, "These wealthy individuals have a team of well-trained, talented lawyers who charge up to $1,000 an hour, spending all day figuring out how to help clients evade estate taxes. It is unrealistic to expect anyone in Congress to stop this."

Daniel Hemel, a tax law professor at New York University, estimates that through complex trust structures and other tax avoidance strategies, the wealthiest Americans can pass on about $200 billion in wealth each year without paying estate taxes.

The enforcement of estate tax-related regulations has weakened, partly due to the IRS being severely hampered by years of budget cuts. In the early 1990s, the IRS audited over 20% of estate tax returns. However, by 2020, this percentage had plummeted to about 3%.

With the Republican Party controlling the White House and Congress, this trend may further intensify, as they have been cutting the IRS's enforcement budget. Incoming Senate Majority Leader John Thune and other Republicans on Capitol Hill have long sought to abolish the estate tax, claiming it imposes an unfair penalty on family farms and small businesses.

However, Jensen Huang's multi-billion dollar tax avoidance strategy—detailed in documents he submitted to the U.S. Securities and Exchange Commission (SEC) and information disclosed by his foundation to the IRS—fully reveals the extent to which the estate tax system has been severely hollowed out.

Notable trust and estate lawyer Jonathan Blattmachr commented, "From the perspective of estate tax planning, this is undoubtedly a perfect operation, and Jensen Huang has done exceptionally well."

"Only a fool pays estate tax"

For thousands of years, governments have tried to slow the accumulation of family wealth. Augustus Caesar of ancient Rome controlled the inheritance of wealth by imposing a death tax. The founder of laissez-faire capitalism, Adam Smith, also criticized the system of wealth inheritance. Andrew Carnegie once said, "By imposing heavy taxes on estates at death, the state condemns the selfish millionaire's life, which is not worthy of respect." The United States adopted the modern estate tax in 1916. Over the past few decades, Republicans in Congress have successfully weakened this tax, lowering rates and increasing the exempt amount for estates. Today, a married couple can transfer approximately $27 million in wealth tax-free, with amounts exceeding this typically taxed at a rate of 40%.

Billionaires view tax avoidance as a pastime. Gary Cohn, a former executive at the American investment bank Goldman Sachs and chief economic advisor to elected President Donald J. Trump during his first administration, humorously remarked, "Only a fool pays estate tax."

Clearly, Jensen Huang is no fool. In 1993, he and two other engineers had a moment of inspiration at a Denny’s restaurant in San Jose, California, where they conceived a powerful new type of computer chip, which later laid the foundation for NVIDIA. The company initially focused on the development of 3D graphics chips, but by the early 21st century, its business gradually expanded into other areas, such as providing semiconductor products for Tesla electric vehicles.

Utilizing the "I Dig It" Strategy for Tax Avoidance

In 2012, Jensen Huang and his wife Lori took the first steps to shield their estate from estate taxes.

According to securities documents filed by Huang, they established a financial instrument called an "irrevocable trust" and transferred 584,000 shares of NVIDIA stock into it. These shares were valued at approximately $7 million at the time, but they would ultimately save several times that amount in taxes.

The couple's move drew inspiration from a successful case from 20 years ago, specifically a precedent approved by the IRS in 1995, which tax experts refer to as "I Dig It." (This is a playful take on the name of the financial instrument involved, namely a deliberately flawed grantor trust.)

One of the advantages of "I Dig It" is that it not only significantly avoids estate taxes but also effectively avoids federal gift taxes. Estate tax is levied on assets transferred to heirs while the wealthy are still alive, primarily aimed at maintaining the estate tax collection system. Otherwise, the rich might choose to donate all their property during their lifetime to evade estate taxes.

Here’s how the "I Dig It" strategy works. Suppose wealthy John Doe decides to donate $10 million in cash to a trust fund aimed at providing for his children. As long as he has not reached the $27 million gift tax exemption limit, he does not need to pay gift tax on this donation. Subsequently, the trust fund can use this $10 million, along with a loan provided by Doe, to acquire $100 million worth of stock. According to the IRS ruling from 1995, these stocks would not be subject to estate tax upon Doe's death.

Additionally, the "I Dig It" strategy has another benefit. Suppose the stocks held by the trust fund appreciate tenfold; then, that appreciation would also not be subject to estate tax. However, this could trigger a capital gains tax bill of up to $214 million, calculated at a rate of 23.8% on $900 million in gains However, according to another ruling by the IRS, Doi can pay the tax on behalf of the trust fund without being considered an additional gift to his heirs.

Otherwise, if the trust fund pays the capital gains tax itself, the wealth left to future generations would be significantly reduced.

The "I Dig It" strategy is extremely complex but also highly profitable. Michael D. Mulligan, a senior trust and estate attorney in St. Louis who assisted in developing this strategy, refers to it as a "gift that keeps on giving."

According to documents submitted to the court and securities regulators, a large number of super-rich individuals have adopted various variants of this strategy.

Media mogul Mel Karmazin's family has used multiple "I Dig It" strategies. Bill Davidson, the former owner of the Detroit Pistons, successfully avoided over $2.7 billion in taxes using this strategy. Mitt Romney also employed this technique during his time running the private equity firm Bain Capital and advocated for the repeal of the estate tax when he received the Republican presidential nomination in 2012.

The IRS has questioned some tax avoidance measures that it considers too aggressive. Davidson ultimately reached a settlement with the IRS. The agency claimed that the Karmazin family's arrangements "lacked economic substance" and demanded back taxes of $2.4 million. However, according to a lawyer for the Karmazin family, the IRS ultimately dropped most of its arguments and only collected about $100,000 in taxes.

In Jensen Huang's case, the details provided in the securities filing are limited, but several experts, including Mulligan, indicate that it is almost certainly a classic "I Dig It" gift, loan, and sale transaction.

Huang transferred stocks worth over $3 billion into his trust fund in 2012. If these shares were passed directly to Huang's heirs, they would face an estate tax of up to 40%, meaning the tax could exceed $1 billion. However, through the trust fund arrangement, this massive inheritance may only need to pay a tax of no more than several hundred thousand dollars.

Establishing GRAT Financial Instruments for Tax Avoidance

Soon, the Huang couple took another significant step in reducing estate taxes. Securities filings show that in 2016, Huang established several financial instruments known as Grantor Retained Annuity Trusts (GRATs).

They borrowed a strategy invented years ago for the ex-wife of Walmart co-founder Audrey Walton. Starting in 1993, Walton transferred approximately $200 million worth of stock to two GRATs. The issue is that the trust company must ultimately repay the value of the stock held by Walton, plus some minimal interest. If the value of the stock rises above the amount that must be repaid, the trust company can retain the remaining portion tax-free

The IRS has previously raised objections to this arrangement. However, in 2000, a judge from the U.S. Tax Court supported its legality. Professor Hemel from New York University stated that the IRS could have challenged the use of GRAT in other ways, but the agency ultimately "compromised," essentially allowing the use of trusts as an acceptable means to evade estate taxes.

Billionaires took note of this. Lloyd Blankfein, CEO of Goldman Sachs, casino mogul Sheldon Adelson, oil investor Harold Hamm, cable giant John Malone, and Charles Dolan, as well as designer Ralph Lauren, all established GRATs shortly after the Walton case ruling, helping their families avoid billions of dollars in future taxes.

During President Barack Obama's administration, the U.S. Treasury Department attempted multiple times to increase efforts to combat estate tax evasion, proposing to limit the use of GRATs and "I Dig It" strategies. However, these proposals were defeated in Congress. During Donald Trump's first term, Treasury Secretary Steven Mnuchin, himself a user of GRATs, blocked efforts to close this loophole.

In 2016, Jensen Huang and his wife invested over 3 million shares of NVIDIA stock into their four new GRATs. These shares were worth about $100 million at the time. If the value of these assets increases, their two adult children will receive tax-free windfalls, both of whom currently work at NVIDIA.

And that is indeed the case. Securities filings compiled by data company Equilar show that these shares are now worth over $15 billion. This means the Huang family could avoid paying about $6 billion in estate taxes.

If the trust company belonging to Jensen Huang sells these shares, it would incur a massive capital gains tax—calculated based on NVIDIA's current stock price, exceeding $4 billion. However, the Huang couple can pay this bill on behalf of the trust fund without it being considered a taxable gift to the heirs.

Tax Avoidance Through Charitable Giving

Starting in 2007, Jensen Huang adopted another method to further reduce his family's estate taxes. This strategy involves utilizing his and his wife's charitable foundation Jensen Huang donated NVIDIA shares to himself and the Lori Foundation, which were valued at approximately $330 million at the time of the donation. Since such donations are tax-deductible, this means they reduced the income tax bill for the Huang couple in the year the donation occurred.

The foundation must donate at least 5% of its total assets to charitable organizations each year. However, like many billionaire foundations, Jensen Huang and the Lori Foundation meet this requirement by making substantial donations to so-called "donor-advised funds" (DAFs).

These funds are pools of money managed by donors, with strict limitations on their use, prohibiting purchases for non-charitable purposes such as cars or vacation homes. However, the funds can invest in businesses owned by friends of the donor or donate money to name buildings at the universities their children wish to attend.

It is worth noting that there is a significant loophole in tax law: donor-advised funds are not required to actually donate to charitable organizations. When the donor passes away, control of the fund can be immediately transferred to their children without incurring estate taxes.

In recent years, up to 84% of the donations from Jensen Huang and the Lori Foundation have flowed into their donor-advised fund GeForce, a name that clearly pays homage to NVIDIA's gaming chips. The NVIDIA shares donated by the Huang couple are currently valued at nearly $2 billion.

Although the fund is not required to disclose how its funds are used, the foundation has stated that these assets will be dedicated to charitable causes, including higher education and public health. An NVIDIA spokesperson also confirmed this.

Additionally, there is an extra benefit that cannot be overlooked. Based on NVIDIA's current stock price, the donations to the fund have saved Jensen Huang approximately $800 million in estate taxes. (Tencent Technology Special Translation by Jin Lu)

Source: Tencent Technology (ID: qqtech), Original Title: "How Super Rich Jensen Huang Avoids $8 Billion in Taxes"

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