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The Getty Family’s Trust Issues [1]

['Condé Nast', 'Evan Osnos']

Date: 2023-01-23

The legal survival of a multimillion-dollar tax dodge can hinge on minutiae. Auditors have been known to examine not only what state you claimed to call home but also where you swiped your gym card, the locations of your social-media posts, and where you keep your most treasured belongings—an examination known in the industry as the “Teddy-bear test.” To gauge what investigators might think of the approach laid out in Sonn’s suit, I interviewed five tax lawyers. They said the final tax bill would likely rest on subtle facts—for instance, how much trust business was done in California, or whether the beneficiaries moved away with plans to return.

Cartoon by Maggie Larson Share Share Shop Shop

Darien Shanske, a law professor at U.C. Davis, characterized the Gettys’ approach as “aggressive, obnoxious tax planning,” saying, “They are at the limit, or perhaps beyond the limit.” But the family’s larger strategy, he told me, might be simply to take their chances with California’s version of the I.R.S., the Franchise Tax Board. The F.T.B., like many agencies, has a finite capacity for complex cases, especially when faced with a well-resourced litigant. “They’re probably guessing that, in the unlikely event that the F.T.B. challenges them, it may well lose, thanks to their preparatory work—or that, faced with this work and the legal uncertainties, it’ll just decide to settle.” Leberman, the trust administrator, told me that the “major portion” of work was kept “outside the State of California,” and that the family intends to “fulfill any and all tax obligations.” In Shanske’s view, this is a slender pledge; fulfilling narrowly conceived legal obligations, while avoiding taxes in a state so closely associated with the Getty family, undermines their claim to social responsibility. “There’s a price schedule that we set amongst ourselves as a polity,” he said. “And they decided they want to pay less.”

Spend enough time around wealth managers and their clients and you can start to see the whole story of American power and suffering as a function of the simple arithmetic of compounding—of money making money, of lobbyists layering on new exemptions each decade, of the cultural amnesia that makes ideas about wealth come to seem normal, honorable, inevitable. In private moments, even Old Paul Getty marvelled at his drive to accumulate. “I don’t know why I continue to be active in business,” he wrote in his diary in 1952, four decades after he first tried to retire. “Force of habit, I suppose.”

What motivates those who already have so much to strategize so hard to have a little more? Greed is not always about money for money’s sake. For some, it’s power. (“The prize of the general is not a bigger tent but command,” Oliver Wendell Holmes said.) For others, cheating on your taxes is a nihilistic triumph. (“That makes me smart.”) For more than a few, it’s about fear. Luke Weil, an heir to a gambling-industry fortune, once told a documentarian that the prospect of losing his inheritance haunted him like the threat of “losing a parent or a sibling.”

The deepest motive may be even more primal, an innate appetite for status. “If you measure the blood levels of the chimp on top of the hierarchy, they tend to have high serotonin and testosterone levels, which are mood-enhancing,” Harrington, the sociologist, said. Putting that in human terms, she continued, “If you don’t preserve the wealth enough so that the intermarriage and education and status-maintenance activities continue, then you’re also letting the institution crumble.” Perpetuity, after all, is priceless. “The fortune is the monument you build to yourself,” she said. (For those who are truly mortality-avoidant, there is the personal-revival trust, a fund geared to clients who plan to be cryogenically frozen and want to be assured of coming back in comfort.)

In their current condition, taxes on American wealth are, effectively, on the honor system, with opt-outs for the flagrantly defiant. Could it be different? In recent years, the highest-profile ideas have been wealth taxes, such as Senator Warren’s proposal for a two-per-cent annual levy on fortunes greater than $50 million, and an extra one per cent above a billion. Critics say that the idea fails to distinguish trustafarians from entrepreneurs, and that people will cheat—though we don’t usually abandon speed limits just because speeders will speed.

Other ideas have received less attention. In 2021, Democrats proposed to narrow the angel-of-death loophole, expand the estate tax, impose a billionaires’ income tax, and eliminate some of the most popular trusts, including the GRAT. But lobbyists mobilized, reviving some of the same arguments that gutted the estate tax, and by Christmas the exemptions had been saved. “Closing the loopholes is not rocket science,” Lord, the Arizona lawyer, said. “All you need is a couple of bought-off senators.”

Still, the perversities of the tax code have become so glaring that even some of their most devoted protectors suspect that change is coming. Blum, the Texas lawyer, lamented in the seminar last year that Congress had “shined a spotlight on many of the best tools in our toolbox that we use to avoid estate tax.” He warned, “Now that the general public is aware, there is a growing outcry to shut down these benefits. This is a wake-up call that, sooner or later, the tax landscape will likely drastically change.”

Many of the ideas for reform converge around the need to prevent the re-feudalization of American wealth—the Spartan scenario, which early Americans fought so hard to prevent. For the moment, restoring real taxes on what we leave behind could be more politically viable than levying a wealth tax. Instead of colliding with American myths about the pursuit of success, such taxes could tap into Americans’ ambivalence about inherited riches. Some proponents suggest a federal rule against perpetuities, to impose a universal ban on dynasty trusts. Others suggest stronger financial incentives for whistle-blowers. “Governments have limited budgets, the stuff is complicated, and the advisers know what’s going on,” McCaffery said. “They know where the bodies are buried.”

In one of my conversations with Sonn, I asked why more people from her rarefied wing of financial services didn’t speak out. “Anybody who is within the industry, and has been there a long time, has accepted certain tenets,” she said. “Climate change is an ‘externality.’ Social injustice, and the various social crises that we’re experiencing right now, would be considered ‘externalities.’ And they’re actually mandated by corporate law to say, ‘You cannot think about the externalities. You have to think about the profit first.’ ”

Sonn told me she didn’t know anyone else in finance who had publicly criticized a client or the underlying assumptions of the business. “There’s an unspoken omertà,” she said. People “become engaged in the wrongdoing themselves. So they’re able to enforce a certain kind of culture of silence around bad behavior.” Sonn had started out in wealth management determined to help people find “tax-efficient” ways of clearing their conscience but had come to see an ethical flaw in that ambition. “The financial-services industry lives between the letter of the law and the spirit of the law,” she said. “That’s what tax efficiency is.”

Sarah Getty insisted that the sisters had acted in accordance with their family’s values. “Everything we were trying to do was lawful,” she said. “I’m not against paying taxes at all, because I think they’re very important, especially if they go in the right things. I would want the right government to be in control, though, because, if the wrong government is in control, then they go to all the stuff I don’t support. I’m very against military and guns and weapons, and very pro-planet.” Like many others I spoke to while reporting on Sonn’s dispute with the Gettys, Sarah described a feeling of captivity to industries and laws that enriched her but tried her conscience. Nicolette told me, “This Nevada trust arrangement was made before I became a trustee or was included in the trust or Getty matters at all.” She went on, “I’ll admit that for a time I did consider the option of moving out of California in order to avoid the tax, because it is quite substantial.” But, she said, she abandoned the idea, and expects to pay about $30 million in taxes on her share of the trust. “I’m one who thinks the tax burden needs to be higher on the wealthy such as myself and my family,” she said. Her sister Kendalle, who declined to comment for this article, is fond of retweeting posts by Bernie Sanders: “Billionaires get richer & pay less in taxes while millions are unemployed, kids go hungry, veterans sleep on the street. We must stand up to the billionaire class and create an economy for all, not just a few.”

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[1] Url: https://www.newyorker.com/magazine/2023/01/23/the-getty-familys-trust-issues

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