Taxes: How Wealth Is Structured and Preserved

The Million Dollar Question: From 2014 to 2018, what was the federal income tax rate paid by the 25 wealthiest Americans, measured as the income tax they paid divided by their wealth growth?

A) 0% B) 3.4% C) 15.8% D) 37%

Read on for the answer.

A working map of how the US tax code applies to wealth above $5 million — capital gains versus ordinary income, the buy-borrow-die strategy, the trust structures, the charitable tools, the residency choices — and the new $15 million estate exemption that locked in for 2026. Strictly explanatory, not advice.

What it is

Two distinctions matter before any analysis of how wealthy households manage their tax exposure.

The first is tax avoidance versus tax evasion. Avoidance is the legal use of structures the tax code provides — trusts, charitable vehicles, capital-gains harvesting, jurisdiction shopping. Evasion is failing to report income or fraudulently claiming deductions. Press coverage routinely conflates the two; the substantive distinction matters enormously. Every structure named in this post is legal under current US tax law. The piece is about the structures themselves, not about edge cases that cross the line.

The second distinction is more architectural. Three features of the US federal tax code drive almost everything about how the wealthy are taxed differently from people whose income comes from labor:

• Long-term capital gains are taxed at a lower rate than ordinary income. The top federal rate on long-term capital gains is 20% plus the 3.8% Net Investment Income Tax — 23.8% all-in — versus the top federal ordinary-income rate of 37%, per the IRS’s published brackets. For a household whose income is mostly investment returns, that gap compounds across decades.
• Unrealized gains are not taxed. Capital gains become taxable only when an asset is sold. The wealthy can choose when (and whether) to realize, giving them control over the tax timing in a way wage earners do not have.
• Inherited assets receive a stepped-up basis at death. Decades of appreciation in an asset can pass tax-free to heirs at the moment of inheritance — the heir receives the asset at fair market value, and the lifetime gain is erased for tax purposes.

Those three features, working together, are the engine behind the most-cited modern wealth-tax fact: that the 25 wealthiest Americans paid roughly $13.6 billion in federal income tax against $401 billion in wealth growth from 2014 to 2018 — a 3.4% “true tax rate” by ProPublica’s calculation. The same group paid 15.8% measured against their reported income; the gap between those two numbers is the structural story this post tells.

What follows: the tier-by-tier shape of who uses which tools, the mechanics of the major structures (buy-borrow-die, GRATs and IDGTs and SLATs, dynasty trusts, charitable vehicles), the operational cost, the tradeoffs, and what the One Big Beautiful Bill Act (signed July 4, 2025) changed about the federal estate-and-gift exemption starting January 2026.

Who uses it

The tax-structure ladder maps onto the Wealth Levels bands.

$1M–$5M (“millionaires next door”). Tax planning is mostly retirement-account optimization (401(k), IRA), capital-gains management on a primary home, modest charitable deductions. State of residence starts to matter. A revocable living trust for probate avoidance is common.

$5M–$30M. Real coordinated tax planning begins. CPA + estate attorney work together on annual planning. First irrevocable trust structures (often life insurance trusts). Capital-gains harvesting and tax-loss harvesting strategies. Donor-advised funds become rational. Concentrated-stock diversification strategies for households with equity-comp wealth.

$30M–$100M. Multiple trust structures (GRATs, IDGTs, SLATs); a private foundation or large DAF; coordinated annual planning across federal, state, and sometimes international. Carry interest treatment for finance partners. Qualified Small Business Stock (§1202) for early-stage tech founders. Strategic Roth conversions. The household’s tax life is structurally complex; mistakes are expensive.

$100M+. Dedicated tax counsel inside the family office. Dynasty trusts in trust-haven states (South Dakota, Delaware, Nevada). Private placement life insurance (PPLI). Coordinated estate freezes that lock in current asset values for transfer-tax purposes. Multi-jurisdictional residency planning.

$1B+. Tax planning runs at the institutional level. Foundations operate as endowed entities at hundreds of millions of dollars. Trust structures span multiple generations and jurisdictions. The tax counsel’s role is closer to corporate-finance advisory than personal tax advice.

Why they use it

Five reasons recur across every tier above $5 million.

The tax code rewards capital over labor. Wage income gets taxed at top federal rates of 37% plus state plus payroll. Long-term capital gains are taxed at 23.8% federal all-in plus state. Households whose income is primarily investment returns pay materially less than households whose income is wages — even before any structural planning.

Realization is a choice. Capital gains are taxed only when assets are sold. Wealthy households control when (and whether) to realize, giving them an option that wage earners do not have.

Inheritance resets the basis. Step-up in basis at death erases the unrealized appreciation that built up during the original holder’s lifetime. An asset purchased for $1 million and held until the original buyer’s death at $20 million transfers to heirs at a $20 million basis — eliminating the $19 million capital gain for federal income-tax purposes.

Charitable giving has unique tax leverage. Donating appreciated stock to a donor-advised fund or a private foundation gives the donor the full fair-market-value deduction and avoids the capital-gains tax that would have applied if the stock had been sold first. The combination is the most efficient single-transaction structure in the US tax code.

State of residence matters more than people think. Federal taxation is the same across states; state income tax varies from 0% (Florida, Texas, Nevada, Washington, Tennessee, South Dakota, Wyoming, Alaska) to ~13.3% in California, per Tax Foundation 2025 data. The pure-tax move from California or New York to Florida or Texas can save 10%-plus of annual income at the top of the bracket — one of the most-documented relocation stories of the 2020s.

How it works (the structures)

The major structures the wealthy use to operate inside the system efficiently. Each one is legal under current US tax law and widely used.

1. Buy, borrow, die — the defining strategy of large concentrated wealth. Step 1 (buy): hold appreciating assets long-term. Step 2 (borrow): take loans against the assets at preferential rates — typically a securities-backed line of credit at 50–80% loan-to-value, priced at SOFR plus 150–250 basis points — to fund spending. Borrowed money is not income, so no income tax is triggered. Step 3 (die): assets pass to heirs with a stepped-up basis, eliminating the unrealized gain forever. The household never sells, never realizes the gain, never pays capital-gains tax on the appreciation. (Deeper treatment in Borrowing Against Wealth.)

2. The capital-gains preference. Long-term capital gains (assets held more than one year) are federally taxed at 0%, 15%, or 20% depending on income bracket, plus the 3.8% Net Investment Income Tax above certain thresholds. The top all-in federal rate of 23.8% compares to a top ordinary-income rate of 37%. The 13.2-percentage-point gap is the largest single structural advantage at the top of the wealth distribution.

3. Trust structures. A trust is a legal vehicle that holds assets on behalf of beneficiaries, separate from the grantor’s personal estate. The major US types in wealth planning:

• GRAT (Grantor Retained Annuity Trust). Assets are transferred into the trust; the grantor receives back an annuity for a fixed term; remaining appreciation passes to heirs gift-tax-free if the assets outperform the IRS’s published interest rate (the §7520 rate). The Walton family is the most-publicized user of this structure.
• IDGT (Intentionally Defective Grantor Trust). The grantor pays income tax on trust income while the trust assets compound for heirs; the tax payment itself acts as an additional tax-free transfer to the beneficiaries.
• SLAT (Spousal Lifetime Access Trust). One spouse gifts to a trust for the other spouse’s benefit, locking in current exemption levels while preserving access during life. Heavily used in the 2024–2025 window when the prior $13.99 million exemption was scheduled to sunset.
• Dynasty trust. Designed to last for multiple generations without triggering generation-skipping transfer tax. South Dakota, Delaware, and Nevada allow perpetual or near-perpetual trusts because they have eliminated the common-law rule against perpetuities.

4. Charitable tools.
– Donor-Advised Funds (DAFs). Operated by Fidelity Charitable, Schwab Charitable, Vanguard Charitable, and many community foundations. Donor receives the deduction at the time of the contribution; controls grant timing afterward. US DAF assets reached approximately $230 billion as of the 2024 NPT report and continue to grow.
– Private foundation. Separate legal entity, requires a 5% annual distribution, gives the donor more control over governance and investments. Operating cost: $50,000–$500,000+ per year depending on scale.
– Charitable Remainder Trust (CRT). Donor receives an income stream for a fixed term; remainder goes to charity. The donor takes a deduction at the present value of the charitable remainder.
– Charitable Lead Trust (CLT). The opposite of a CRT — charity receives the income for a term; remainder goes to family. Effectively transfers appreciation to heirs at low transfer-tax cost.

5. State residency and jurisdiction shopping. The pure-tax move from California or New York to Florida or Texas can save 10% or more of annual income at the top of the state-tax bracket. Trust havens (South Dakota, Delaware, Nevada) allow non-residents to establish trusts under those states’ favorable laws. The combination — physical residence in a no-income-tax state plus trust assets in a trust-haven state — is the operational reality at $50M+.

Million Dollar Question — sidebar: Which US state is the leading “dynasty trust” jurisdiction? South Dakota. The state eliminated the common-law rule against perpetuities in 1983, has no state income tax, and offers among the strongest asset-protection statutes in the US. South Dakota now holds over $700 billion in trust assets, most of it from out-of-state families. Delaware and Nevada are the closest competitors.

What it costs

The operational cost of running these structures.

Tax preparation at the wealthy tier: $5,000–$50,000 annually for a coordinated CPA-plus-estate-attorney engagement. At UHNW, $100,000-plus in annual professional fees is normal and rises with the number of entities and jurisdictions.

Trust formation: $5,000–$25,000 in setup legal fees per trust, plus ongoing trustee and administration fees of 0.10%–0.50% of trust assets annually for institutional trustees (corporate trust departments, trust companies). Family-member trustees are cheaper but bring governance and liability complications.

Private foundation: $50,000–$500,000 annual operating cost (staff, legal, accounting, investment management); requires the 5% annual distribution to maintain qualified status. A foundation only makes sense above ~$5–10 million in initial corpus; below that, a DAF is structurally cheaper and operationally simpler.

Private Placement Life Insurance (PPLI): front-loaded fees of roughly 1.5–3% of contributed assets, plus annual fees of 1–2% on cash value. Suitable for $5M+ allocations because the underlying investment growth becomes tax-deferred inside the policy.

State relocation: apparent cost is zero, but real cost includes a property purchase or rental in the new state, the audit risk on the state of departure (California and New York both aggressively audit residency claims for at least three years post-departure), and the family-and-lifestyle disruption that can outweigh the tax benefit if not handled carefully.

The income-tax savings at scale dwarf the structure costs at every tier above ~$5 million. A household with $500,000 of annual investment income relocating from California to Florida saves ~$66,000 a year in state tax — pays for $20,000 of legal fees and a property decision the household was already going to make.

Hidden costs and tradeoffs

What the brochure does not lead with.

Complexity becomes a liability. By $30 million, the household’s tax life is genuinely complex — multiple entities, multiple jurisdictions, annual coordinated planning. A single missed GRAT election, a delayed trust filing, an inconsistent characterization of an entity across federal and state returns can cost millions and trigger audits. The structures only work if they are administered correctly, year after year, with consistent decision-making.

Loss of control. Many of the most-effective structures (irrevocable trusts, foundations, GRATs that have already paid out their annuity) require the grantor to give up control of the assets. The trust is effective for tax purposes precisely because it is not yours anymore. Some grantors find this harder to live with than they expected; the asset-protection benefit and the loss-of-control feature are the same thing.

Audit and challenge risk. The IRS audit rate above $10 million of income is meaningfully higher than for the broader population. Aggressive structures — particularly anything that pushes valuations or jurisdictional claims, or that uses entities the IRS has signaled disfavor of (certain conservation-easement structures, micro-captive insurance arrangements) — invite scrutiny. The IRS’s Dirty Dozen list names categories of arrangements the agency considers abusive; that list changes year to year.

Political and regulatory risk. The favorable treatment of long-term capital gains, the step-up in basis at death, the carried-interest preference, and the dynasty-trust structures the trust-haven states have built are perennially debated in Congress. Several are explicit targets of progressive tax-reform proposals. The legal landscape that exists today is not guaranteed to exist in five or ten years. Decisions made now (especially irrevocable ones) are bets on the rules staying roughly where they are — and the rules sometimes change.

The “we structured this perfectly” delusion. Wealthy households consistently underestimate the operational risk inside their tax structures. Effective tax planning at $50M+ is integrated across federal income, state income, gift, estate, and generation-skipping transfer taxes — not the isolated optimization of any one of them. The household that thinks it has its taxes handled because it has a great estate-planning attorney is usually missing the integration.

A theme that runs through the canon: the system is more complex than any single structure suggests.

What people get wrong

Five corrections, in roughly the order they cause confusion.

1. Tax avoidance is not tax evasion. Avoidance is the legal use of structures the tax code provides. Evasion is failing to report income or fraudulently claiming deductions. The distinction matters enormously in framing, in legal exposure, and in moral responsibility. Conflating the two is the most common failure of wealth-tax journalism.

2. The “3.4% true tax rate” is real, but the methodology matters. ProPublica’s headline number divides federal income tax paid by wealth growth. The same 25 wealthy Americans paid 15.8% measured against reported income. Both numbers are accurate; they answer different questions. The wealth-growth measure is what makes the headline shocking — and is also what reveals the structural feature it is measuring: that unrealized gains are not income for tax purposes. This is policy-by-design, not policy-by-accident. The methodology is explained in detail by ProPublica itself.

3. Most “billionaire tax avoidance” is just the capital-gains preference plus the step-up in basis. The single largest structural advantage at the top of the wealth distribution is the lower long-term capital gains rate combined with the elimination of basis at death. Both are explicitly written into the federal tax code as policy choices, not loopholes. Whether they should exist is a political question; that they do is settled. The trust structures, the foundations, the residency moves are leverage on top of those two foundational features — not the foundation themselves.

4. State income tax matters more than federal for the relocation decision. Federal rates apply equally everywhere. The 10–13 percentage point gap between California or New York and Florida or Texas, applied to large investment income across decades, often dominates the household’s net-worth decision about where to live in retirement. The Silicon Valley founder migrating to Austin, the New York financier moving to Palm Beach, the Bay Area tech executive registering in Wyoming — these are not lifestyle choices being rationalized as tax decisions. For most of the people making them, they are tax decisions that come with lifestyle constraints.

5. The OBBBA estate-and-gift exemption changes the planning calculus. As of January 1, 2026, the federal estate-and-gift exemption is permanently $15 million per individual / $30 million per married couple, indexed to inflation, made permanent by the OBBBA signed July 4, 2025. Households that scrambled in late 2025 to use the prior $13.99M exemption before its scheduled TCJA sunset to ~$7M may find some of those moves unnecessary in retrospect — though irrevocable trust transfers are still irrevocable, and the SLATs and dynasty trusts created in that window will continue to operate.

Bottom line

The US tax code applies one set of rules to wealth above $5 million and a different set in practice — not because the wealthy are breaking the rules, but because the rules themselves treat capital differently from labor, untaxed unrealized gain differently from realized income, and inherited assets differently from earned assets. The 3.4% true tax rate that ProPublica measured is the predictable mathematical consequence of those design choices. The structures named here — trusts, foundations, donor-advised funds, capital-gains harvesting, jurisdiction shopping — are the tools the wealthy use to operate inside that system efficiently.

What changed in 2025: the One Big Beautiful Bill Act locked in a $15 million federal estate-and-gift exemption per individual ($30 million per married couple) starting January 1, 2026, made permanent and indexe