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Taxation Innovation

John Rowe figured he could handle the IRS. After getting advice from a law firm and a financial planner, the wealthy executive chairman and CEO of Aetna Inc. set up a scheme that would transfer millions of dollars to his family while minimizing the gift taxes the family paid Uncle Sam.

Rowe took nonqualified stock options worth an estimated $28.5 million and placed them in two "grantor retained annuity trusts" (GRATs) in 2003. These trusts would pay Rowe an annual income for a set period, and whatever was left in the trust after that time would go to Rowe's family. This stratagem would produce dramatic gift-tax savings.

So how did Wealth Transfer manage to obtain this patent? The answer, critics say, is that the patent office didn't know what it was doing.

Patent Blunder

Such concerns are typical whenever the patent office first begins issuing patents for an industry. Those in the industry fear patents will limit what they can do and will dramatically raise their costs.

These worries eventually go away, and the industry adjusts to the new reality, according to many patent experts. For example, banks were outraged when the patent office began issuing business- method patents affecting the financial service industry in the late 1990s. But those patents remain in effect, and banks are doing fine.


Steven Seidenberg

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