Bloomberg, How Wal-Mart’s Waltons Maintain Their Billionaire Fortune, by Zachary R. Mider:
America’s richest family, worth more than $100 billion, has exploited a variety of legal loopholes to avoid the estate tax, according to court records and IRS filings obtained through public-records requests. The Waltons’ example highlights how billionaires deftly bypass a tax intended to make sure that the nation’s wealthiest contribute their share to government rather than perpetuate dynastic wealth, a notion of fairness voiced by supporters of the estate tax like Warren Buffett and William Gates Sr.
Estate and gift taxes raised only about $14 billion last year. That’s about 1 percent of the $1.2 trillion passed down in America each year, mostly by the very rich, former Treasury Secretary Lawrence Summers estimated in a December blog post on Reuters.com. The contrast suggests “our estate tax system is broken,” he wrote [How to Target Untaxed Wealth]. ...
Closing just two estate tax loopholes [Familty Limited Partnerships and GRATs] -- ones that the Waltons appear to have used -- would raise more than $2 billion annually over the next decade, according to Treasury Department estimates. That doesn’t count taxes lost to the type of charitable trusts the Waltons used to fund projects like the museum; the department hasn’t estimated that cost. ...
[P]rofessional planners have sometimes held up the Waltons as a model. Patriarch Sam Walton, who founded Wal-Mart in Bentonville, cultivated an image as a regular guy from Oklahoma who enjoyed quail hunting and drove a beat-up Ford pick-up truck. He also showed unusual foresight about estate planning.
According to his autobiography, “Made in America,” Sam Walton started arranging his affairs to avoid a potential estate tax bill in 1953. His five-and-dime-store business was still in its infancy and his oldest child was 9.
That year, he gave a 20 percent stake in the family business to each of his children, keeping 20 percent for himself and his wife.
“The best way to reduce paying estate taxes is to give your assets away before they appreciate,” he wrote in the book.
Sam’s retailing success made his family the richest since the Rockefellers, who themselves were pioneers in estate-tax avoidance. As soon as the tax was enacted in 1916, John D. Rockefeller, then the world’s richest man, circumvented it by simply giving much of his fortune to his son. Congress closed that loophole eight years later by adding a parallel tax on living gifts to heirs. ...
[Charitable lead annuity] trusts are often called “Jackie O.” trusts after Jacqueline Kennedy Onassis, the former First Lady who died in 1994 and whose will called for one. According to IRS data, the Waltons are by far the biggest users of Jackie O. trusts in the U.S.
The money put into these trusts is ostensibly for charity. If the assets appreciate substantially over the years, though, the trusts have another desirable feature: they can pass money tax free to heirs.
A donor locks up assets in these trusts, formally known as charitable lead annuity trusts, or CLATs, for a period of time, say 20 or 30 years. An amount set by the donor is given away each year to charity. Whatever is left at the end goes to a beneficiary, usually the donor’s heirs, without any tax bill.
The type of Jackie O. trust used by the Waltons doesn’t generate a break on income taxes. Instead, the big potential saving is on gift and estate taxes. When a donor sets one up, the IRS assesses how much gift or estate tax is due, based on how much of the trust’s assets will end up benefiting charity and how much will go to heirs. Most donors structure the trusts so that the heirs’ estimated leftover is zero or close to it.
The IRS makes its estimate using a complicated formula tied to the level of U.S. Treasury bond yields during the time when the trust is set up. If the trust’s investments outperform that benchmark rate, then the extra earnings pass to the designated heirs free of any estate tax. The rate has been hovering near all-time lows since 2009. For trusts set up this month, it’s 1.4 percent.
With a big enough spread between the actual performance and the IRS rate, a Jackie O. trust can theoretically save so much tax that it leaves a family richer than if it hadn’t given a dime to charity. ...
The historically low U.S. interest rates since 2009 are making Jackie O. trusts more popular and spurring tax planners to develop variations designed to squeeze out even more tax savings. ... The interest rates have prompted calls for reform even by some estate planners who set up Jackie O. trusts and the non-profit groups that benefit from them. One alternative floated at a Senate Finance Committee hearing in 2008 was to value the donation when the trusts actually give the money to charity, rather than guessing at the amount beforehand. ...
Helen Walton funded her first Jackie O. trusts not with Wal-Mart stock, the family’s biggest asset, but with a stake in Walton Enterprises LLC, the family office upstairs from the bike shop. That may have allowed her to exploit another loophole in the tax code -- one that lets the wealthy discount the value of their fortunes by 30 percent or more. ...
The Waltons have held their Wal-Mart stake in a family limited partnership or similar structure since 1953. ... “It’s beyond belief,” said Wendy Gerzog, a professor at the University of Baltimore and a former U.S. tax court lawyer who has written extensively about the discounts. She said the practice creates “a world of unreality.” ...
[L]awmakers, and the Treasury Department under both U.S. Presidents Bill Clinton and Barack Obama, have proposed eliminating some discounts involving transfers between family members. The Obama administration estimated that its most recent proposal, submitted in 2012, would raise an extra $18.1 billion over 10 years. None of the proposals have gone anywhere. ...
Not long before Helen Walton created her first Jackie O. trust, her former sister-in-law won a court victory validating another tool to fend off the estate tax.
As with the Jackie O. trust, this maneuver exploits the inevitable discrepancy when tax officials try to value future gifts.
In 1993, Audrey Walton put $200 million of Wal-Mart stock into a pair of “grantor retained annuity trusts” or GRATs, to benefit her daughters, Ann and Nancy. ...
The difference between the GRAT and the Jackie O. trust is that the GRAT pays an annuity back to the person who set up the trust, rather than to a charity. The trusts were set up to last for two years, and to pay out $217 million in stock and cash to Audrey Walton. If the stock rose in value so that money was left over at the end, it would go to her daughters tax free. ...
Here’s the catch: Walton claimed she owed no gift tax when she set up the trusts, because, under the IRS’s valuation formula, nothing would remain for her daughters. She claimed, in essence, she was just shifting money out of one pocket and into another, with no tax consequences.
The result is a bet with the IRS that anyone would take -- one that tax planners sometimes describe as a “heads I win, tails we tie.”
Audrey Walton’s bet turned out to be a tie because nothing was left over for her daughters. She declined to comment on the case.
Still, recognizing the potential loophole, the IRS attacked Walton’s trust, demanding a gift tax payment. Walton fought back, and in 2000 the U.S. Tax Court declared the Walton move legitimate and forced the IRS to rewrite federal regulations to allow it.
The “Walton GRAT,” as it’s now known, has become a common estate-planning technique for people with large amounts of liquid assets, such as CEO’s of publicly traded companies. The current low interest rates make it all the more likely that a GRAT bet will be a win rather than a tie. Users of GRATs, according to SEC filings, include the Coors brewing family and billionaire Nike Inc. founder Philip H. Knight.
President Obama has repeatedly called for closing the Walton loophole in his annual budget proposal, estimating it would save $3.9 billion over 10 years. So far, the proposals have gotten no traction.
Walton’s death in 1992 wouldn’t have resulted in an estate tax bill,
assuming he left the bulk of his estate to his widow, Helen. Money
flowing to a surviving spouse is exempt from the tax. Helen died in
2007, leaving billions in Jackie O. trusts.
Graphic: How to Preserve a Family Fortune Through Tax Tricks