•$100 BILLION: How America’s richest family avoids taxes, maintains its wealth

$100 billion: How America’s richest family avoids taxes, maintains its wealth

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Alice Walton recently received an honorary degree of Doctor of Arts and Humane Letters from the University of Arkansas. (AP File Photo)

By Zachary R. Mider, bloomberg News
Posted: 09/13/13, 9:19 AM PDT |

Visitors to the Crystal Bridges Museum of American Art in Bentonville, Ark., leave appreciative notes on a glass wall near the entrance.

“Thanks Alice!’’ reads one. “Merci Alice Walton, pour la vision!’’ reads another.

Wal-Mart Stores Inc. heiress Alice Walton founded Crystal Bridges in 2011 in a wooded ravine next to her childhood home, supplying dozens of paintings from her personal collection. Bankrolled by more than $1 billion in donations from her family, the museum attests to the Waltons’ generosity and vast wealth. It’s also a monument to their skill at preserving that fortune across generations.

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 Internal Revenue Service 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.

Estate and gift taxes raised 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. “Our estate tax system is broken,’’ he wrote.

Alice Walton’s mother and brother poured more than $9 billion into trusts since 2003 that fund charitable projects like Crystal Bridges and are also designed to protect gifts to heirs from taxation. Her former sister-in-law, Audrey Walton, pioneered a tax-avoidance maneuver that is now widely used by U.S. billionaires.
“I hate to say it, but the very rich pay very little in gift and estate tax,’’ said Jerome Hesch, a lawyer at Berger Singerman in Miami who reviewed some of the Walton family’s trust filings for Bloomberg. “At the Waltons’ numbers, the savings are unbelievable.’’

Lance Morgan, who represents the branch of the family that includes Wal-Mart founder Sam Walton’s three surviving children and eight grandchildren, said in a statement that “any charitable or estate planning practices employed by the Walton family are broadly available and commonly used.’’
Spurred by historically low interest rates that magnify the tax savings, the richest Americans have amassed at least $20 billion in trusts like those used by the Waltons. They include Elaine Marshall, the Koch Industries Inc. director, and Fidelity mutual funds’ Johnson family.

A 40 percent tax is levied at death on estates of more than $5.25 million for an individual or $10.5 million for a couple. Total lifetime giving to heirs that exceeds those thresholds is also taxed at 40 percent, preventing people from avoiding the estate tax through early handouts.
Guarding the Waltons’ wealth as it passes from one generation to the next is the task of a handful of staffers laboring in an unmarked suite in Bentonville, above a bike shop called Phat Tire. Walton Enterprises LLC manages the world’s biggest fortune in a nondescript office that even employees of the coffee shop next door have never heard of.

The family’s estate-planning efforts are well shielded from public view. The wills of Alice’s parents, Sam and Helen, on file in an Arkansas probate court, reveal little about their financial arrangements. That of her brother John, who died in 2005, was sealed by a Wyoming judge.
Still, professional planners have sometimes held up the Waltons as a model. Patriarch Sam Walton 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.
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.

Not all of Rockefeller’s Gilded Age contemporaries sought to found dynasties. Andrew Carnegie donated almost his entire fortune to charity, building thousands of libraries across the country. In this era, Warren Buffett and William Gates III have pledged publicly to give away all but a nominal amount to philanthropy.
“We shouldn’t have a situation where gimmicks allow rich people to avoid estate taxation,’’ Gates’s father, William Gates Sr., the author of a 2004 book that advocated for the estate tax, said in an interview. “A value in our lives is having children who make their own way to some extent.’’

Alice Walton, 63, the youngest of Sam and Helen Walton’s four children, is a former money manager who founded and ran her own financial firm, Llama Co. She lives on a ranch in Texas, where she raises award-winning cutting horses and collects art.
In 2005, Walton grabbed the art world’s attention with a series of purchases. Spending as much as $35 million for a single work, she quickly amassed the collection that would form the basis of Crystal Bridges.
Most of the money for Walton’s museum - more than $1 billion, including endowments - came from the Walton Family Foundation, the family’s main charitable arm.

The Foundation, in turn, is funded mostly by a series of 21 trusts. Sam Walton’s widow, Helen, set up four of the trusts in 2003. Her estate established 12 more after her death in 2007. Her son John, who died in an ultra-light plane crash in 2005, provided for five more in his estate.
These 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.

When a donor sets up a Jackie O. trust, 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 save so much tax that it leaves a family richer than if it hadn’t given a dime to charity.
Alice’s mother, Helen, chose an auspicious time to set up her first four Jackie O. trusts in January 2003. The IRS rate of 3.6 percent was the lowest since 1970, and Treasury yields rose the next month.
Those trusts can only save taxes if they beat that 3.6 percent rate. From 2007 to 2011 - the years for which the IRS provided public copies of the trusts’ tax returns -- they did so handily.

The trusts returned about 14 percent a year before taxes during that period, according to a Bloomberg analysis of IRS filings. That growth means the four Helen Walton trusts have been accumulating assets faster than they give them away. As of 2011, they held a combined $2 billion, up from $1.4 billion in 2007.
Barring a stark reversal of fortune, at least that much money will probably pass to Helen Walton’s heirs.
Jackie O. trusts ``are primarily charitable planning tools whose only general guarantee is that 100 percent of the assets, plus an assumed return approved by the IRS, will be distributed to charity,’’ family spokesman Morgan said in a statement.

Because assets are locked up for decades, such trusts are attractive only to the wealthiest families, said John Anzivino, a principal at Kaufman Rossin & Co. in Miami.
“You have to be someone who’s willing to say, ‘I don’t need this extra money,’’’ Anzivino said.
Wealthy families held a record $20.9 billion in Jackie O. trusts in 2011, the last year for which IRS figures are available, almost twice the amount they held in 2000.
Leon Hess, the late oil magnate and New York Jets owner, created one at his death in 1999 that’s now worth $682 million. Hedge-fund billionaire David Tepper’s trusts are worth $155 million. Elaine Marshall’s Jackie O. trusts are worth $169 million, and the Johnson family’s is worth $91 million. Representatives of all these donors or their families declined to comment or didn’t return calls.

The historically low U.S. interest rates since 2009 are making Jackie O. trusts more popular. “This time in history is probably going to go down as a unique opportunity’’ to “transfer assets out of an estate at the lowest cost,’’ said Charles J. McLucas, president of Charitable Trust Administrators Inc. in Tustin, California.
Jay Friedman, an accountant at Perelson Weiner LLP in New York, examined data compiled by Bloomberg about one of the Jackie O. trusts set up in 2003. He estimated that single trust would last 39 years and would leave $2.2 billion for Helen Walton’s heirs.

“It’s an enormous amount of wealth transfer, with avoidance of gift tax,’’ Friedman said. “At the end of the term, you see those gigantic numbers.’’
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.
Walton Enterprises is essentially a vehicle for holding the family’s Wal-Mart stock. Individuals can claim that the value of a stake in such holding companies is far less than that of the underlying shares - even if the family can liquidate the stock whenever it wants.

The IRS lost a series of Tax Court cases in the 1990s to taxpayers who contended that holding assets through such companies diminished their value.
One clue in the IRS filings from the 2003 trusts suggests Helen Walton claimed such a discount, according to Hesch, the Miami lawyer. The trusts own stakes in Walton Enterprises that generated dividend yields of about 7 percent a year, more than three times what Wal-Mart stock paid out during the same period.
Such high-dividend yields signal that the family may be valuing the Walton Enterprises stake at far less than the value of the underlying stock, Hesch said. The technique can be used to “super-charge’’ the tax savings from a charitable trust, he said.

“It’s beyond belief,’’ said Wendy Gerzog, a professor at the University of Baltimore who has written extensively about the discounts. The practice creates “a world of unreality.’’
Morgan, the Walton family spokesman, declined to say whether the Waltons have ever claimed such discounts.
Sam 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.

There’s little sign that the estate tax has significantly eroded the family’s fortune. Since Helen Walton died, Walton Enterprises has shed just 4 percent of its Wal-Mart stock, some of which remains in the Jackie O. trusts. Because of share buybacks, its control of the company has increased, from 40 percent to 49 percent.
- With assistance from Renee Dudley and David de Jong in New York, Richard Rubin in Washington, Jesse Drucker in Rome and Nick Tamasi and Michael Novatkoski in Princeton, N.J.

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