What do the Waltons and Jackie Onassis have in common? (Hint: it's the tax billionaire's don't pay..
Visitors to the Crystal Bridges Museum of
American Art in Bentonville, Arkansas,
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. (WMT) 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, 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.
‘Unbelievable’ Savings
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. Another 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 LLP
in Miami who reviewed some of the Walton
family’s trust filings for Bloomberg. “At the
Waltons’ numbers, the savings are
unbelievable.”
A family spokesman, Lance Morgan, said in
a statement that “any charitable or estate
planning practices employed by the Walton
family are broadly available and commonly
used.”
Morgan represents the branch of the family
that includes Wal-Mart founder Sam
Walton’s three surviving children and eight
grandchildren. Their Wal-Mart stake is
worth enough to fill a large backyard
swimming pool with solid gold.
Amassing Billions
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.
Closing just two estate tax loopholes --
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.
‘More Unfair’
In a sign of just how much money is at
stake, the IRS is trying to collect as much
as $2.8 billion from the estate of the
Michigan industrialist William M. Davidson,
according to a petition filed by Davidson’s
family in U.S. Tax Court in June. The IRS is
challenging the validity of some of
Davidson’s maneuvers, which were different
from the ones the Waltons use.
“The whole tax structure since I came to
Congress actually has gotten more and
more unfair,” said James McDermott, a
Washington Democrat who’s been in the
House since 1989 and has sponsored
unsuccessful bills to close estate-tax
loopholes.
Artful Dodgers: From Hedge Fund Managers
to Retail Magnates to Superstar Athletes
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.
Waltons’ Model
Still, professional 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.
Rockefeller Riches
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. It’s
unfortunate to have people who, when
Mom and Dad pass on, they leave you a
billion dollars for which you’d done
nothing.”
Money Talks
At the end of the 1990s, an effort to
repeal the estate tax gathered force,
supported by a group of billionaire families
and their lobbyists at Patton Boggs LLP, a
Washington law firm. Walton Enterprises
paid Patton Boggs to lobby on tax matters
during that time.
A Patton Boggs lawyer, Aubrey Rothrock,
said in a statement that the Waltons’
lobbying supported “private foundation
reforms to create new incentives for
charitable giving” and did not involve “the
specific issue of repealing the estate tax.”
Aided by Democrats such as Blanche
Lincoln, an Arkansas senator, Congressional
Republicans in 2001 passed a temporary
measure that would phase out the tax over
10 years. The tax was restored in 2011.
As a senator, Lincoln was one of the few
Democrats to whom the Waltons donated.
She’s now a lobbyist whose clients include
Wal-Mart.
Walton Contributions
Lincoln’s opposition to the estate tax
wasn’t driven by the Waltons or Wal-Mart,
she said in a telephone interview. Her
views were shaped by growing up on a farm
and representing a state with many small
family businesses that could be hurt by the
tax, she said.
Contributors to Lincoln included Alice
Walton, the youngest of Sam and Helen
Walton’s four children. Alice, 63, is a
former money manager who founded and
ran her own financial firm, Llama Co. She
now lives on a ranch in Texas known as the
Rocking W., where she raises award-
winning cutting horses and collects art.
One of her favorite paintings, now hanging
at Crystal Bridges, is a vivid full-length
1904 Alfred Maurer portrait of a model in a
huge feathered boa, clutching a cigarette
and sneering at the viewer.
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.
Art Patron
Walton stepped up to a lectern to christen
the museum on a bright November day in
2011. Her sunglasses shielding her eyes
from the glare, she thanked just about
everyone else who had played a role, from
the architect and construction workers to
the Northwest Arkansas Council.
“This project exemplifies the way one
single gift grows and becomes greater, as
many more give generously,” she said in
her Ozarks twang.
She didn’t mention one side-benefit of the
gifts -- estate tax avoidance. 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, which also
spends hundreds of millions of dollars a
year on education reform and
environmental protection.
The Foundation, in turn, is funded mostly
by a series of 21 trusts. Sam Walton’s
widow, Helen, to whom the family land
where the museum stands is dedicated, 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.
‘Jackie O.’
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.
Treasuries Tie
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.
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.
Happy Returns
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. He declined to answer detailed
questions about the trusts.
Generation Shift
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. “‘At the same time, we hope
to shift it down a generation, without tax.’”
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.
‘Unique Opportunity’
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.
“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.
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.
Back in 1989, when Congress chose
Treasury yields for the trust calculation, the
move effectively raised the rate from 10
percent to more than 11 percent,
diminishing the potential to use the trusts
to avoid taxes.
“Nobody in 1989 ever envisioned we would
be in a zero interest-rate environment,”
said Hesch, the Miami tax lawyer. “Once
something is in the statute, and is a
benefit to taxpayers, it is extremely
difficult to get it out.”
Being Charitable
Helen Walton took pride in her charitable
giving. “It’s not what you gather, but what
you scatter that tells what kind of life you
have lived,” she used to say, a phrase
memorialized on the walls of the company’s
Sam’s Club stores. She did much of that
giving through her Jackie O. trusts.
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.
Friedman relied on some assumptions,
because the public filings don’t show the
term of the trust or whether Helen Walton
paid any gift tax when she set them up. He
assumed the trust was worth about $330
million in 2003, when it was established.
And he assumed the trust would earn 7.5
percent a year, more than twice the 3.6
percent rate used by the IRS, but about
half its actual rate of return during the
period reviewed by Bloomberg.
“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.”
Bike Shop
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 used to challenge that concept, but
it lost a series of Tax Court cases in the
1990s to taxpayers who contended that
holding assets through such companies
diminished their value. For instance, the
taxpayers would point out that stakes in
family holding companies themselves
weren’t publicly traded and often didn’t
carry any voting rights .
Dividend Yields
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, and better than any stock
in the Dow Jones Industrial Average.
(INDU)
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.
After the IRS’s Tax Court losses, estate
planners began recommending that
taxpayers create family holding companies,
just to generate the discount. The Waltons
have held their Wal-Mart stake in a family
limited partnership or similar structure
since 1953. Typical discounts are 20 to 30
percent.
‘Beyond Belief’
“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.”
Morgan, the Walton family spokesman,
declined to say whether the Waltons have
ever claimed such discounts.
McDermott and other lawmakers, 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.
‘Aunt Audie’
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.
Audrey Walton is the ex-wife of James L.
“Bud” Walton, Sam’s younger brother and a
co-founder of the retail chain. Sam’s
children know her as “Aunt Audie.” A
resident of tiny Versailles, Missouri, Audrey
Walton, 89, has been a major supporter of
University of Central Missouri, where the
Mules play in the Audrey J. Walton Stadium.
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.
Coin Toss
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.
Dead Proposals
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.
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
actually increased, from 40 percent to 49
percent.
Millionth Visitor
While the Waltons’ savvy use of the tax law
may have left less for the government,
residents of Bentonville -- where Sam
Walton was known as “Mr. Sam” and his
daughter as “Miss Alice” -- are gladly
reaping the benefits.
Crystal Bridges museum welcomed its
millionth visitor last month, far earlier than
anticipated. Maureen Seymour, 64, from
nearby Bella Vista, took admission at an
exhibit across from a reflecting pool. She
volunteers in the museum because “it’s a
happy place,” she said. “We have a lot of
people here who have never seen a
museum, ever.”
As for the tax implications of the Waltons’
philanthropy, “I’m not privy to all that.”
Seymour said. “I think about what it’s done
for the community. It’s added such a
dimension here. Think of all the jobs
they’ve created, at all levels. The Waltons
have been very, very generous.”
