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. 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.
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 pickup 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’ father, William Gates Sr., the author of a 2004 book that advocated 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.
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.
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 the 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 CEOs 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.”
“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, 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.
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 pickup 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’ father, William Gates Sr., the author of a 2004 book that advocated 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.
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.
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 the 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 CEOs 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.”
