How Wal-Mart’s Waltons Maintain Their Billionaire Fortune – Bloomberg 09-11-13

Salient to Investors:

Lawrence Summers estimated in December that estate and gift taxes raised only $14 billion in 2102, or 1 percent of the $1.2 trillion passed down in America each year, mostly by the very rich, suggesting our estate tax system is broken.

Jerome Hesch at Berger Singerman said the very rich pay very little in gift and estate tax: at the Waltons’ numbers, the savings are unbelievable.

The richest Americans have amassed at least $20 billion in trusts like those used by the Waltons.

Charitable lead annuity trusts, or “Jackie O” trusts, allow a donor to lock up assets for say 20 or 30 years, set the amount given away each year to charity, and whatever remains at the end goes to a beneficiary, usually the donor’s heirs, without any tax bill.

With the type of Jackie O. trust used by the Waltons, if the trust’s investments outperform the benchmark rate determined by the IRS, then the extra earnings pass to the designated heirs free of any estate tax. John Anzivino at Kaufman Rossin & Co. said such trusts are attractive only to the wealthiest families because the assets are locked up for decades.

Wealthy families held a record $20.9 billion in Jackie O. trusts in 2011, almost twice the amount they held in 2000. 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.

Charles J. McLucas at Charitable Trust Administrators said this time will probably go down as a unique opportunity to transfer assets out of an estate at the lowest cost.

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 Waltons have held their Wal-Mart stake in a family limited partnership or similar structure since 1953. Typical discounts are 20 to 30 percent.

Wendy Gerzog at the University of Baltimore said the discounts create a world of unreality.

Grantor retained annuity trusts, or GRATs, pays an annuity back to the person who set up the trust, rather than to a charity. The “Walton GRAT” 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 include the Coors brewing family and Nike founder Philip H. Knight.

Read the full article at  http://www.bloomberg.com/news/2013-09-12/how-wal-mart-s-waltons-maintain-their-billionaire-fortune-taxes.html

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