By Mark Trewitt
This series of excerpts from the book Integrated Generosity by Mark Trewitt takes a glimpse at three American family dynasties, their exceptional planning strategies, impactful outcomes, and significant charitable commitments. Regardless of the outcome, families impacted by estate taxes will experience unintended outcomes resulting from a lack of education, knowledge, understanding, and action on the part of the parents.
The Walton Family
At present, the use of transfer strategies available place you on a path to tremendous improvement in estate tax outcomes in the future. There is probably no better single example of this than that of Sam and Helen Walton. According to Mr. Walton’s autobiography, Made in America, they began arranging his affairs to avoid a potential future estate tax bill in 1953, when his five-and-dime store was but a few years old and his oldest child was only nine. That was the year that they gave a 20% stake to each of their four children in trust, keeping 20% for themselves.
While there are no specific reports on how much Sam and Helen gave to charity while they were alive, other than his biography in Wikipedia that states that they made substantial contributions to First Presbyterian (their home church in Bentonville, Arkansas), one can only assume that they were able to the make use of charitable gifts during life to achieve substantial reductions in their income taxes, while at the same time making significant impact on causes important to the Walton Family. According to a 2013 Bloomberg article, Helen Walton, taking pride in her family’s charitable giving, said “It’s not what you gather, but what you scatter that tells what kind of life you have lived.”
In 2014, Forbes Magazine summarized a report, “Making Change at Wal-Mart” (released by “Wal-Mart 1 Percent,” a project of union-backed organizations), which attempts to criticize Walton family heirs. The report states that less than 1% of the contributions to the Walton Family Foundation are from the second generation of the Walton family, which is a true statement. “Wal-Mart 1 Percent” takes a position that there is something wrong with this outcome, when in fact nothing could be further from the truth. At the same time, the report supports Helen Walton’s philosophy, indicating that 99% of the contributions made to the Walton Family Foundation, established in 1988 and now having assets of over $2 billion, were from twenty-one different charitable lead annuity trusts.
Quoted in the 2014 Forbes article, the report closes by saying: “The Walmart heirs have built one of the largest and most powerful private foundations in the country—at almost no cost to themselves. They have done so with the assistance of financial experts who manage the family holding company, Walton Enterprises, and the Walton Family Foundation, with a keen eye toward maximizing the family’s wealth. In addition, the Waltons are exploiting complex loopholes in the tax code in order to avoid billions of dollars in estate taxes by funding their Foundation with special trusts.”
As to the “complex loopholes” the Bloomberg article states: “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.’” While the report attempted to criticize the lack of generosity on the part of the second generation of the Walton Family (and in doing so missed the larger story), here is the important lesson that can be learned from their story—the Walton Family has successfully retained wealth of over $140 billion (the 2014 estimated value of the family’s holdings) by utilizing (the report uses the term “exploiting”) broadly available and commonly used planning strategies.
As a result of good planning early on and continuing the pattern of intentional and directed stewardship, the Walton family wealth has been protected from the involuntary philanthropy of estate taxes between the first to second generation, a pattern which will continue for many future generations. They did so at a cost of only 1.4%, represented by the $2 billion to charity as of 2014, in the form of the Walton Family Foundation, the bulk of which has come from annual payments from the twenty-one charitable lead trusts established by Walton family members. Not bad, from any quantitative aspect you may choose to take, respective of the preservation of wealth from taxes of many kinds.
From a charitable aspect, the Walton family certainly could have done more, but most of the wealth retained by the family is from the growth in value of Wal-Mart stock, which is throwing off dividends each year that have been used, in part, to fund the required payments from the charitable lead trust to the Walton Family Foundation. Based on the required 5% distribution rule for private foundations, approximately $100 million per year (and increasing) is flowing out to fund the mission of the foundation with a significant portion of this reaching charitable endpoints.
Considering that Sam and Helen Walton did not come from wealth and pursued a course for their life that is quite a remarkable “rags to riches” story in and of itself, the charitable aspect of their planning outcomes should be commended rather than criticized. However, there is another qualitative aspect of this outcome that merits mention, one that is completely overlooked in the aforementioned report, summarized in the closing paragraph of the 2014 Bloomberg article which said: “Think of all the jobs they’ve created, at all levels.”
Many smaller but no less successful family-owned businesses (even when stock is publicly traded) are often sold or liquidated to pay estate taxes as a result of inadequate or simply poor planning. By contrast, due to good planning and wise counsel, the Walton family was able to successfully preserve an American company that now employs over 2.1 million people globally and 1.4 million workers in the United States—approximately 1% of the entire US workforce. For anyone critical of the voluntary estate tax that the Walton Family chose not to pay through good planning, some math may be needed on how much “Wal-Mart connected” tax revenue is generated to the US Treasury each and every year. The following are my own calculations and estimates, but through Federal income and Social Security taxes, collected from 1.4 million gainfully employed Wal-Mart associates, the resulting collective payroll would range somewhere between $30 billion (based on a low $20,000 average Wal-Mart wage) and $80 billion dollars (based on a high $57,000 average Wal-Mart wage) annually.
Had the second generation of the Walton family been forced to sell significant (and perhaps controlling interest) in Wal-Mart stock, to pay a one-time “toll” of tens of billions of estate taxes, the present day size of Walmart’s US workforce might be significantly smaller. According to Wikipedia, there were only 380,000 Wal-Mart employees at the time of his death. As a result of the business enterprise being allowed to grow, as opposed to being forced to carve up the family business to pay estate taxes, the Wal-Mart work force grew almost four-fold from his death in 1992 through 2014.
Arguably there is significant economic impact (that Wal-Mart and its employees contribute to the US economy each year) well into tens of billions of dollars annually, in addition to tax revenues generated by Wal-Mart related supply-chain businesses and their employees. As a result of the Walton family’s success in preserving wealth, the income and payroll tax collected by the US Treasury is well into the hundreds of billions of dollars to date. So in the big picture even the IRS came out a winner.
The preceding real-life example supports many of the precepts from the book entitled Integrated Generosity by Mark Trewitt. To learn more about the book, please visit: http://integratedgenerosity.com/free-e-book--white-paper-series.html where you can also sign up to receive financial advice on charitable giving.