By Ben Steverman, Anders Melin, and Devon Pendleton
Illustrations by Chris Nosenzo
October 21, 2021, 12:00 AM EDT
Sitting in the bleachers by the University of Oregon’s running track, Nike Inc. founder Philip Knight offered the sort of lofty promise many other super rich Americans have made over the past decade. The bulk of his money, he told CBS News that day in 2016, would be given away—eventually. “By the time the lives of my children and their kids run out, I will have given most of it to charity,” he said. What Knight didn’t mention was that, for years, he’d been using a range of legal techniques to ensure his heirs keep control of most of his assets and profit from them in the process, quietly transferring vast piles of money in a textbook example of how the rich avoid taxes.
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Knight is now 83, and since founding Nike in 1964 he’s built a fortune worth about $60 billion. He’s hardly the only American billionaire to take advantage of lawful tax-avoidance tricks—filings show JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, Zoom Video Communications Inc. founder Eric Yuan, and many others employ such tools. The family of Walmart Inc. founder Sam Walton pioneered one of the techniques Knight appears to have used. But because Nike is publicly traded and both Knight and his surviving son, Travis, play roles on the company’s board and must report their stock transactions, theirs is the rare case that can be examined in detail from public filings, exposing a process that’s usually shrouded in secrecy. Bloomberg Businessweek identified about $9.3 billion in Nike shares and other assets Knight has moved to his descendants, starting in 2009. The full total could be more.
“It’s a perfect case study in how the major estate tax loopholes work in tandem and how the estate tax is entirely avoidable,” says Robert Lord, a tax attorney in Arizona and a consultant for Americans for Tax Fairness, an advocacy group. Lord brought the transactions to Businessweek’s attention. Knight’s representatives declined to comment on them, beyond saying they were integrated into his philanthropic strategy.
The U.S. started collecting estate taxes in 1916, levying a 10% rate on fortunes of $5 million (roughly $125 million today) or more. The top rate steadily rose, to 77%, where it remained until the late 1970s. Then rates began to fall, and at the turn of the 21st century critics of the estate tax and the related gift tax started to score some major wins. During the George W. Bush administration, Republicans successfully whittled away at the levy by cutting the top rate and lifting the lifetime exemption for the taxes—the total amount anyone can leave to heirs tax-free. President Donald Trump doubled the exemption for eight years starting in 2018, so for the moment only married couples leaving $23 million or more to their heirs need to worry about estate and gift taxes at all. Last year the taxes brought in only $17.6 billion, out of $3.4 trillion in federal revenue, according to the U.S. Department of the Treasury. Their decline is one of many factors that have contributed to a dramatic increase in wealth at the top, helping make the 20 richest Americans, including Knight, worth a combined $1.9 trillion, according to the Bloomberg Billionaires Index.
The past decade of record-low interest rates, rising asset prices, and ever-looser tax rules has made this an historically ideal time for the top 0.1% to pass wealth to their heirs. These trends have turned once-minor loopholes in the tax code into gaping flaws. In Knight’s case, the tax savings from a sophisticated estate plan were magnified by a remarkable rise in Nike’s stock, which rode a surge in online sales to climb about 1,000% over the past 12 years and bring the company’s valuation from $25 billion to $250 billion.
First, Knight cycled millions of Nike shares through a series of trusts that effectively moved billions of dollars’ worth of stock price gains from his estate to his heirs, tax-free. Then he put most of his remaining shares into a vehicle called Swoosh LLC and let a trust controlled by his son, Travis, purchase a stake at a big discount. The chain of trusts let hundreds of millions of dollars in dividends flow to Knight’s heirs with him covering the income taxes. All this planning also ensured his family would retain control of his sneaker empire.
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Such moves almost always happen in strict secrecy. The wealthy merely need a lawyer to draw up some documents. The IRS might not review transactions until decades later, when the giver dies and an estate tax return is due. That’s if the agency, underfunded and short on specialists, even looks in the first place. “I’ve had estate tax audits basically handled by receptionists in some offices,” says Edward Renn, a partner at Withers law firm who’s based in New Haven.
Formerly, when it became clear that wealthy taxpayers and their advisers had found a blatant loophole, Congress would close it. In recent decades, lawmakers have preferred to keep them open, but legislation put forward by congressional Democrats would seek to plug most of the ones Knight has taken advantage of. Even modest reforms to an estate tax now paid by fewer than 1 in 1,000 Americans at death could, in theory, serve as a check on intergenerational inequality, taking a 40% bite from transfers of fortunes that might not otherwise be taxed. “If you’re interested in taxing wealth,” says Columbia law professor Michael Graetz, “the estate tax is the only mechanism the federal government now has.”
To get ahead of the possible changes, the super rich are rushing to set up trusts and transfer assets to heirs while they still can, as lobbyists representing their interests work to maintain the status quo.
The foundation of Knight’s strategy is the grantor-retained annuity trust, or GRAT. His first step was to set up nine GRATs, which successfully transferred Nike shares now worth $6.1 billion to heirs tax-free from 2009 to 2016. Two other GRATs that show up in public filings received about $970 million of unspecified assets from Knight. The filings don’t disclose the ultimate beneficiaries, but Lord says that, based on how family wealth transfers usually work, they might include the family of Knight’s late son, Matthew, who died in 2004.
Officially, gifts are taxable: If you send someone more than $15,000 per year, you’re supposed to file a separate gift tax return, with the total counting toward your $11.7 million lifetime estate-and-gift-tax exemption. (Double that for married couples.) Once you reach that threshold, you must pay a 40% levy. But giving heirs the right to profit, risk-free, from your investments? Not a taxable gift if you route it through a GRAT. “It looks like the heirs didn’t receive anything of value, but in fact they have been given all of the upside growth potential,” says Ray Madoff, a law professor at Boston College.
Tax-Dodging Tools of the 0.1%
The GRAT (Grantor-Retained Annuity Trust)
Lets heirs profit from an asset they don’t technically own, paying an annuity back to the wealthy person who set it up—the grantor—and thereby avoiding having the funds designated as a taxable gift.
1. Set up a GRAT (or have your lawyer do it) and make your heirs the beneficiaries.
2. Put in assets, such as stocks, that have a good chance of making money over time. Technically this isn’t a taxable gift, as long as the GRAT is set to repay you the initial value of the assets in the form of an annuity, usually over two or three years.
3. If the assets go up in value during this period, the gains can stay in the GRAT, minus a (usually low) minimum rate tied to interest rates. Whatever’s left goes to the heirs tax-free.
4. If the assets drop in value during that time, your heirs are unaffected. You can pretend the GRAT never existed and try again. The more GRATs you set up—and some of the ultrarich open one monthly—the higher the chance some will succeed.
DID YOU KNOW? In an August survey of filings from 70 randomly selected S&P 500 companies, more than half had executives and top shareholders who used GRATs. The total value of shares in those GRATs: more than $12 billion. In one example, Dimon shuffled JPMorgan shares now worth $127 million into and out of GRATs in November 2020.
Giulia Marchi/Bloomberg/Getty Images
GRATs and other such tools have the basic goal of making wealth look much smaller than it really is. It’s possible to have your gifts appear to be worth almost nothing, even as you move millions or even billions of dollars tax-free. The giver merely retains a promissory note—basically an IOU that sees the trust agree to pay back the gift’s value over time. Smart businesspeople ordinarily wouldn’t hand over a valuable asset in exchange for something as flimsy as an IOU, but the rules let advisers construct the legal fiction that this is a normal transaction and not a taxable gift to the trust.
After routing a fortune through GRATs, Knight put much of his remaining Nike shares into Swoosh LLC, which exploits a loophole President Barack Obama tried to close in his final days in office. Called the minority valuation discount, it takes advantage of rules allowing taxpayers to take discounts on assets that are harder to sell. If you have a 25% stake in a $100 million private company, for example, it’s probably not worth its theoretical value on the open market: To actually turn it into $25 million, you’d need to persuade other shareholders to buy you out or to sell the entire company, then get full price for your stock.
To exploit the loophole, wealth advisers intentionally put their clients’ assets in structures that seem to make them harder to sell. If you own an apartment building, for example, you might put it in an entity whose ownership is split among trusts for various family members. Each trust looks like it lacks control of the building, which lets you tell the IRS that the sum of the slices is worth less than the unified whole.
Or you do what Knight did: Take publicly traded stock such as Nike shares and put it in an LLC, then divide that up between yourself and your heirs in a way that qualifies for a discount, minimizing your own tax bill while passing more assets onto heirs. Knight put the bulk of his Nike shares into Swoosh in 2015. The following year, Travis’s trust purchased a slice of Swoosh that effectively put him in control of Nike, according to Nike’s annual report. The 48-year-old filmmaker got a 15% discount on the company’s stock price at the time, delivering a $215 million tax-free gift from father to son. In addition to part of Swoosh, the trust (which also benefits a broader array of family members) holds $6.5 billion worth of shares, including those that left Knight’s estate through GRATs.
Tax-Dodging Tools of the 0.1%
The Minority Discount
Artificially deflates the value of your asset by splitting it among separate owners.
1. Take almost any kind of investment—a private company you own, a piece of real estate, a stock portfolio—and put it in an LLC or another legal entity.
2. Divide the LLC into pieces and spread it among your heirs or trusts created on their behalf.
3. Claim that the combined value of the pieces is less than the value of the whole, because no one entity controls the entire investment. Some advisers insist that their client’s stake is worth 30% to 40% less than it would otherwise be, with bigger discounts for smaller stakes lacking voting power over the LLC.
4. Later—perhaps after you die—your family can get together and sell the entire asset on the open market and profit from its real, nondiscounted value. This works even for an LLC containing publicly traded shares that, if they hadn’t been locked up in the LLC, could easily have been sold off for their full value.
DID YOU KNOW? The family of Thomas Frist Jr., co-founder of hospital chain HCA Healthcare Inc., holds its 22% stake in HCA through an entity called Hercules Holding II. His three children own pieces of Hercules through various trusts. The family has at least $500 million worth of HCA shares in GRATs and $18.2 million in a generation-skipping tax-exempt trust.
Knight’s estate planning is “very artfully done,” Lord says. The attorney, whose tax work once included helping clients use loopholes, until he grew concerned about rising wealth inequality, first ran across filings in May showing Knight’s transactions. Each filing alone looked relatively innocuous, but when Lord put them all in a spreadsheet he quickly realized he’d found something significant: The number of Nike shares Knight ran through GRATs matched those that ended up in a trust that had also become the destination for Swoosh shares. “I’ve never seen anything like this, where you can put it together,” Lord says.
GRATs fit into a category of trusts called intentionally defective grantor trusts. They’re useful to the wealthy because when the assets they hold increase in value and are sold, their creator, not their beneficiary, is taxed for the gains. In effect they let rich parents pay income taxes for their children. This loophole, like others, came about in an effort to close a different one. Formerly, when the wealthy paid much higher income tax rates than they do now, they’d hide income by routing it through multiple trusts that owed lower rates. Lawmakers in the 1950s responded by making those trusts “defective,” taxing whoever set them up instead, usually at the highest rate. But although that closed the income tax loophole, advisers later realized their clients could avoid the estate and gift tax by setting up an “intentionally defective” trust with their descendants named as beneficiaries. Knight’s regulatory filings don’t disclose exactly how much his heirs may have benefited from this feature, but Businessweek estimates the total could be more than $140 million.
An era of low rates has made tactics like these especially lucrative. The IRS requires that swaps of assets into trusts be structured somewhat like loans, and it sets minimum rates based on government bond yields. For Knight, low rates meant that Nike’s dividend, which has since 2009 delivered $380 million to trusts ultimately benefiting his heirs, would easily cover interest payments on his transactions, Lord says.
Mark Wolfson, a managing partner of investment adviser Jasper Ridge Partners who counsels Knight on philanthropy and estate planning, says the billionaire’s transactions “are integrated with Mr. Knight’s philanthropic strategy. For example, the trusts include charitable beneficiaries, and most of Mr. Knight’s assets are expected to be transferred to charitable organizations.” An estimated $50 billion remains in Knight’s estate, according to the Bloomberg Billionaires Index, and would be taxable when he dies, assuming he doesn’t have a plan to avoid those taxes, too.
Given his philanthropic goals, one remaining option would be a charitable trust, which can wipe out an entire estate tax bill. Charitable trusts—and specifically split-interest charitable trusts—can work a bit like GRATs, in that they also give heirs the chance to profit on the trust’s investments and are most effective when interest rates are low. The key difference, of course, is that they must also donate funds to a family foundation or another charity. According to IRS data, Knight already has one charitable trust, which contained assets worth $889 million in 2019.
Tax-Dodging Tools of the 0.1%
The Split-Interest Charitable Trust
Wipes out tax bills by placing assets in trusts that are directed toward philanthropy while also benefiting you and your family.
1. Set up what the IRS calls a split-interest trust, so-named because its proceeds are divided between charitable and noncharitable beneficiaries. These come in a few different flavors. The charitable lead trust is especially useful for erasing estate taxes when interest rates are low.
2. Place assets in the trust. This transaction doesn’t trigger estate or gift taxes as long as you follow IRS rules. A charitable lead trust, for example, must pay small amounts to charity annually over a set period, often 10 or 20 years, but can then give the rest to your heirs tax-free.
3. Invest your trust in more aggressive assets, such as stocks, because your heirs will benefit from any upside. The size of your tax deduction is based on IRS estimates of how much is likely to go to charity over the life of the trust—calculations based on interest rates at the time you donate the money. If your trust’s investments beat those assumptions, something that’s especially easy to do in low-interest-rate environments like the current one, your heirs can end up with as much as or more than you originally placed in the trust.
4. While your trust must donate to charity, the funds don’t need to get there quickly. They can flow into pots of money you control, including a family foundation (which can pay as little as 5% per year to nonprofit causes) or a donor-advised fund (a more flexible charitable vehicle that has no such requirement whatsoever).
Even though Knight escaped billions of dollars in gift taxes, he could have avoided even more. “If Knight wanted to move the entire estate to his kids free of estate tax, he could have easily done it,” Lord says. Knight could have put far more in GRATs to start with, for example, and set up far more of them (though his charitable goals might have rendered such efforts unnecessary).
For the first time in decades, the most lucrative estate tax loopholes are under serious threat. The proposal House Democrats passed through the Ways and Means Committee in September would cut the lifetime exemption in half, to about $12 million for a married couple, and it explicitly targets minority discounts and grantor trusts, including GRATs. Existing trusts, including Knight’s, would be allowed to keep operating.
The proposal would also limit the effectiveness of dynasty trusts, a powerful and increasingly popular tool that allows a fortune to propagate to multiple generations tax-free. IRS rules require that wealthy families pay estate or gift taxes for each generation the money passes through—so, for example, a $100 million gift from a rich couple to their grandchildren gets taxed twice. But to appeal to the wealth management industry, certain states—notably Alaska, Delaware, Nevada, and South Dakota—changed their rules to allow for the creation of dynasty trusts, which can last forever and allow multiple generations of heirs to live off the family fortune tax-free. (Wolfson says Knight’s trusts don’t fit this category.)
Tax-Dodging Tools of the 0.1%
The Dynasty Trust
Allows a family fortune to do what even the richest billionaire can’t: live forever, by preserving wealth for distant generations.
1. File to open a trust in a state such as Delaware that’s abolished the long-standing tradition of requiring trusts or other legal arrangements to have an expiration date. You don’t need to live in one of these states to take advantage of its looser rules.
2. Get enough assets into the trust to provide for multiple generations of heirs, starting with a relatively small amount to avoid triggering a big tax bill. Trump’s tax reform established the current tax-free ceiling of $11.7 million, or $23 million for a married couple.
3. Once you’ve seeded your dynasty trust, set up transactions between it and other entities you control, including GRATs or your own bank or investment accounts. These deals should appear, on paper, to be legitimate deals, but the terms can be as generous as possible. A dynasty trust might “buy” an investment from you for only 10% of its value, with a promise to pay back the rest eventually. There’s no limit on how big the trust can get.
DID YOU KNOW? An Amazon.com Inc. Securities and Exchange Commission filing showed that at the end of 1998, Jeff Bezos’ mother and stepfather, Jackie and Miguel Bezos, held 112,500 shares in a “generation skipping” trust set up two years earlier. Those shares, potentially held for Jeff Bezos’ children and any nieces and nephews, are worth $2.3 billion today, adjusted for stock splits.
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If the most popular routes around the estate tax are ultimately blocked, charitable trusts might become one of the few remaining ways for a large fortune to avoid being taxed at a 40% rate when passed from generation to generation. To date, Knight has focused his philanthropy on only a few institutions, such as Stanford, where he went to business school, and the University of Oregon, where he was an undergraduate and ran track more than 60 years ago.
Lord doesn’t blame Knight for taking advantage of what the law allows. “I fault Congress,” he says, “for letting this happen.”