The reason the elite 1% stay ultrarich is keeping as much of their wealth possible with tax-dodging tactics that they pass onto their family generation after generation. The greatest tax-dodging tactic to maintain wealth for generations to come is through utilizing a Grantor-Retained Annuity Trust(GRAT).
A GRAT allows heirs of the wealthy to profit from an asset that they don’t technically own resulting in paying an annuity back to a wealthy person or the grantor who established the trust. This loophole helps the wealthy avoid having the funds designated as a taxable gift that would take a majority of the value when transferring assets.
This process starts with the trustee or their lawyer establishing their heirs as beneficiaries to the GRAT then they start putting in assets (like stock) that have a good chance of appreciating in value overtime. Technically, this isn’t considered a taxable gift with the GRAT as it is set to repay you the initial value of the assets in the form an annuity typically spanning over the course of 2-3 years.
In the case of the assets gaining vale during this time period, the gains can remain in the GRAT minus a minimum (typically low) rate tied to interest and whatever is left is left to the heirs tax-free. In the event of the assets dropping value during the 2–3-year period, the heirs are unaffected with trustees able to pretend the GRAT never existed and try again.
In some cases, trustees set up multiple GRATS as the more trusts for a higher chance of success with some members of the ultrarich opening a GRAT on a monthly basis. A prime example for this tax-dodging scheme can be demonstrated in the case of the founder of the Nike Inc. Philip Knight with his fortune of $60 billion.
Knight has openly claimed in 2016 that his wealth will benefit his children and grandchildren citing that a majority will be given to charity. Despite saying that he will be donating his fortune to charity, he is also taking advantage of legal techniques to ensure his heirs keep control of most of profit and assets while quietly transferring funds in a manner to avoid paying taxes.
The founder of Walmart Inc., Sam Walton, was one of the first members of the ultrarich to pioneer this method of maintaining wealth for his heirs. This process remained a secret until Knight started to utilize it as Nike is a publicly traded company with both Knight and his surviving son, Travis, are both on the company’s board of directors that are required to report their stock transactions.
Knight serves as a rare case as this process that is typically shrouded in secrecy can be examined in detail from public filings. According to records, Knight started implementing this practice moving $9.3billion in Nike shares and other assets to his heirs with the possibility that the total can be more if continued over time that is mostly likely to occur.
Knight started by moving millions in Nike shares through a series of trusts that also assisted in moving the billions of dollars’ worth of stock price gains from his estate to benefit his heirs while dodging taxes. Knight also transferred his wealth by transferring the remaining shares into Swoosh LLC then letting a trust controlled by Knight’s son Travis to purchase a stake with a massive discount.
This chain of trusts allows for hundreds of millions of dollars in dividends to benefit his heir that covers as Knight covers the income taxes with all this planning working towards ensuring his family retains control of the Nike empire he founded. Knight’s meticulous plan wouldn’t be possible with GRATs that he has moved 38.7 million Nike shares through the family trust.
In 2015, Knight transferred a bulk of his fortune of 257million Nike shares to Swoosh LLC with the current value at the time of $37 billion. Knight’s family trust acquires a piece of Swoosh in 2016 with a 15% discount saving the Knight family $215 million.
Knight’s family buys a tenth of Swoosh that seems like a small amount, but this deal gives the trustee Travis Knight control of Nike. The Knight family trust, Travis A Knight 2009 Irrevocable Trust II, has amassed a value of $6.5 billion consisting of 41 million Nike shares plus $380 million in dividends.