Bob Lord has been an Institute for Policy Studies associate fellow since 2013, based with our Program on Inequality and the Common Good.  A veteran attorney, based in Phoenix, Bob has brought a special expertise to our IPS inequality team.

Bob understands trust and estate law first hand — and the tax avoidance and reduction strategies of the super-wealthy.  He was invaluable to me in the research and writing of my book, The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions.

Bloomberg recently published original findings by Bob Lord in the article, “The Hidden Ways the Ultrarich Pass Wealth to Their Heirs Tax Free.”  The article also includes some animations explaining many of the complicated transactions deployed.

Bob essentially “reverse engineered” Nike founder Phil Knight’s tax planning process, including the role of his limited liability companies (LLCs), complicated trusts called Granter Retained Annuity Trusts (GRATs), and his charitable giving.

While Knight has proclaimed he will give most of his wealth to charity, the Bloomberg investigation exposes that for years, Knight has “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.”

In the advent of revelations from the Pandora Papers and ProPublica about the tax avoidance strategies of the world’s wealthiest people, Bob’s work contributes a unique case study of the tools deployed by one prominent U.S. billionaire.

I sat down with Bob Lord to try to explain this to people who are not tax attorneys.

This is an excerpt from a longer Q&A with Bob Lord.  An extended discussion is available here.

Q:  You spent several months sifting through public information about Nike founder and billionaire Phil Knight.  What did you learn?

I learned a good bit about the tax avoidance strategies Knight used in his estate planning and got an idea of how much estate and gift tax Knight was able to escape through those strategies and also how much additional estate tax avoidance was possible.

Q: What were the public documents you looked at?  How did you reverse engineer Phil Knight’s tax planning?

For the most part, public filings by Phil Knight and his son, Travis, with the Securities Exchange Commission (SEC). The only other helpful public document was an article in the Portland Business Journal that had a quote from Phil Knight about his charitable intentions.

Q: What did the SEC filings reveal?

Those SEC filings revealed the creation of one irrevocable trust named the Travis A. Knight 2009 Irrevocable Trust II, which I’ll call the Travis Irrevocable Trust, and a series of 11 grantor retained annuity trusts (GRATs) between 2009 and 2014.

The filings also revealed the formation of Swoosh, LLC, in 2015, the transfer of Nike shares to Swoosh, and the operating agreement defining the rights that attached to the two classes of ownership interests in Swoosh, known as X units and Y units.

The filings revealed all the transfers of Nike shares between Knight and the GRATs, both the contributions of shares to the GRATs and the distributions of shares to Knight in payment of annuity installments. The filings revealed the terms of a sale by Knight to the Travis Irrevocable Trust of all the X units in Swoosh. Finally, the filings revealed the total number of Nike shares held directly by the Travis Irrevocable Trust when Travis became trustee in April 2016.

Q: So, what did you learn from these filings?

From that public information, I was able to deduce the following:

First, the Travis Irrevocable Trust almost certainly was an intentionally defective grantor trust (IDGT).

Second, the Swoosh X units Knight sold to the Travis Irrevocable Trust were valued for tax purposes at a discount of about 15 percent below the value of the Nike shares held by Swoosh that were allocable to those X units.

Third, the transfers of Nike shares between Knight and the GRATs were for the most part made pursuant to what’s known as a “rolling GRAT strategy” between 2009, when the first GRATs were created, and 2014, when the last ones were.  (For more discussion of the “rolling GRAT” strategy, see the extended Q&A with Bob Lord).

Fourth, once all of the GRATs’ annuity obligations to Knight were fully satisfied on April 22, 2016, 38,656,369 of the Nike shares Knight originally transferred to the GRATs in 2009 and 2010 (adjusted for splits) had not been returned to him through annuity payments and other transfers. That exact same number of shares, 38,656,369, were held by the Travis Irrevocable Trust one week later, on April 29, 2016, when Travis became trustee. A review of all SEC filings confirms the obvious inference here that the Nike shares retained by the GRATs were then transferred to the Travis Irrevocable Trust. We don’t know from the publicly available information how those transfers were structured.

The net result of all this was that on April 30, 2016, after the sale of Swoosh X units to it, the Travis Irrevocable Trust held 64,356,369 Nike shares, 38,656,369 directly and 25,700,000 indirectly through its ownership of the Swoosh X units. The only consideration Knight received for those Nike shares was $1,203,170,000 -roughly $1.2 billion – paid by the Travis Irrevocable Trust for the Swoosh X units. Also, on April 30, 2016, the bulk of Knight’s remaining Nike shares, which constituted most of his wealth, some 231,300,000 shares, were held indirectly by him through his ownership of the Y units in Swoosh.

Q: Is the purpose and result of this to pass on wealth to Knight’s son Travis without estate and gift tax?

Yes, and also to the other beneficiaries of the Travis Irrevocable Trust. Those beneficiaries likely include Travis’ children and could include other descendants of Phil Knight.

Q: But if the annuity and the property placed in trust have the same value, where’s the tax avoidance?

The tax avoidance takes place when the assets in the GRAT perform well and grow in the trust. In Knight’s case, the value of those Nike shares he placed in the GRATs grew at a much greater clip than needed to satisfy the GRATs’ annuity obligations. That meant there would be shares left over at the end.

Q: Could what Knight does be considered the use of a dynasty trust?

I suspect the answer to that is yes, but I don’t know definitively. Knight’s representatives apparently did not comment on this. And there’s no precise definition out there for the term dynasty trust.

To me, a dynasty trust is one that likely will continue for multiple generations and ideally will not be subject to federal wealth transfer tax as the generations pass, including the generation-skipping tax. For practical purposes, this turns on whether a trust is exempt from the generation-skipping tax.

Q: If Knight died today, how much tax would his LLC save?

Possibly as much as $3.6 billion in estate tax, because today’s 40 percent estate tax applies to wealth transfers over $23 million for a couple. Knight’s been receiving distributions from Swoosh, which he’s used mostly to make charitable contributions. But he still owns about 200 million Nike shares through his Swoosh Y units. Those Nike shares have a current value of about $30 billion. Based on the rights of Y unitholders in Swoosh, figure Knight’s estate might claim a valuation discount on the Y units of 30 percent, or about $9 billion. That’s an estate tax reduction of $3.6 billion.

Q: Could Knight have saved more?

That depends on what Knight sought to accomplish. If his goal simply was to transfer as much wealth as humanly possible to his descendants, net of estate, gift and generation-skipping tax, he could have saved a whole lot more. And he could have done this rather easily, by simply making more extensive use of the strategies we know he employed.

Q: ProPublica recently found that among the wealthiest 100 Americans, more than half of them deployed what ProPublica referred to as special trusts, which mainly were GRATS. Should we should assume that Phil Knight was among this group?  How important was the GRAT to the overall plan?

GRATs were at the center of his overall plan. Those GRATs allowed him to move 38,656,369 Nike shares out of his estate without paying gift or estate tax. With Nike stock trading in the $150 per share range recently, those shares translate into about $5.8 billion of total value.

Q: Can Phil Knight’s plan be challenged by the IRS?

For the most part, no. (But see the full interview with Bob for his thoughts on how components of this tax avoidance plan might be subject to IRS challenge).

Q:  The International Consortium of Investigative Journalists (ICIJ) recently released the “Pandora Papers,” based on 14 leaks from offshore wealth advisory firms.  There were not many wealthy Americans on the list, in part because the 14 firms were in jurisdictions that are unlikely places for US billionaires to go.  But does what you found also explain this?  That wealth US residents don’t have to go “offshore” to avoid taxes here.

Yes, I think it does. As you know from your work, the lodging of wealth in trust is motivated by three objectives, secrecy, tax avoidance, and avoidance of other legal claims. So, the wealthy seek out jurisdictions that serve as tax havens, claim avoidance havens and secrecy havens, and preferably all in one. Right here in the U.S., several of our states, most notably South Dakota, have engaged in a destructive race to the bottom to become the premier secrecy and claim avoidance haven. That leaves tax avoidance. Those wealthy Americans don’t need to go offshore to find a tax haven. As we’ve discussed at length here in this interview, they live in one.

Q: Who do you hold responsible for this tax dodge?  Is Knight responsible?  Is it the Wealth Defense Industry that Enables Him?  Is it Congress for allowing these loopholes to exist?

ProPublica posed a similar question to Professor Daniel Hemel about this, to which he responded: “I don’t blame the taxpayers who are doing it. Congress has virtually invited them to do it. I blame Congress for creating the monster and then failing to stop the monster once it became clear how much of the tax base the GRAT monster would eat up.”

What Professor Hemel said about GRATs applies with equal force to the other tax avoidance strategies, such as the valuation discount and IDGT strategies Knight used, as well.

Q: What should lawmakers do?

The good news is House Democrats have put forward a provision to cut the estate tax wealth exemption in half, to $12 million for a married couple, and to limit minority discounts and grantor trusts, including GRATs.  Existing trusts, like the one’s created by Phil Knight, would be allowed to keep operating.  There are also proposals that would limit the size and duration of dynasty trusts. This is moving us in the right direction.

Chuck Collins directs the Program on Inequality and the Common Good at the Institute for Policy Studies. Follow him on Twitter @Chuck99to1.

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