In a Bloomberg expose, “The Hidden Ways the Ultrarich Pass Wealth to Their Heirs Tax Free,” we learn about Nike founder and billionaire Phil Knight’s strategies to avoid estate tax and maximize transfers to his heirs and charitable foundations.
IPS associate fellow and attorney Bob Lord provided an analysis to Bloomberg, effectively “reverse engineering” 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.
Is Knight’s charitable giving motivated by generosity or is it primarily driven by tax reduction?
Knight has developed a reputation as a generous philanthropist — one who is considerably more modest about his efforts than some of his billionaire peers. Each year he donates millions to charity, and he consistently sits near the top of the Chronicle of Philanthropy’s annual ranking of mega-donors.
Billionaires like Phil Knight, who is worth an estimated $58 billion according to the latest Forbes analysis, are the largest beneficiaries of the tax reductions provided in our tax code. As we’ve documented, for every dollar a billionaire like Phil Knight gives to charity, taxpayers chip in 74 cents in lost tax revenue. Yet for billionaires like Knight, charitable giving becomes an extension of their tax reduction planning and power and influence.
Most of Knight’s philanthropy is directed to his own private family foundation, however, and his donations come in the form of appreciated Nike stock. Stock giving has enabled Knight not only to receive enormous income tax deductions, but also to avoid hundreds of millions of dollars in capital gains taxes as well. And despite the millions (and possibly billions) that his foundation has saved him in taxes, the foundation’s annual payout rate — the rate at which it gives grants to working charities — is abysmally low.
Knight hasn’t signed the Gates-Buffett Giving Pledge, but he has said many times that he plans to give away most of his wealth during his lifetime. And he has, at times, backed up those words with action: according to the Chronicle’s database of large charitable gifts, Knight has given more than $2.4 billion directly to charity over the past 10 years alone. Most of that money has gone to his two alma maters, Stanford University and the University of Oregon, which have received about $1.7 billion between them.
Knight’s direct donations have not always been without controversy, as when he allegedly threatened to withhold his gifts to the University of Oregon until staffing decisions in the sports program went his way, or until the university cancelled its membership in a sweatshop monitoring organization that Nike didn’t like. But it is Knight’s foundation giving that perhaps sits least comfortably with his philanthropic image.
Foundation Giving and Its Perks
In recent years, the bulk of Knight’s giving has gone to his private foundation, the Knight Foundation, which he serves as president and his wife and son serve as directors. Knight gave $1.9 billion to his foundation over the five years from 2014 to 2018, more than double the amount he gave directly to charity during that time.
Almost all of Knight’s recent gifts to his foundation have been in the form of appreciated shares of Nike company stock. By donating stock instead of cash, Knight has been able to save hundreds of millions in capital gains taxes that he would have had to pay if he had sold the stock instead.
The year 2018, the most recent for which the foundation’s tax returns are available, is a good example. That year, Knight contributed $1.6 billion to the Knight Foundation, almost all of which was in the form of Nike stock. The cost of that stock was listed in the tax return at $33 million, which means if he had sold the stock, he would have incurred a capital gain of more than $1.5 billion. If — as is very likely — Knight’s stock was held long enough and his income was high enough for the stock to be subject to a 20 percent capital gains tax rate, it means that by donating the stock, he avoided at least $300 million in capital gains taxes that he would have had to pay if he’d sold the stock instead.
Add to this the fact that Knight would have been allowed to deduct up to 60 percent of his $1.6 billion gift from his income taxes in 2018, and it appears his philanthropic giving has netted him a good chunk of tax savings indeed.
Knight didn’t make any gifts to his foundation in 2019, but according to SEC filings, in 2020 he donated Nike stock worth more than $900 million to “a charitable organization of which the reporting person and his spouse are directors,” a description that could only fit the Knight Foundation. Knight again avoided paying capital gains on this stock donation. And since the IRS has suspended the cap on charitable deductions during the pandemic, Knight would have been able to deduct the entire value of his near-billion-dollar gift from his income taxes as well.
What Charities and the Taxpayer Get from All of This
It is an understatement to say that the dollars flowing out from the Knight Foundation to working charities have not kept pace with the dollars flowing in — or with the tax breaks Knight has received from his gifts.
Each year, private foundations are required to pay out at least 5 percent of their assets in grants. But over the five years from 2014 to 2018, the average payout of the Knight Foundation has been just 2.1 percent. Even in 2018, the year Knight put $1.6 billion into his foundation, it paid out at only 2.2 percent.
Knight scored just a 2 out of 5 on Forbes’ recent philanthropy rankings of the richest Americans. This might have disappointed him, but those rankings appropriately only count “out-the-door” money going to working nonprofits, not to private foundations. The only way the public sees any return from the charitable tax breaks they subsidize is from real charity: revenue going to charities actually working for the public benefit. The public has seen little real charity in exchange for the hundreds of millions in charitable subsidies they have given to Phil Knight. And this raises questions about whether Knight’s philanthropy is designed more to serve the nonprofit sector, or his own financial interests.