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.

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). Were it not an IDGT, the sale of Swoosh X units by Knight to it would have triggered an income tax liability of several hundred million dollars. So it is inconceivable Knight’s estate planners would have structured his affairs that way, when the income tax could so easily be avoided by having the Travis Irrevocable Trust be an IDGT, which, by the way, created other tax benefits for Knight.

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 whatever reason, the rolling GRAT strategy was abandoned in 2014.

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: What do you mean by a “rolling GRAT?”

First, what’s a GRAT, right? A GRAT is a trust in which the creator of the trust, the grantor, retains the right to receive a series of equal annual payments, which is called an annuity. Hence the term Grantor Retained Annuity Trust. When we refer to GRATs used by billionaires for estate tax avoidance, it’s usually shorthand for something known as a zeroed-out GRAT. That’s where the value of the annuity retained by the grantor is equal or almost equal to the value of the property contributed to the GRAT. Because the grantor pays gift tax only on the difference between the value of the annuity he retains and the value of the property transferred to the GRAT, he pays no gift tax to establish one of these zeroed out GRATs.

We can infer from the value of the shares Knight’s GRATs distributed to him in satisfaction on his annuities that his GRATs were indeed zeroed-out GRATs.

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.

Now, suppose the shares didn’t grow so fast in value, or even lost value? In that case, the GRAT would wind up transferring all the shares back to Knight in satisfaction of the annuity. And because of the way these trusts work tax-wise, it would basically be the same result as if nothing had transpired. That’s why tax lawyers say these GRATs set up a “heads I win, tails we tie” situation between wealthy taxpayers and the IRS.  When a GRAT “works” someone like Phil Knight is able to transfer substantial wealth to a trust for his kids without paying gift or estate tax. When it doesn’t work, it’s a nothingburger tax-wise.

Q: Okay, what about that rolling GRAT strategy?

The rolling GRAT strategy involves the establishment of new GRATs each time an existing GRAT makes an annuity payment. Shares of stock lend themselves well to this strategy. Those annuity payments are for a stated value, but they don’t need to made with cash. They can be made with property from the GRATs. And the way these GRATs work for income tax purposes is such that no income tax is paid when they use appreciated assets to make annuity payments, as Knight did with his Nike shares.

So, except for a few wrinkles with two of the GRATs he created in 2009, each time one of Knight’s GRATs transferred shares to him to satisfy an annuity obligation he contributed the shares to a new GRAT. Over time, however, the number of shares contributed to new GRATs decreased because the existing GRATs retained shares. Knight stopped forming new GRATs in 2014. Had he continued the rolling GRAT strategy, nearly all of the shares originally transferred to the early GRATs would have been permanently removed from Knight’s estate free of tax.

Q: Is the rolling GRAT strategy accepted by the IRS or considered improper?

There’s nothing I know of that prohibits the use of the rolling GRAT strategy. Taxwise, I don’t think it would be considered the least bit aggressive. But it exposes what a farce the supposed policy behind the statute that allows for GRATs is. The purpose for the GRAT strategy supposedly was to allow a person to transfer property to children or other beneficiaries and retain only a payment stream to be used for living expenses. In the case of a rolling GRAT, though, the annuity payments are constantly being placed back in trust, rather than being used by the grantor.

Now, there is an interest factor used in computing the required annuity payments, so the value of the annuity payments flowing to the grantor does increase modestly over time. But that’s not the entire story. GRATs almost always are structured as grantor trusts, which means the grantor pays income tax on all the income that flows to a GRAT, even though the economic benefit of that income goes to the beneficiaries of the GRAT.

So, for example, in Knight’s case, the Nike shares held by his GRATs received dividends, which grew in amount over time. Knight has paid, and will continue to pay until his death, all of the income tax on those dividends. The transfer of the Nike shares from the GRATs to the Travis Irrevocable Trust didn’t change that situation any, by the way. Effectively, all Knight’s income tax payments on that dividend income are additional tax-free gifts. And if the dividend income is invested in income-producing assets, Knight also will pay the income tax on that income as well.

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.

In Knight’s case, I don’t know whether the Travis Irrevocable Trust is exempt from the generation-skipping tax, but I know it would have been quite possible for it to be so exempt. I doubt Knight’s estate planners would have structured the sale of the Swoosh X units to the Travis Irrevocable Trust in the manner they did were the trust not exempt from generation-skipping tax.

Unfortunately, the Bloomberg reporting does not reveal whether Knight was asked if the Travis Irrevocable Trust was exempt from generation-skipping tax and, if so, what his answer was.

Q: You estimate that Phil Knight has sheltered over $10 billion in transfers to his descendants from estate and gift tax.  What are the estimated taxes avoided?

In total, Knight has transferred 64,356,369 Nike sharers to the Travis Irrevocable Trust. Using a $150 per share value, the price at around which the shares currently are trading, that’s $9.65 billion. Reduce that by the $1.2 billion paid by the Travis Irrevocable Trust for the Swoosh X units, and we’re left with $8.45 billion.

From there, the math to estimate the tax avoidance is a bit rougher. Two of the GRATs Knight created in 2009 wound up exchanging their Nike shares with Knight for other assets. By the time the exchanges took place, the shares had appreciated substantially, which means there would have to be value left in those two GRATs after the annuities were paid to Knight, but there’s no public document showing what that value is.

Further, the Nike shares held in the Travis Irrevocable Trust have paid dividends which would be included in Knight’s estate had the shares not been transferred. Until 2016, the dividends paid on the 38,656,369 shares held directly by the GRATs may have been used to make annuity payments. Since 2016, however, several hundred million dollars of dividends would have been paid to the Travis Irrevocable Trust.  

So, $10 billion is kind of a ballpark estimate, but I think a reasonable one.

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. I should note here that the management rights in Swoosh were held almost entirely by the X unitholders. So, if the 15 percent discount applied to the X units in 2016 was justified, a substantially higher discount logically would apply to the Y units.

But that would be the case only if the Y units went to Knight’s descendants or other individuals. In all likelihood, based on Knight’s giving history and his public statements, a substantial portion, perhaps all, of those Swoosh Y units will go to charity. In that case, the tax savings would be much smaller, possibly even zero.

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.

But Knight has philanthropic goals as well. If his goal is to leave a substantial sum to his descendants and the rest to charity, with little or zero going to pay wealth transfer taxes, he may have achieved all the tax savings he sought to achieve.

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 there is one aspect of Knight’s estate plan that I think may have crossed the line.

Subsequent to Knight’s sale of Swoosh X units to the Travis Irrevocable Trust, Swoosh has made distributions of Nike stock to its members, the Travis Irrevocable Trust and Knight himself, in proportion to their ownership percentages. In total, Swoosh has distributed 23,500,000 Nike shares; 21,150,000 to Knight and 2,350,000 to the Travis Irrevocable Trust. Knight has contributed the shares distributed to him to charitable organizations, with most of those shares going to organizations of which he is a director, likely the Knight Foundation.

The contribution and distribution of Nike shares to and from Swoosh, allowed Knight to have it both ways on valuation of his assets for tax purposes. When in connection with his sale to the Travis Irrevocable Trust Knight sought a low value on his Nike shares for estate and gift tax purposes, he claimed a valuation discount on the Swoosh X Units he sold, presumably because of the lack of marketability of the Units. When Knight sought a higher value for income tax purposes on his charitable contributions, the direct ownership of the Nike shares distributed to him allowed him to avoid the valuation discount that would have applied had his contribution been in the form of Swoosh Y Units.

If a court were to determine that Swoosh, LLC was formed or availed of primarily to avoid tax, the valuation discount Knight claimed for the X Units sold to the Travis Irrevocable Trust likely would be disallowed, resulting in a taxable gift of over $213 million, which would translate into an $85 million gift tax liability. The pattern of distribution of Nike shares by Swoosh, following the sale of the X Units to the Travis Irrevocable Trust could support the conclusion that Swoosh was formed primarily to avoid tax.

In April 2016, according to that Portland Business Journal article, Knight told CBS News that he and his wife planned to give away their fortune: “By the time, you know, the lives of my children and their kids run out, I will have given most of it to charity.” The statement, taken together with Knight’s already established pattern of making substantial lifetime gifts, suggests that prior to selling 10% of Swoosh to the Travis Irrevocable Trust at a discount he intended to make further gifts during his lifetime. Further, his statement suggests an intention that the gifting continue during the remainder of his children’s and grandchildren’s lives.

For the very curious, here is some of the detail: The formation of Swoosh allowed Knight to accomplish those objectives with maximum tax benefit, while accomplishing little else. Following is, to me, the most plausible way in which Knight’s tax planning, funding of his foundation, and public statements can be reconciled:

By lodging the Nike shares in Swoosh, Knight was able to reduce the consideration paid to him by the Travis Irrevocable Trust by $213 million. The subsequent distributions of Nike shares from Swoosh, 23,500,000 shares with a value of several billion dollars, for the primary purpose of allowing Knight to make charitable contributions he said he planned to make, indicates that the holding of Nike shares by Swoosh, LLC, only was intended to be transitory.

The plan for the continued charitable giving during the lifetimes of Knight’s children and grandchildren suggests that Knight intends for the bulk of his Swoosh Y Units to be held in a charitable lead trust that will make distributions to the Knight Foundation in the years following his death. That could accomplish two tax objectives. First, it could depress the value of the amount transferred to a charitable lead trust by the discount applied to the Y Units, thereby reducing the value of the annual payments required to be made to the Knight Foundation. Once the Y Units are lodged in a charitable lead trust, however, the pattern that has taken place since 2016 — distributions of Nike shares followed by charitable contributions — could be continued to fund those annual payments, thus avoiding the discount that would apply if the Y Units were used for that purpose. Second, by lodging the bulk of the value in a charitable lead trust and only making contributions to the Knight Foundation on a gradual basis, the amount of actual charitable grants required of the Knight Foundation to avoid excise tax could be minimized.

That’s based in part on supposition, especially regarding Knight’s intention for the years following his death. Interestingly, however, if the IRS were to raise the issues raised here, Knight’s estate plan documents would shed considerable light on his intention at the time he sold the X Units to the Travis Irrevocable Trust.

Q: You observed that Phil Knight has made a lot of major charitable gifts in recent years, but that this might be an indicator that he is using a Charitable Lead Trust as a tax avoidance vehicle.  How does this work?

A charitable lead trust is based on the same principle as a GRAT, where the property interest that is subject to gift or estate tax is a future interest in property placed in trust and the intervening interest is not subject to transfer tax. In the case of the GRAT, the intervening interest is the annuity retained by the grantor. In the case of a charitable lead trust, the intervening interest is given to a charitable organization. If the trust is a charitable lead annuity trust (CLAT), the intervening interest is an annuity. If the trust is a charitable lead unitrust (CLUT), the intervening interest, the unitrust interest, is the right to receive a state percentage of a trust’s value annually for a number of years.

Knight could provide in his estate plan for those Swoosh Y units to be held in a charitable lead trust. If he did that, only the value of the remainder interest – the interest passing to his descendants after the annuity or unitrust interest has been paid to charity – would be subject to estate tax. If he used a CLAT for this sort of planning, he could avoid estate tax entirely, because it’s possible to have a “zeroed-out CLAT,” where the charity’s annuity interest has a value equal to the value of the property placed in the CLAT. If he used a CLUT, it would not be possible to avoid estate tax entirely. CLUTs, however, are better suited to avoiding generation-skipping tax.

The plan for the continued charitable giving during the lifetimes of Knight’s children and grandchildren suggests that Knight intends for the bulk of his Swoosh Y Units to be held in a charitable lead trust that will make distributions to the Knight Foundation in the years following his death. That will accomplish two tax objectives. First, it will depress the value of the amount transferred to a charitable lead trust by the discount applied to the Y Units, thereby reducing the value of the annual payments required to be made to the Knight Foundation. Once the Y Units are lodged in a charitable lead trust, however, the pattern that has taken place since 2016 — distributions of Nike shares followed by charitable contributions — can be continued to fund those annual payments, thus avoiding the discount that would apply if the Y Units were used for that purpose.  Second, by lodging the bulk of the value in a charitable lead trust and only making contributions to the Knight Foundation on a gradual basis, the amount of actual charitable grants required of the Knight Foundation to avoid excise tax will be minimized.

Q: Given that wealth left to charity escapes estate tax anyway, how do you make sense of Knight’s extensive use of estate tax avoidance vehicles?

That’s a matter that deserves a lot more attention and warrants a re-examination of how our tax law subsidizes charitable gifts and bequests.

Let’s take Knight’s statement to CBS News at face value and assume he plans for the bulk of his wealth ultimately to go to charity. We know that he engaged in extensive estate tax avoidance planning, with the result being billions passing to his descendants in trust free of wealth transfer tax. We also know that Knight could have transferred more to his descendants free of tax but apparently is satisfied he’s done enough for them.

But Knight didn’t need to do any tax avoidance planning to leave the amount he has left to his descendants. He could have simply transferred an amount of wealth to them which would leave them with the desired amount of remaining wealth after all estate or gift tax on the transfer was paid.

So, when you think about it, Knight didn’t engage in his extensive estate tax avoidance to leave more to his kids and grandkids, he did it to leave more to charity. Put another way, the intended beneficiary of his tax savings never was his kids, it was the charities to which he’s leaving the bulk of his wealth.

This is consistent with an attitude expressed by Warren Buffett when asked by ProPublica about his meager income tax payments over recent years: “Buffett reiterated that he has begun giving his enormous fortune away and ultimately plans to donate 99.5 percent of it to charity. ‘I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing U.S. debt,’ he wrote.”

In a subsequent ProPublica article, we learned how far Buffett has gone to divert his erstwhile tax dollars to charity. In 2010, when his wealth was well into the tens of billions, Buffett converted a traditional IRA holding $11.6 million to a Roth IRA. By 2018 the value in the Roth IRA had nearly doubled, which translates into a tax savings for Buffett (which, in his mind would have gone to “slightly reduce” the country’s debt) of perhaps $3 million. There’s little question Buffett’s tax savings ultimately will go to charity. But for a guy worth tens of billions, $3 million is pocket change. The effort Buffett used to make sure a sum so tiny to him went to charity rather than the U.S. Treasury is stunning.

Knight’s estate tax avoidance reveals the same mindset and one which I suspect many other billionaires share: They should not pay tax because they, rather than the people we elect to federal office, should decide what needs are addressed and how.

In Knight’s case, that mindset is particularly troublesome. Among his substantial charitable gifts is what the Portland Business Journal described as an “opulent training facility” for the University of Oregon football team. Think what you wish about America’s politicians, do we want folks who prioritize lavish training facilities for athletes over say, housing assistance, making the call on how our societal needs are addressed?

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.