Updated: Mar 13, 2022
Building Generation Wealth is a journey…ask Phil Knight (Nike)
Building Generation Wealth is a journey. But it has to begin somewhere. For Phil Knight, co-founder and chairman emeritus of Nike, Inc…. it began when he was a sportswriter was for the ‘Oregonian’ where he worked the morning shift tabulating sports scores. In year 2021, Phil ranked in the top 25 on ‘Forbes Billionaires List of The Richest People in the World’ Phil Knight founded Nike in 1964. Knight is now 83, He has built a fortune worth about $60 billion.
Phil once said, It is hard enough out there. Get all the help you can. Getting help really is just a part of that lifelong search for wisdom[i]. This wisdom includes managing and protecting generational wealth.
Bloomberg Businessweek article ‘The Hidden Ways the Ultrarich Pass Wealth to Their Heirs Tax-Free[ii]’ gives us insight into how Nike founder Phil Knight is giving a fortune to his family while avoiding billions in U.S. taxes. This is not tax evasion…this is tax avoidance. This is legal.
Today if a US citizen, resident, or decedent's death occurred in 2016, an estate tax return (Form 706) must be filed if the gross estate of the decedent is valued at more than the filing threshold for the year of the decedent's death. The filing threshold for 2021 is $11,700,000[iii]. As of June 2021, only 17 states and the District of Columbia still levy an estate or inheritance tax[iv].
A major disruptor in building generational wealth is estate taxes. The U.S. started collecting estate taxes in 1916, levying a 10% rate on fortunes of $5 million. The top rate steadily rose to 77%, where it remained until the late 1970s. Then rates began to fall, During the George W. Bush administration, Republicans successfully whittled away at the levy by cutting the top rate to 40%.
The past decade of record-low interest rates, rising asset prices, and easing tax rules has made this a 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.
The Bloomberg Businessweek article reminded us that we don’t have to reinvent the wheel to protect wealth. Phil Knight deployed an estate retention technique pioneered by Walmart’s founder Sam Walton. Nike is publicly traded, and its leadership must report their stock transactions. This gives us a rare opportunity to examine wealth transference that is 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.
Phil Knight cycled millions of Nike shares through a series of grantor-retained annuity trust commonly called GRATs. His first step was to set up nine GRATs, which successfully transferred Nike shares from 2009 to 2016. This effectively moved billions of dollars of stock price gains now worth $6.1 billion to heirs tax-free from his estate to his heirs. Two other GRATs that show up in public filings received about $970 million of unspecified assets from Knight.
The Bloomberg Businessweek article points out that 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 Grantor (In this case Phil) dies, and an estate tax return is due. That’s if the IRS which is traditionally understaffed even looks in the first place.
Phil put most of his remaining shares into a limited liability company (LLC)[v] 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.
We are grateful for Bloomberg Businessweek sharing this insightful information with us. To be sure there are hundreds of articles and experts offering advice on generational wealth transfers. But very few point toward meaningful financial outcomes without recommending the purchase of expensive life insurance and other commission-driven products. Reflecting on what Phil said. “Getting help really is just a part of that lifelong search for wisdom.[vi] This wisdom includes managing and protecting generational wealth. Building and generational wealth do not require you to go buy insurance or investments to transfer wealth.. It does, however, require you to seek out financial professionals who understand estate law and strategies. And relax...it won't cost you a fortune[vii].
Resources and References
[i] Forbes, Kerry A. Dolan, Jennifer Wang and Chase Peterson-Withorn. Forbes Billionaires 2021: The Richest People in the World.’ | https://www.forbes.com/billionaires/
[ii] Businessweek, Ben Steverman, Anders Melin, and Devon Pendleton with Illustrations by Chris Nosenzo. ‘The Hidden Ways the Ultrarich Pass Wealth to Their Heirs Tax-Free’ October 21, 2021, | https://www.bloomberg.com/features/how-billionaires-pass-wealth-to-heirs-tax-free-2021/
[iii] Frequently Asked Questions on Estate Taxes | https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes and https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
[iv] ‘State’ Estate Taxes:
As of June 2021, only 17 states and the District of Columbia still levy an estate or inheritance tax. Please open link and refer to Table 1. |https://www.cbpp.org/research/state-budget-and-tax/state-taxes-on-inherited-wealth
State Death Tax Chart, The American College of Trust and Estate Counsel |https://www.actec.org/resources/state-death-tax-chart/
[v] Using an LLC for Estate Planning
A limited liability company (LLC) can be a useful legal structure through which to pass assets down to your loved ones while avoiding or minimizing estate and gift taxes.
A family LLC allows your heirs to become shareholders who can then benefit from the assets held by the LLC, while you retain management control.
The tax benefit of the LLC lies in the fact that the value of the shares transferred to heirs can be discounted quite steeply, often up to 40% of their market value.
Source: https://www.investopedia.com/articles/personal-finance/071514/using-llc-estate-planning.asp [vi] Forbes, Kerry A. Dolan, Jennifer Wang and Chase Peterson-Withorn. Forbes Billionaires 2021: The Richest People in the World.’ | https://www.forbes.com/billionaires/
[vii] Martindale: Martindale-Hubbell legal directory contains listings for more than one million lawyers and law firms. |https://www.martindale.com/