(Bloomberg) — Harold Hamm executed one of the largest wealth transfers in U.S. history last week, handing each of his five children a stake worth about $2.3 billion in Continental Resources Inc., the shale drilling company he founded more than 50 years ago.
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Like other ultra-rich Americans, Hamm’s massive gift, years in the making, is likely to be passed down largely tax-free.
Hamm, 76, seems to have relied on two of the most common loopholes for avoiding the U.S.’s 40% estate-and-gift tax levy as he shifted the majority of his fortune. The key to these techniques, both perfectly legal, is to carefully structure transactions so they benefit heirs but aren’t technically gifts at all. Democrats had proposed shutting down the strategies in prior versions of President Joe Biden’s economic agenda, which is now stalled in Congress.
Despite the transfers, Hamm has assured investors that he retains control of Continental because his children aren’t allowed to sell shares until his death.
“I have said for a long time Continental is a company built to last,” Hamm said in a statement. “This process has been going on for over a decade with two primary objectives of proper succession planning and long-term continuity of the company.”
Wildcat Way
In a move befitting a wildcatter like Hamm, the gifts appear to have been turbocharged by canny timing. Hamm began his current estate plan in 2015, after the price of oil had plunged and Continental shares were in a slump. In mid-2020, when the pandemic dealt a devastating blow to the oil industry and U.S. interest rates plumbed record lows, Hamm restructured the transactions to boost the advantage to his heirs. At one point in 2020, his fortune had shrunk to $2.4 billion, down almost 90% from its peak.
Hamm and his family are now worth about $18 billion, according to the Bloomberg Billionaires Index. Filings show Hamm used an LLC and more than a dozen different trusts to complete the transfers.
“While it could seem exotic to many taxpayers, using multiple transactions and trusts to avoid estate tax is very common among high-wealth families,” said Tabetha Peavey, an attorney adviser at the Tax Law Center at New York University, who previously worked on estate planning.
Massive transfers of publicly-traded stock between family members aren’t uncommon among the billionaire class. A Bloomberg News investigation last year found Nike Inc. founder Phil Knight used a variety of techniques to move billions of dollars to his family tax-free. Zoom Video Communications Inc. Chief Executive Officer Eric Yuan transferred $6 billion worth of shares to unspecified beneficiaries for “estate planning” reasons last March. Late casino mogul Sheldon Adelson shuffled shares of Las Vegas Sands Corp. in and out of more than 30 trusts to pass along at least $7.9 billion to family members. Cosmetics heiress Jane Lauder became an overnight billionaire in 2013 when she received L’Oreal SA shares worth more than half a billion dollars.
In Hamm’s case, the transfer plan has a similar flavor to his career, which has been defined by a tolerance for risk and tumult. By making deals near the bottom of the oil market, Hamm gave his children the chance to profit from any recovery.
Hamm got those assets into the trusts via loans. The Internal Revenue Service requires that the wealthy pay interest on any intra-family lending, or else risk having it classified as taxable gifts. Filings show Hamm refinanced loans to his children’s trusts, at a principal value of $761 million each, on July 1, 2020. That timing allowed his family to lock in rock-bottom interest rates, making it far more likely they could pay back the windfall over the next several years.
Since July 2020, Continental stock has returned nearly 250%, tripling the value of each child’s stake to more than $2 billion.
The spectacular rise in Continental shares made Hamm and his heirs richer, but by using trusts, he could ensure those wealth gains happened outside his taxable estate, meaning they wouldn’t be subject to transfer taxes.
The ultimate tax savings may total billions of dollars, even if Hamm still owes taxes on any wealth left in his estate. His heirs could also owe income taxes on their capital gains in Continental stock in the event they sell it.
‘Massive Accumulations’
Hamm was hardly the only wealthy American who used the ultra-low interest rates and market plunge of 2020 to deploy strategies for slashing future IRS bills, according to Robert Lord, an attorney in Arizona and tax counsel for Americans for Tax Fairness, an advocacy group.
“It was the perfect storm for estate-tax avoidance,” Lord said of the post-pandemic period. The “massive accumulations of wealth building up” are “dangerous to society,” he added, “especially when it’s dynastic wealth that will not be broken up for centuries.”
Hamm, the youngest of 13 children born to poor Oklahoma sharecroppers, got his start in the energy industry at age 18 with a one-man oilfield services business he funded with a $1,000 loan. He struck out as a wildcatter four years later with a company that later became Continental.
Aggressive expansion has been key to Hamm’s rise. Two decades ago he bought 300,000 acres in North Dakota’s Bakken field. The region had eked out modest amounts of oil since the 1950s, but the advent of horizontal drilling and fracking, which Hamm helped pioneer, transformed the state into the country’s third-biggest producer by 2012.
A prominent Republican donor and energy adviser to President Trump during his 2016 campaign, Hamm’s biggest brush with mainstream fame arguably came in 2015 when he cut an almost $1 billion check to his ex-wife Sue Ann Arnall as part of their divorce. The settlement shrunk Hamm’s fortune by about a tenth.
Lucrative Loopholes
Trump and congressional Republicans made avoiding the estate tax easier than ever through a law that doubled the lifetime exemption — the amount that anyone can leave to heirs tax-free — to $24 million for a married couple this year. But that change did little to help those like Hamm who want to pass billions of dollars to their children.
Hamm instead relied on two long-standing and lucrative loopholes that Congress has repeatedly declined to close.
One, called the minority valuation discount, allows the wealthy to artificially deflate the value of assets by splitting them among separate owners. By putting Continental shares in an LLC and dividing ownership among trusts for his children, it’s likely Hamm was taking advantage of the strategy, said Lord, who reviewed the filings. If so, Hamm could claim for tax purposes that the value of the LLC was significantly less than the value of the publicly traded stock it contained.
President Barack Obama tried to close that loophole at the end of his term of office. A Continental representative said changing the valuation rules “would create chaos for the sanctity of sound tax principles.”
The other tool is the grantor trust. With loans and other advantageous deals, wealthy benefactors can funnel money into the vehicles, ensuring that their contents aren’t subject to the estate tax when they die. If structured correctly, they can become dynasty trusts, passing assets to multiple generations of heirs. While it’s almost certain Hamm’s children hold grantor trusts, Lord said, it’s not clear if they qualify as dynasty trusts.
Sophisticated planning techniques like those deployed by Hamm have made it easy for even the richest Americans to mostly dodge the estate tax, originally created more than a century ago as a check on the growth of dynastic wealth. Revenue from the estate tax totaled just $9.3 billion in 2020, the latest IRS figures show, a plunge of more than 50% from 2018 and a sliver of the more than $4 trillion collected by the federal government each year.
“Without further action from Congress, existing holes in the tax system will continue to encourage inefficient and costly tax planning,” NYU’s Peavey said.
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