Shale King Harold Hamm passes stock valued today at $18 billion tax-free to his heirs using tax loopholes.
Who Is Harold Hamm
Harold Hamm is the owner of Continental Resources Inc., the shale drilling company he founded 50 years ago. One could argue that he is a poster child of the American dream. He was one of thirteen children born to a share cropper. He started his company with a $1,000 loan and turned it into a multi-billion company. Talk about (OPM) using other people’s money to get rich!
This is how he transferred billions of dollars, perhaps totally tax free, to his five children per Bloomberg News.
Advance Planning and Fortuitous Events
If Hamm had gifted his stock interest to his children during his lifetime, he would have incurred significant gift taxes. If the stock had remained in his estate and his children inherited the stock upon his demise, his estate would have incurred significant estate taxes.
Hamm decided to make lemon aid from lemons. He launched this estate plan in 2015 when the price of oil plummeted and the shares of his company significantly decreased in value. In mid-2020, the pandemic caused the oil industry a severe blow and interest rates plunged to record lows. At one point in 2020, his company’s worth was only $2.4 billion and had sunk 90% in value. Hamm was a wildcatter and knew it was time to strike (act). In terms of estate planning, it was the perfect storm.
The Tax Loopholes at Play
Hamm transferred $761 million to the five trusts (believed to have been grantor trusts) for his children. Since those shares were equally divided among his five children, the tax laws allowed those shares to be artificially devalued using what is called a minority interest discount. Depending upon how aggressive he was in valuing his stock, minority discounts of 20% to 30% are not uncommon. Thus, the value of the those transfers to the trusts were significantly below the value of his shares which were publicly traded. In all, it was reported that he created an LLC and over a dozen trusts to make his wealth transfers. Today, his family’s wealth is valued at about $18 billion.
Had Hamm simply transferred the shares to the trusts, he would have had to pay some very hefty gift taxes. Instead, he loaned those shares to the trusts and the trusts were required to pay him interest on those loans thus avoiding the gift tax. Since interest rates were at all-time lows, the trusts were able to pay the interest on those loans.
Since that July 2020 transfer, the value of Continental shares have increased 250% and are worth more than $2 billion each. Since that appreciation happened outside of his estate, they escape estate taxes upon his demise.
If you are keeping track, Hamm avoided all transfer taxes, gift and estate.
Other Billionaires
Bloomberg News mentions that it was not able to ascertain if Hamm’s trusts were dynasty trusts which allow future generations to avoid transfer taxes. For those of us who aren’t in a position to avoid taxes of this magnitude, perhaps we have some solace in knowing that if his children sell any of their shares they will be subject to long-term capital gains, taxed at a rate of 20%, and the billions of dollars remaining in Hamm’s estate will be subject to estate taxes upon his death.
Hamm is not the only billionaire who has taken advantage of the tax loopholes for the super rich. Other billionaires mentioned in by Bloomberg News included Phil Knight, the founder of Nike, Zoom CEO Eric Yuan, Sheldon Adelson of the Las Vegas Sands fortune, and Jane Lauder.
Tax Tip
Far too many taxpayers lack an estate plan. As Harold Hamm’s planning illustrates, planning before the event is usually the most advantageous approach. Regardless of the size of your estate, you should consult with an estate attorney and your tax professional to ensure that you have provided for your family by having a will, trusts if appropriate, and living wills and health directives.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.