Harold Hamm, a US billionaire and CEO of Continental Resources Inc., a shale drilling company, is handing over to each of his 5 children a stake worth $2.3 billion in his company tax-free.
According to the report by Bloomberg, the 76-year-old billionaire relied on the most common albeit perfectly legal loopholes for avoiding the U.S’ 40% estate-and-gift tax levy. The key to these techniques is to carefully structure transactions so they benefit heirs but are not technically gifts.
Hamm began his current estate plan in 2015. He restructured the transactions to boost the advantage of his heirs. Around that time, the price of oil had plunged and Continental shares were in a slump. Right up to mid-2020, interest rates plummeted record lows, as the pandemic dealt a devastating blow to the oil industry.
While the oil market was at the bottom, the billionaire made deals and this gave Continental and subsequently his children an opportunity to profit from the recovery of the market.
Distributing wealth to family members tax-free is a practice that is common for the ultra-rich. Tabetha Peavey an attorney-adviser at the Tax Law Center at New York University, while speaking to Bloomberg stated that using multiple transactions and trusts to avoid estate tax is very common among high-wealth families.
To transfer the assets to his children, the billionaire put them into trusts via loans. Filings show that on July 1, 2020, he refinanced loans to his children’s trusts, at a principal value of $761 million each, 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.
From July 2020 to February 2022, Continental shares increased nearly 250%, tripling the value of each child’s stake to more than $2 billion.
The use of trusts ensured that those wealth gains happened outside his taxable estate, and they wouldn’t be subject to transfer taxes. This way, the billionaire saved billions of dollars in tax and even if he owes any tax, it would be a tax on what is left in his estate.
Eventually, however, his heirs could be liable to pay income taxes on their capital gains in Continental stock but only if they sell it. An action that they are prevented from taking until their father dies.
