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The Waltons. Most Americans know the Walton Family as the founders of Wal-Mart. Who doesn’t know about
Wal-Mart? A recent Tax Court case has made the Waltons even more famous among tax advisers than they
already were.
The Walton case is intriguing. In 1973, Audrey Walton, the ex-wife of Sam Walton’s brother, Bud Walton,
created two separate two trusts, each funded with approximately $100 million of Wal-Mart stock. Talk about
big hitters!
These trusts were two-year Grantor Retained Annuity Trusts - GRAT. A GRAT is type of trust sanctioned by
Treasury Regulations, which provides for a stipulated annual payment to the Grantor each year, with the
remainder of the trust at the end of the payout period passing to a designated family member. The GRAT
provides that if the donor (Audrey) dies before the GRAT terms, expires then the GRAT payments are payable
to her estate. In the Walton case, Audrey filed a gift tax return, declaring a zero value for gift tax purposes for
each GRAT, claiming that under existing law and applicable interest rate, the valuation of the gift to the
remainder interest was zero.
Why did Audrey engage in this exercise? Audrey’s tax adviser obviously informed her that a GRAT is a means
of passing property to family members, free of gift or estate tax, so long as the value of the trust property
appreciates more than the applicable federal interest rate (AFR). In other words, if the AFR is 6% and the
property appreciates at 10% _______ percent or $_________ in Audrey’s case would be transferred free of
tax. Sounds like a good idea, doesn’t it?
(In Audrey’s case, the plan didn’t work because the Wall-Mart stock did not appreciate during the two year
period of the Trust. In fact, Wal-Mart stock went down, all the trust property was paid back to Audrey with a
short fall of $14 million.)
What was all the fuss about? Audrey initially claimed that the value of the gift at the end of the GRAT period
was zero (modified at trial to $6,195). The IRS said the gift should have been $3,821,522. You might say there
was a bit of a discrepancy. Obviously, the fact that there was no gift at the end of the day, was not decisive.
The key issue was the validity of a portion of the Treasury Regulations which basically said that because of
technicalities, one could never claim a zero value for a gift despite the annuity tables. Tax Court Decision. The
IRS lost in the Tax Court. The Judge ruled that the Treasury Regulation (called "Example 5") was invalid, that
the tables controlled, and that a taxpayer could in fact zero out the taxable gift in establishing a GRAT
Why do a GRAT? Audrey Walton did not accomplish her objective, passing property free of gift tax and, in fact,
incurred a whopping legal bill. However, her efforts had a silver lining for other taxpayers, who now have a
Court precedent approving this estate plan devise. Certain any short term GRAT set up in the last few years
using a list of securities would likely meet the same fate as Audrey Walton’s GRAT, i.e., there would be
nothing left to pass at the end of the term. These securities probably declined.
However, let’s look at the potential benefits now. The AFR is at historically low rates, which means that the
GRAT will succeed with more modest investment appreciation. Listed stocks as a whole are now low and the
chances for appreciation in the next two to five years appear to be good. Therefore, GRATS have favorable
prospects right now and short term GRATS should be looked at for clients whose life expectancy for one
reason or another is limited. They may well be a "no lose" proposition. Big tax-free transfers being possible,
with no down side.
Other Assets. Typically GRATS have been recommended for stock in closely held businesses that are
appreciating faster than the AFR, based on normal valuation techniques, or where there is likely to be a
substantial jump in value as a result of an IPO or sale of a business
If you have clients who are interested in exploring this sophisticated estate planning technique, please do not
hesitate to call Jim Modrall at (231) 941-9660, or any of the attorneys listed below:
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A.
Pezzetti, Jr. and John. M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Troy W. Stewart, Gary D. Popovits, and
Lawrence K. Kustra at (231) 941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| December 2002 THE WALTON FAMILY AND GRAT by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |