Estate Planning Lessons from the Waltons

Contemporary estate planning causes a division of an estate and results in an ultimate dissipation of the resource base over a period of years. Is it possible to keep the resource base together to serve the family for many family generations? The Sam and Helen Walton story tells us how we can do so. The King Ranch story provides another illustration of what can be done.

Sam Walton’s autobiography was published shortly before his death in April of 1992. Sam Walton writes about building a business and entrepreneurship. He also talks about the building of an estate plan. Most of the information I provide comes from the book. Other information comes from those who knew Mr. Walton or members of his family.

The year was 1940. Sam Walton started out in Des Moines as a management trainee for J. C. Penny – at a salary of $75 a month. He moved to Claremore, Oklahoma, in 1942 to work for Du Pont. He met and married Helen Robson in Claremore. Sam Walton was called for active duty as a second lieutenant in 1942. He separated from the Army in 1945 as a captain. With savings of $5,000 and a $20,000 loan from Helen’s father, Sam Walton open a variety store, a Ben Franklin franchise, in Newport, Arkansas, population 7,000. He was then 27 years of age. Sam Walton prospered and in two and half years paid the $20,000 loan in full. He developed a second store in Newport, which he called the Eagle Store. By then, Sam Walton’s brother, Bud, had returned from the war and his service as a Navy pilot. Bud joined Sam Walton in the merchandising business. In five years, the Walton brothers had built their Ben Franklin franchise operation in Newport to be the number one variety store – in sales and profit – for a six-state region.

Sam and Bud Walton lost their lease on the Ben Franklin location in Newport. They sold the Eagle Store and began to look for a new location – a new town. The year was 1950. Sam and Helen Walton relocated to Bentonville in Arkansasand began a Ben Franklin self-service variety store – Walton’s Five and Dime. Sam Walton opened a Walton’s Five and Dime in Fayetteville in 1952. Bud Walton acquired a Ben Franklin store on his own in Versailles, Missouri. Sam Walton and Bud Walton developed another Ben Franklin store on a 50-50 ownership basis in Ruskin Heights,  Kansas City. They began to develop other locations. In 15 years, the Waltons had become the largest independent variety store operator in the United States.

Discounting was emerging as a merchandizing concept. Sam Walton studied the lessons of Marty Chase (Anne & Hope), Sol Price (Fed-Mart), and Herb Gibson (Gibson’s Discount Stores). He took his discount store plan to Butler Brothers in Chicago (the Ben Franklin franchisor). Butler rejected the discount store idea. Sam and Bud Walton had to begin on their own. The Waltons opened their first WalMart in 1962 – in Rogers, Arkansas. The rest is history – a multibillion dollar history of hard work, persistence, innovation, and growth.

By the time Sam and Helen Walton moved from Newport, they had the four children they wanted – Rob, John, Jim and Alice. Sam Walton’s mentor was Helen’s father, L. S. Robson. Mr. Robson had organized his ranch and family business as a partnership. Helen and her brothers were all partners. Sam and Helen Walton did the same thing in 1953. According to Sam Walton, “What little we had at the time we put into that partnership with our kids. . . .” They call their family partnership Walton Enterprises. WalMart grew out of this partnership. The ownership of real estate, area banks, and a newspaper also grew out of Walton Enterprises.

Sam Walton died in April of 1992. At the time of his death, Sam Walton only owned a 10% interest in the partnership. Helen owned another 10% interest. Although his book is not specific in detail, it appears that Sam Walton’s 10% interest in the partnership passed to a marital trust for Helen Walton (deferring the estate tax) and will, upon Helen Walton’s death) pass to one or more family charities (producing a zero estate tax). If Sam Walton had done nothing, it is likely, upon Helen’s death, that the family and the family business would have been burdened with an estate tax on property, estimated by Forbes in 1985, to be worth $20 to $25 billion dollars. Although there is no published information to support this conclusion, it is probable that the estate tax burden to the family and family business will be absolutely zero.

ESTATE PLANNING LESSONS FROM SAM AND HELEN WALTON

“The transfer of ownership [in the partnership] was made so long ago that we didn’t have to pay substantial gift or inheritance taxes on it. . . . The principle behind this is simple: the best way to reduce paying estate taxes is to give your assets away before they appreciate.”

Our little firm has worked with some pretty heavy hitters. Some of them are listed in the Fortune 500 category. Almost all of these persons started with nothing. They are “hunter warriors” who had absolutely no goal to build a substantial net worth. They built their treasury because they were dedicated to building something else – their business. They did so through hard work, innovation, and persistence. Almost all of them have made their credit shelter gifts – and the result has been but a spit in the ocean compared to what must be done to minimize the estate tax burden to their families – and to their businesses. Most believe that they have accumulated far too much in net worth to do effective planning. Faced with the impossible, they defer any planning to a later day. The lesson taught by Sam Walton is, no matter the size of the estate – no matter how much or how little – the time to plan is now. Even for those persons with very large estates, there is much which can be done – now.

What will the Walton charities get upon Helen Walton’s death? WalMart went public. The family partnership retains a 38% control block of the WalMart stock. It is absolutely critical that this block remain intact to retain control of the business. Will the Walton charities ever vote one share of the WalMart stock? No. The charities will get a noncontrolling interest in the Walton family partnership. The vote of the WalMart stock remains in control of the family at the partnership level.

Though Sam and Helen Walton owned but a 20% interest in Walton Enterprises, their primary source of income came from compensation paid to Sam Walton as manager of the partnership. Walton Enterprises was a general partnership in which every member of the family actively participated. Sam Walton was the elected manager of the partnership. Jim Walton is now the manager. Here are Sam Walton’s words about the government of the Walton family partnership.

“The board of Walton Enterprises, which is us, the family, makes decisions on a consensus basis. Sometimes we argue, and sometimes we don’t. But we control the amount we pay out to each of us, and everybody gets the same. The kids got as much over the years as Helen and I did, except I got a salary. That way, we accumulated funds in Enterprises rather than throwing it all over the place to live high. And we certainly drew all we needed, probably more, in my opinion.” (From Sam Walton, at page 6)

Many of our clients do not want to risk the loss of their control. They don’t want to run the risk of being out-voted by the kids. If Sam and Helen Walton wanted to insure their continued control, they could have used a limited partnership. Limited partnerships run the risk of being classified as an association taxable as a corporation. One of the four classification issues is centralization of management, a corporate characteristic. To flunk this classification test, a limited partnership agreement should include substantial limitations on the removal of the general partner. These restrictions are almost always found in investment limited partnerships having unrelated owners. The same restrictions are necessary in a limited partnership having family partners. If a general partner can be removed only for cause, and then by a vote, of let’s say, 70% interest of the partners, the senior generation can retain management control while retaining as little as a 31% ownership position in the partnership. Sam and Helen Walton did not fear their children. Their children were raised to be true partners. The partnership unified the Walton family.

Sam and Helen Walton raised their four children to be frugal and independent. They gave them independence and freedom of choice.

“One thing I never did – which I’m really proud of – was to push any of my kids too hard. I knew I was a fairly overactive fellow, and I didn’t expect them to try to be just like me. Also, I let them know they were welcome to come into our business, but that they would have to work as hard as I did – they would have to commit to being merchants. Rob went to law school and became our first company lawyer. He did most of the work to take us public, and has been involved with the senior management of the company ever since – as an officer and board member. Jim learned a lot about real estate – and the art of negotiation – from his uncle Bud. After Bud sort of stepped back from his involvement with locating and buying store sites, Jim took over. . . . Now he’s running Walton Enterprises, the family partnership, and I thinks he’s almost as tight with a dollar as I am.

“. . . Alice and John worked for a little while at WalMart, but have branched out into independent businesses of their own. Alice tried her hand as a buyer, but didn’t care for it too much, and now she’s got her own investment company, the Llama Company, down in Fayetteville. In some ways, I believe she’s the most like me – a maverick – but even more volatile than I am. John, who was a Green Beret medic in Vietnam, became our second company pilot – I was the first. He’s the most independent of the bunch and the only one who doesn’t live here in Arkansas, and he’s a tremendous individual. He and his family live out West, where he designs and builds sailboats, and he also runs a large crop-dusting business, which is owned by Walton Enterprises.”(From Sam Walton, page 73-74).

This remarkable lesson teaches us that the partnership can bring the family together in a common endeavor – partnership matters – yet give each family partner the freedom of choice. The partnership can enable an individual family partner to pursue his or her own goals. As with John Walton, the family partnership can finance a family partner’s individual business.

It appears that Rob, John, Jim and Alice Walton own their partnership units individually. Sam and Helen Walton could not have envisioned in 1953, that their partnership would grow to have a value of $20 billion to $25 billion in 1985. What if Sam and Helen Walton had transferred the partnership units to each child in a generation skipping transfer tax-exempt trust. The partnership interests of the children, now worth in the billions of dollars, could have completely by-passed the federal estate tax system in their generation, in their children’s generation, and probably in their grand-children’s generation.