Acting as own trustee cost the corporate raider turned Republican activist at least $100 million and two of his four daughters. How will his charitable foundation survive without him?
Harold Simmons built a sprawling industrial empire out of a single Texas drugstore but his estate plan never quite matched his M&A brilliance.
Now that the 82-year-old magnate is gone, most of his $10 billion fortune remains locked up in a pair of trusts that only he knew how to administer on behalf of his children.
The trusts have raised auditor eyebrows in the past and it’s likely that at least one of them will end up paying the IRS up to a staggering $2 billion in estate tax alone.
And that’s only where the executors’ headaches start.
Misguided move fell short
Fifty years ago, a lawyer told Simmons to transfer ownership of the family business – then just the one drugstore – into a trust, naming his daughters as beneficiaries.
Tactics like this were and remain standard operating procedure when it came to heavily leveraged protecting working assets from being seized if creditors decided to pursue a claim.
In theory, the girls would have gotten the benefit of the business as it expanded across sugar plantations and aerospace companies. The IRS would not be able to take an estate tax cut at the end.
Unfortunately, for still mysterious reasons, Simmons decided to appoint himself as trustee, effectively giving himself back direct control of the business he supposedly gave up.
A move like that will get your trust on the long-term radar of the IRS from the very first complaint, but then Simmons flaunted the two-sided ownership structure.
He funneled millions of dollars from “the girls” to his favorite political groups. He decided to “invest” trust assets in jewelry for wife after wife.
And since the trust owned the company he technically worked for, it seemed easy enough to instruct corporate management – himself – to buy him everything from hunting ranches to $3,000 suits.
Spending money on himself probably rankled the girls as they grew up, but there was plenty of money to go around.
What upset them was the political donations in their names. All four of the Simmons daughters lean toward the liberal side of the spectrum and weren’t happy to be the top Republican donors across decades.
When the trusts came down
The situation imploded in the mid-1990s when two of the daughters started to protest Dad’s trusteeship.
The IRS got into the act, arguing that disbursements on Simmons’ own behalf were taxable transactions and that the trust owed millions in back tax, interest and fines.
Simmons was already a billionaire at this point so being trapped in a decades-old bad structure could wipe out his estate and cause endless grief in the meantime.
His lawyers told him to split the initial trust and its holdings into one vehicle associated with himself and one with his current wife, so the trusts could cross-fund each other’s activities.
The IRS responded by ruling the “Harold” half of the assets completely taxable in any event, effectively voiding the initial transfer.
Meanwhile, retitling the trust structure forced Simmons to settle with the aggrieved daughters, paying them $50 million apiece to buy them out.
Considering that at best he was authorizing $275,000 a year on both of the girls and it’s still unclear exactly how much of that money found its way back to his household and his causes, it was a huge loss.
While the Harold Simmons Family Trust still owns his businesses, it’s likely the IRS will want its 40% cut of that piece of his empire, so he could end up owing the government another $2 billion.
Focus shifts to the foundation
Part of the restructuring plan involved turning the “Harold” trust into a charitable foundation. Again, the plan was for Simmons to control the assets and feed his extended family on the earnings.
He was chairman. The two daughters who stayed with him serve as president and executive vice president.
Now that he’s gone, the surviving team has absolutely no interest in using the billions he left behind to promote his right-wing politics.
If anything, they espouse progressive causes: women’s health, public television, campaign funds for Hilary Clinton and other Democratic candidates.
Maybe Simmons put more thought into appointing a successor trustee than he did when it came to appointing himself at the beginning. Otherwise, the next generation is now firmly in charge of the family wealth.
Trustee choice is what ultimately tripped him up in the first place, so we might see the Harold Simmons Foundation start funding policies he would have hated.
He just wanted to keep apply his peculiar business genius to the empire he was building, without technically owning what he had built.
What he needed was, of course, an asset protection trust, but he was 25 years too early and living in Texas, which has still not changed its laws to let local trusts work that way.
But he could have appointed a corporate trustee at any time and started running his companies on what would probably have amounted to rubber-stamp orders from the trust.
He never did that. He wanted the freedom to bend the rules when it suited him.
Over the years, that independence backfired fairly often, but it left him with billions of dollars to play with and made all of his daughters rich – one way or another.
