May 21 (Bloomberg) -- Receiving $54 million in consulting fees for a decade’s work on her own family’s offshore trusts is unusual and probably saved U.S. Commerce Secretary nominee Penny Pritzker on taxes, according to estate experts.
“I don’t remember ever working on a trust that paid a consulting fee to a beneficiary,” said Robert Lawrence, chairman of the private client department at Cadwalader, Wickersham & Taft LLP in New York who’s been specializing in international trusts since the late 1960s. The $54 million “is a very large amount of money and in my experience is very unusual as a consultant’s fee, especially if it were to a beneficiary.”
Financial disclosures released last week by President Barack Obama’s nominee provide a rare inside look at some of the trust strategies used by the Pritzkers, the founding family of Hyatt Hotels Corp. Pritzker is scheduled to appear May 23 before the Senate Commerce Committee considering her nomination.
Pritzker would be among the wealthiest cabinet secretaries in U.S. history, ranking with industrialist Andrew Mellon, who served as Treasury secretary during the 1920s. Her net worth is more than $1.5 billion, according to the Bloomberg Billionaires Index.
The trusts Pritzker did the consulting work for a decade on are based in the Bahamas, according to the disclosure documents. They were created when Pritzker was young, and she doesn’t control them and hasn’t received distributions from them, Susan Anderson, a spokeswoman for Pritzker, said in an interview.
“Someone needs to do something special to get $54 million,” for consulting, said Ryan Dudley, a partner in the international tax services group at Friedman LLP in New York. “If you go to Goldman Sachs or one of the investment banks and they charge $54 million generally they have a team of people. If this is just an individual working by herself it seems like a big number.”
Pritzker, 54, gave advice on the restructuring, managing and in some cases selling various trust investments for the purpose of dividing assets along family lines, according to a person familiar with her finances who asked not to be identified because of confidentiality issues.
These investments included holdings in Marmon Corporation, Hyatt International, Triton Container International and Royal Caribbean Cruise Lines, and Pritzker also assisted the trustee in implementing its decisions on matters such as preparing companies to go public, the person said.
The trustee of the offshore trusts determined and negotiated the terms of her compensation during the 10-year restructuring period and the payment was for that decade of work, the person said.
“Only a small fraction of her fee came from trusts of which she or her immediate family were beneficiaries; the vast majority of her fee came from trusts whose beneficiaries were other members of the Pritzker family,” spokeswoman Anderson said in an e-mail. “She was particularly well suited to take on this role because of her extensive business background, her in depth knowledge of the assets being restructured and eventually distributed.”
Other family members also have received consulting payments from the trusts, the person familiar with her finances said. The Commerce secretary nominee paid ordinary income taxes on the consulting fees, according to the person.
“This certainly is unusual to have a family member compensated to this degree,” said John Olivieri, a partner in the private clients group at New York-based law firm White & Case LLP who specializes in estate planning. “The whole thing is unusual. The foreign trust, the compensation.”
By comparison, Hyatt, majority owned by the Pritzkers, hired 16 investment banks to sell $1.1 billion of its stock in a 2009 public offering. The banks collectively charged $56 million in fees; the lead bank, Goldman Sachs Group Inc., collected about $20 million.
When the Pritzkers agreed in 2007 to sell their industrial manufacturer, Marmon Holdings, to Warren Buffett’s Berkshire Hathaway Inc., they relied on advice from Goldman Sachs Group Inc. and Robert W. Baird & Co., a Milwaukee-based investment bank. When they sold Triton in 2011, Bank of America Corp. advised on the sale.
At one time, U.S. families set up trusts offshore for the added benefit of letting the income accumulate tax-free until distribution and for protection from creditors or lawsuits, said Lawrence, of Cadwalader.
A 1969 tax rule discouraged U.S. residents from using offshore accounts. Since then, if gains from offshore trusts aren’t distributed to beneficiaries and taxed in the year it’s earned, the accumulated income will be levied at ordinary income rates plus a “very hefty” interest charge, especially if there’s a substantial amount of money held for a long time, Lawrence said.
“If the $54 million were a distribution to a U.S. beneficiary of accumulated income that had been held for a long time, the tax, plus the interest charge, would have been significantly greater,” Lawrence said.
Computing the interest charge is very complicated, said Dudley of Friedman. The government tries to spread the income over the years of accumulation and then collect tax and charge interest over that time period, he said.
The interest charge plus the ordinary income taxes owed to the federal government can eat up much if not all of the earnings, and there may be state taxes as well, Dudley said. He said he had a client with a trust that existed offshore for about 20 years where the effective tax rate on distributions was about 80 percent of the income.
“That didn’t leave much left,” Dudley said.
If someone is a beneficiary of a trust it’s likely that he or she would be considered a related party for the purposes of rules around transactions that require reasonable payments, said Dudley of Friedman. If it’s a related party, there’s a higher standard of scrutiny for payments, Lawrence of Cadwalader said.
The trust lawyers specified that it’s hard to determine whether the $54 million consulting payment was reasonable without knowing the overall value of assets in the trusts, which weren’t disclosed in the federal filing, and that there are other unknowns such as how long the assets inside have accumulated and exactly what consulting services were provided.
Consultants to trusts offer a variety of services such as investment management, tax planning, and administrative services, said Scott Baker, president of Perspecta Trust in Hampton, New Hampshire, which provides trustee services, estate planning and investment management for affluent families. They would be paid for that role by the trust and they can be a family member or beneficiary, he said.
Pritzker has requested that the trustee of the offshore trusts for the benefit of her and her immediate family start a process that will permit the appointment of a U.S. trustee, though she doesn’t have control over the decision, Anderson, Pritzker’s spokeswoman, said.
The nominee also received a total of $32.2 million in consulting fees last year from 272 family trusts based in the U.S., according to the disclosure form. She reported $1.2 million salary from the Horton Trust Co., which is the trustee of her onshore trusts.
U.S.-based trusts that benefit Pritzker or her descendants had Hyatt stock worth $352 million, and another $58 million was held by the Bahamas trusts that benefit her, according to a Hyatt filing with the U.S Securities and Exchange Commission in April.
Her nomination has already has been criticized by Republicans including Senator Charles Grassley of Iowa who called Obama’s selection of a wealthy beneficiary of an offshore trust as “hypocritical.” During the 2012 presidential race, Obama’s campaign aired television ads accusing Republican nominee Mitt Romney, a co-founder of Bain Capital LLC, of stashing his money overseas, including the Cayman Islands.
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