So with David Koch recently retiring (his official retirement date is July 1, 2018), and I mentioned in my last post that Preston Marshall was accused of spousal abuse and this may affect his ability to own Koch Industries stock. Clearly, the chairman and CEO Charles Koch is dealing with plenty of issues right now. Honestly Charles hasn't had to deal with anything like this since the Koch vs. Koch trial back in the late 1990's.
The Preston Marshall issue should be interesting. It is mentioned that Preston Marshall owns the most amount of shares outside Charles and David Koch. Earlier in 2018 Preston was accused of spousal abuse. It is said that his wife is in the process of divorce proceedings with him. Of course I am sure he was smart and had a prenuptial agreement for this situation to block her access from his wealth.
The Koch Family has a family office called 1888 Management LLC. Family offices typically handle the investment strategy, the philanthropy strategy, and manage the assets and the entities for one family and facilitate communication between the older generation and younger generation to ensure that there is family harmony when assets are passed down to future generations. In addition to this, a family office can handle things like paying bills for the family, coordinating travel plans, ensuring the security detail, among other tasks. The board of managers for 1888 Management LLC are Steven Feilmeier who is currently the CFO of Koch Industries, Elizabeth B. Koch (wife of Charles Koch), David Koch, Anna B Koch (wife of Chase Koch), Jason Kakoyiannis (who is married to Elizabeth Koch-daughter of Charles and Liz Koch). It should be
It appears David Koch is in bad shape health wise and may not have long to live (personally I wish David Koch had written an autobiography at some point-he has had a very interesting life for sure). I covered his lifestyle in depth in this post. As someone who worked at Koch Industries his whole career he must not be happy not being able to go to board meetings and make decisions at Koch Industries. The question is what will happen to his ownership of Koch Industries stock?
Most likely his shares would go to his wife Julia. His shares can pass to Julia without having any estate tax consequences (this is known as the martial deduction). Even Charles Koch doesn't have a few billion dollars laying around since nearly all his net worth tied up in Koch Industries stock. David Koch has said in this article regarding the shares of Koch Industries "once we pass on, our children will acquire the stock, and I want to see Koch Industries continue to grow". His shares probably would go first to Julia Koch and then to the children of David and Julia Koch. If Julia Koch is in her mid 50's she would have many decades and possibly see if her children would get involved in Koch Industries.
There are some strategies that Koch Industries could use for the estate planning. The first option would be to go public in order to access capital. However, Charles Koch has said many times that Koch Industries will go public literally over his dead body. Charles Koch in this Forbes article did mention that the family has been performing estate planning for "many years". With this comment and given my last post on the Marshall family. Charles and David Koch have most likely engaged in setting up trusts and trying to get Koch Industries out of their estates and passing it on to future generations. By using grantor retained annuity trusts (like J Howard Marshall III and the Marshall family) and family limited partnerships (FLPs) Koch can pass shares to their children. The only issue is that the family is to pass $22.4 million for a couple without hitting estate taxes. There is not only estate taxes but also generation skipping tax (GST) which are in addition to estate taxes. This is to prevent generations from continuing to pass down wealth. At some point a future generation will have to pay generational skipping tax (of course unless they set up a dynasty trust).The Koch family has personal experience with estate taxes. Fred Koch was concerned about making sure Koch Industries kept liquidity before he passed. During the 1960's the estate tax rate was 77% for anything over $60,000. In 1962 Charles and Sterling Varner (who had worked at Koch Industries since 1946) wanted to purchase two trucking companies to further expand the crude oil gathering business for Koch Industries. However, Charles from his father was only given approval to purchase one company. Fred Koch went on a trip to Africa and when Charles picked his father up from the airport Charles told his father he ended up purchasing both companies. Fred Koch was furious as he was trying to save cash to pay estate taxes. Charles Koch couldn't pass up an opportunity for growth even if it pissed off his own father. A similar situation occurred in 1967 when Charles Koch wanted to start construction on a new manufacturing facility for Koch Engineering. Charles explained to his father that there was farmland that Koch owned and Charles suggested it be used to build a bigger and better facility to handle the growth of the company. The cost of the facility would be $1.5 million (which would be about $11 million today and Fred Koch replied "A million and a half" We can't afford that". The deal would lead to the home of Koch-Glitsch which would represent the company to expand their product offerings. Fred Koch would pass away later that year on November 11, 1967.
Another strategy that is sometimes used for high net worth individuals is to purchase life insurance to cover estate taxes. Charles and David Koch were planning to have a meeting with an insurance agent to discuss this however the agent (Michael D. Brown) was unable to make the meeting and lost a $8 million commission as a result. The IRS would comment that this technique would not be advisable. However, if individuals purchase life insurance three years before they pass they can get that out of their estate. This strategy is known as setting up an irrevocable life insurance trust (ILIT). An insurance policy is purchased and placed in a trust. As long as the individual lives more than 3 years the life insurance policy will not be included in their estate. The only issue with this as you age the cost of the insurance premiums increase and it may be uneconomical to do. For executives or important individuals at a company often companies will purchase key person insurance. The purpose is to recognize individuals that have an important role with the company and the insurance pays out of that key individual passes to help the business continue on.
The company could use cash flow from the business to cover the estate taxes. It is estimated that Koch Industries in 2012 earned $8 billion before income taxes and depreciation. Koch on average tries to double every 6 years which would say that the company in 2018 earns closer to $16 billion before income taxes and depreciation. If we assume Charles and David Koch are each worth $51 billion then their total net worth is $102 billion. With an estate tax rate of 40% this would say that roughly a little over $40 billion would be needed to pay the estate tax (this of course assumes no estate planning had been done already). Also for David Koch since he lives in New York he will owe New York estate taxes as well. New York estate tax rates are 16% (this would add another $6 billion of taxes roughly). You are able to deduct the state taxes you pay on your federal estate tax return though. On the positive side Koch Industries could pay this out over a number of years. Using Section 6166 the Koch family could have up to 14 years to pay the estate tax. Although they would have to pay interest (however you would have to compare the rate Koch Industries was going versus this). There is no question over this amount of time Koch Industries could pay off the estate taxes owed by using the cash flow from the ongoing business.
There is no doubt that the next few years for Koch Industries will be interesting and be critical for the future as you have a major shareholder retiring. The Koch family most likely has done extensive estate planning to relieve the possible burden of estate taxes. Property records for example show David Koch has set up his homes into different trusts. Charles Koch also has his homes in trusts as well too. The objective here is by having a home in trust it avoids going through the probate process-which is public. I would imagine they have set up trusts, done complicated estate planning, purchased life insurance, and have some cash set aside to cover the estate taxes. There is a good chance that the IRS will contest the estate value of Koch Industries stock as it is a closely held business (this could end up lasting years) and there isn't much of a market for the stock. My prediction would be shares will ultimately end up in the hands of Chase Koch (it should be pointed out that he has children of his own), Elizabeth Koch, John Mark Koch, David Koch Jr, Mary Julia Koch, and the children of Preston Marshall and E. Pierce Marshall Jr. With this number of shareholders there could be no doubts fights and feuds over ownership of the company which could lead to buyouts of certain shareholders down the road. Koch Industries has done very well over a long period of time. In my last post it was reported that Elaine Marshall who is a shareholder of Koch Industries earned $120 million in 2015 (she has roughly a 15% ownership of Koch Industries stock). This would say that even a 1% interest in Koch Industries stock would yield about $8 million of a dividend (this would say Koch pays out roughly $800 million in total of dividends). Charles and David Koch has grown the company dramatically which has increased not only the earnings but also the dividends. There is no doubt that the future for Koch Industries will be interesting and perhaps even more interesting than the past. As the modern philosopher Sean "Puff Daddy" Combs says "it's like the more money we come across the more problems we see".
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