Paul Allen Had A $20 Billion Estate Plan (The IRS Can't Touch)

The question isn’t whether the secretive Microsoft founder structured his finances for maximum posthumous impact. It’s whether the plan is so well designed we’ll never find out.

While every billionaire is unique, most conform to broad patterns. Once they run out of opportunities to spend their money, the IRS gets its cut and everything else gets split between kids and favorite causes.

What we know about the Paul Allen legacy only superficially obeys those limits. After all, he had a better sense of his mortality than the typical billionaire. 

Everyone says there was a long-term plan. His money has been working in secret for decades now, arguably outside his immediate control.

And that’s going to make it tricky for the IRS to ever claim a piece of the estate.

Brushes with death

Remember, Allen left Microsoft back in the ‘80s to fight a relatively mild form of the lymph node cancer that ultimately killed him. Making one of the world’s biggest fortunes wasn’t high on his mind.

After that, when it became clear he had at least a few more decades to live, Microsoft was already on track to become the biggest company on the planet. He was rich.

So he spent his life indulging a wide range of interests: venture capitalism, research, real estate development, yachting, music, on and on.

All the big pieces flowed through the holding company. Various subsidiaries of Vulcan Inc. ran his investments alongside his charities, sports teams and high-tech toy collections.

Vulcan isn’t a conventional family office. There’s no real line between the principal and his interests on the “family” side and the day-to-day operations on the “office” side. 

That’s an important distinction because it makes it much harder to separate Allen’s personal estate from all the corporate parts. Sure, he was sole owner of the company, but the company owned everything else.

The cancer came back a decade ago. While he beat it then, that’s still the time he would’ve gotten serious about making sure the operations would continue without him. 

We know he was deadly serious about that because of all the people inside the organization talking about continuity.

They’re sad that he’s gone but there’s no fear of facing the future without his guidance. That tells me his guidance is already a matter of internal record.

They know their marching orders. And as a result, I suspect Vulcan will look exactly the same without him as it did when he was alive.

A new kind of heir

In a lot of ways, Vulcan is the Microsoft that Allen never really got the chance to manage. It’s a labyrinthine map of his interests.

He loved Seattle. The firm sunk billions into reshaping the city map, sometimes buying the real estate and sometimes selling for a huge profit.

He owned the local teams and a few of the museums. Vulcan ran the most prominent local movie house.

On the business level, the firm was the vehicle through which he bought into the start-up companies he found interesting. 

The track record there isn’t important because Vulcan didn’t take outside money. If Allen liked the business plan, that was all that mattered.

Rumor has it there’s still $10 billion in Microsoft founder shares to provide critical mass. Figure a cost basis near zero after splits and an effective dividend yield that beats just about anything on the open market.

If the story is true, that stock spins off close to $170 million a year in cash — enough money to keep the wheels turning.

And it’s only a fraction of the stake he started with. There’s been a lot of healthy diversification over the years. Ironically it’s why Allen was “only” worth $20 billion when he died.

Had he held onto 36% of what’s now an $800 billion company, he’d have been the richest person on the planet. Instead, he spent a lot of that wealth, gave a lot away and parked the rest in other investments.

But Vulcan itself is really his immediate successor here. The firm is Paul Allen, continued on an institutional level. 

The people are trained to follow his mandates. Eventually his now-dead hand will relax, but for now, like the people say, there’s no operational difference now that he’s gone.

Vulcan will invest as he invested and give as he gave. 

He never got married and his sister and her kids are his only close relatives. While they’re the flesh-and-blood heirs, the firm is his child.

Splitting the whole

The only question is how someone with world-class advice and plenty of foreknowledge of his own mortality formalizes that relationship to satisfy the IRS.

My guess is that the difference between ownership and control will come into play. Allen’s sister was a big player at Vulcan for years but it was all management. 

He maintained control and full ownership. She gravitated toward the family foundation side a few years ago. With $1 billion on the books there, simply running the philanthropy can keep anyone busy for life.

Her three 20-something kids are probably taken care of. The older ones have already worked for family businesses. The youngest is still in college.

Odds are good the firm will find them things to do and ways to get paid. Whether they ever own Vulcan in their own right remains to be seen.

And the family kept its internal dynamics out of the headlines. Vulcan runs on a need-to-know basis. NDAs were reportedly ubiquitous, even covering guests at Allen’s birthday parties. 

What we know is what we don’t know. There’s no obvious trust (he still owns Vulcan outright) and the private equity structure of the firm ensures that there isn’t a lot of public disclosure.

The foundation is too small to own the firm. Maybe the foundation inherits the firm, in which case the heir isn’t going to pay a lot of estate tax on the gift.

After all, Allen signed the giving pledge. Handing formal ownership of the firm to the foundation satisfies that objective.

The firm would continue unchanged, spinning off cash and following Allen’s directives to invest in his interests and fund his causes.

The causes themselves would be the formal beneficiary of all that activity. But the causes wouldn’t interfere with the way the firm operates.

The family can direct the philanthropy though. Maybe they have jobs somewhere inside the overall structure to cover their current income requirements. Odds are good the plan covers that.

And the firm might end up spinning some of its operations out if they aren’t essential to the plan.

That’s how private equity works. You take your exits and keep the money rolling. Sooner or later, Vulcan isn’t about any of the sports teams, the portfolio companies or the real estate, just like it isn’t really about the yachts, the plane collection or the art.

All of that can get sold, repurposed or rolled into a museum. If they aren’t providing a human owner with any joy, the managers will decide how to make the decision.

The foundation only needs to hand out 5% of its assets every year. On that timeline, if Vulcan’s investments deliver a reasonable return, it doesn’t shrink into obsolescence. It grows.

Depending on management, the foundation is theoretically immortal. It will never die, dissolve or face estate taxes again under the current code. 

And even $20 billion is enough to keep Vulcan alive in perpetuity somewhere within it. Family will come and go. Direct knowledge of Paul Allen’s agenda will undoubtedly get diluted with time.

But that’s life. Every living entity changes and most of the more sophisticated ones evolve to face a changing world. 

If Paul Allen’s people really have the ironclad plan they say they do, transferring his ownership to a more tax-efficient entity isn’t going to be a problem. It’s just the cost of doing business.


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