The administrators of the Steven P. Jobs Trust are now accumulating nearly $100 million a year without having to sell a single share of the $11 billion in stock they currently control.
Most estates require the trustees to line up fairly active portfolio management if they want to live up to their fiduciary duties. As in life, the late Steve Jobs is proving himself to be a substantial exception.
As we reported last year, Jobs put his 5.5 million Apple shares and nearly 138 million Disney shares into trust back in 2009, removing them from both his direct control and taxable estate.
Since then, it doesn’t look like any of it has been liquidated. Instead, each of those Disney shares is now paying back a 60 cent annual dividend, and as of last week Apple is paying dividends as well.
Net pre-tax income for not making a single trade: $97 million.
But while the portfolio came to the trust administrators already constructed, they still have plenty to do, experts in the field tell me.
For one thing, free cash flow just expanded by close to 20%.
Since the famously low-maintenance Jobs family was making do on just his $1 salary and the $82 million from Disney, they might be hard pressed to spend the extra $40,000 a day they’re now getting from Apple.
Whatever they can’t spend needs to be reinvested -- probably in slightly less concentrated allocations -- and that can keep the trust busy.
The trust is being run by Howson & Simon, an accounting firm in Silicon Valley so elite it hasn’t even built a public website.
Other high-tech heavyweights in Howson & Simon’s clientele include Larry Ellison, founder of Oracle and a multi-billionaire in his own right.
Diversification is crucial
Bringing Ellison into the equation underlines how important it is for the the Jobs family to divest some of the stock that Steve accumulated and refused to sell while he was alive.
If you’ve ever worked with an executive client who gets a lot of stock options, you know how delicate it can be to reduce the position without flooding the market with shares and depressing the overall value of the portfolio.
Ellison is an even more extreme example of this than his good friend Steve Jobs ever was.
Even after Howson & Simon begged him for years to diversify his holdings, Ellison still owns a staggering 22.4% of Oracle stock -- the options kept building up faster than he can sell them.
With an estimated net worth of $36 billion, that’s well over 90% of the third-largest fortune in America rising and falling on a single stock price.
Unlike Jobs, Ellison has never been shy about running up huge bills collecting manor houses in Japan and yachts. At his dot-com peak, he was burning through well over $250 million a year, borrowing on the value of his stock instead of selling it.
Interestingly enough, while H&S partner Philip Simon urged Ellison to liquidate just 0.5% of his shares every quarter, SEC records show that the last time he lightened up was in late 2010.
The dividend may not be enough
Be that as it may, Steve Jobs had a vested personal interest in keeping his own stock in the family.
As top Disney shareholder, those shares bought him a seat on the board of directors and plenty of input into the company’s digital entertainment strategy.
And as Apple founder and CEO, hanging onto his stock was the ultimate show of confidence in the company he built.
However, those personal interests are weakening now that he’s gone.
Neither the trust nor any member of the Jobs family was put on the ballot to replace him on the Disney board, while Apple seems to be rolling along okay in his absence.
Naturally, there are strategies for squeezing cash out of securities without selling them.
After the Ellison experience, Howson & Simon probably have hedged the Jobs trust with zero premium collars, variable prepaid forwards and the whole library of derivative strategies.
As accountants, they’re definitely also mulling tax scenarios that make the new Apple dividend and the long-standing Disney payout less attractive.
Right now generating close to $100 million in dividends is pretty close to ideal, since the trust and its beneficiaries will pay just 15% on tax on that income this year.
Next year, however, dividends are currently set to be taxed as ordinary income, which will probably be 35% for the family.
Since the capital gains rate is only set to rise to 20%, liquidating in 2013 may save the trust vast amounts in long-term tax, and so we might see some huge sales of either or both stocks starting in January.
Staying in the shadows
Simon & Garfunkel appear in the massive Steve Jobs biography, but Howson & Simon don’t.
Jeffrey Howson advised the Steven P. Jobs Foundation during its brief life in the late 1980s and the firm now shows up on the documents transferring family property into the trust.
Otherwise, they’re keeping quiet. When asked about what they do on the trust, nobody’s gotten any comment out of them more expansive than a measured “all we do is pay the bills.”
That’s exactly how a trust can work. If they don’t talk, the details of what Steve wanted for his shares, his family and his legacy remains as low-key as he was.