By Stephen Gandel
January 6, 2017

Rex Tillerson’s nine-figure Exxon exit payout is even sweeter than it sounds.

Earlier this week, in a filing with the Securities and Exchange Commission, Exxon Mobil said it plans to cut financial ties with its former CEO Tillerson, who has been picked by President-elect Donald Trump to be the next secretary of state. Tillerson also detailed how the separation will work in a letter released by the U.S. Office of Government Ethics.

It involves a very big payout. Under the deal, Tillerson will be getting $180 million, in exchange for giving up his restricted stock units. This comes on top of the $54 million that Tillerson already had coming to him in Exxon stock he already owned.

Nonetheless, a number of ethics professionals have praised the deal, because it eliminates Tillerson’s main conflict of interest: his enormous stock holding in a global energy company that does business in nearly every part of the world, including some of the areas with the most heated conflicts. Richard Painter, a former ethics lawyer for President George W. Bush who has been an outspoken critic of the financial ties of the President-elect, called the Exxon deal a model for resolving Trump’s own conflicts of interest. A hometown website of sorts, the Houston Press—Tillerson grew up in Wichita Falls, Texas, about 130 miles from Exxon’s headquarters in Irving, Texas—praised the deal, saying that Tillerson is “showing how you are supposed to do things,” and that he and the oil giant are “doing their best to steer clear of anything that even meanders toward ethical gray areas.”

Both sides stressed that sacrifices were being made. Exxon pointed out that Tillerson is actually getting $7 million less than he would have under normal circumstances. (Cue the tiny violins.) Tillerson, in his letter, said he was giving up an Exxon credit card that would have granted him discounted gas for life. Tillerson won’t get all of the $180 million immediately. It will go into a trust that vests over time. And if he leaves the State Department and heads back to the oil industry, he will have forfeit a significant portion of the money. It would go to charity.

What neither side cared to mention: A quirk in the way the deal was structured will allow Tillerson, at least for now, to avoid over $71 million in taxes. With the deal, Tillerson can move his money, now locked up in the value of Exxon’s stock, which right now accounts for about half of Tillerson’s total wealth, according to a financial disclosure form Tillerson filed on Wednesday, into diversified mutual funds—potentially an even bigger benefit, since his financial well being won’t be so closely tied to just one company. And again, he gets to do that without incurring taxes, at least for now.

Exxon declined to comment for this story, saying that Tillerson had left the firm and that his taxes were a personal issue. A lawyer for Tillerson did not respond to emails seeking comment.

Here’s how the almost unprecedented deal will work: In the early 1990s, George H.W. Bush’s administration added a loophole to the tax code that allows political appointees to defer any capital gains taxes they would ordinarily have to pay on investments they’re required to divest to take a post in government. The main requirement is that the appointee reinvest the money immediately into a diversified mutual fund or U.S. Treasury Bonds. The $54 million worth of Exxon stock that Tillerson owns directly will squeeze through the Bush-era loophole. So the money Tillerson gets is tax-free for now as long as it stays invested. And could be forever. If Tillerson never touches the money before he dies, and given that the $54 million is about a tenth of his total net worth he might not have to, it will transfer to his heirs with no tax liability.

Earlier: 3 Things That Could Happen to Rex Tillerson’s $245 Million Exxon Windfall

But for the bulk of Tillerson’s Exxon holdings—$180 million in restricted stock units—there was a catch. Restricted stock, unlike actual shares, are not covered by the loophole. Normally, if Exxon wanted to allow Tillerson to sell his restricted stock, and sever his financial ties with the company, he would have to pay taxes immediately—$71 million worth. Instead, Tillerson and Exxon came up with the trust structure that will allow Tillerson to avoid taxes for now. Tillerson will swap his restricted stock for cash, based on the current value of Exxon’s shares. The cash goes into a trust, and the trust vests over the next decade, on the same schedule that Tillerson was supposed to receive the restricted stock. True, Tillerson is prevented from getting a one-time huge cash bonanza from heading to the government. But he won’t have to pay taxes upfront, either, like he normally would have had to.

Instead, Tillerson will owe income taxes on the cash in the trust as it vests, as he would have if he had held onto the restricted stock.

The potentially even bigger benefit is what goes on in the trust. Tillerson doesn’t have to keep it in cash until it becomes fully his. Instead, immediately Tillerson can reinvest the money into a diversified mutual fund, which as any financial planner will tell you is a far better investment choice than having 50% of your net worth in one commodity-driven stock. Another bonus, once the money is in the trust: Exxon agreed to forfeit its right to “clawbacks,” which it would have been allowed to make with restricted stock if some of Tillerson’s actions as CEO caused major losses to the company down the road.

“They clearly structured this in the most efficient way they could for Tillerson,” says tax expert Robert Willens.

From Exxon perspective in the deal it struck with Tillerson, the problem is at least an optics one with its own investors, and potentially bigger than that. Exxon’s proxy has a lengthy section about how the company believes in long-term thinking and how its executive compensation reinforces that. A large portion of executive pay is in deferred comp tied to future performance. And the payouts are stretched out over a decade. No immediately cash payments on retirement. No exceptions. “Our program is applied consistently to all executives, including the CEO,” Exxon says in its latest proxy statement.

Clearly that last statement is no longer true. Even in Exxon’s public statement it seemed to acknowledge that it was cutting a deal at odds with what it has stated in the past. The Tillerson payout shows that no matter how set in stone compensation plans are, boards can alter them anyway, especially when it will mean having a friend in a very high place. Executives probably understand this as well.

For Tillerson, there is one snag. The ethics rule allow him to invest the cash in the trust into a diversified mutual fund. But Tillerson has pledged not to put any of his money into Exxon. If he’s truly serious about that pledge, that rules out investing in a S&P 500 index fund, since Exxon makes up about 2% of that index. As an alternative, Tillerson may want to consider putting his money in the Goldman Sachs Growth Opportunities Fund. It has nearly $3 billion in assets, and a better than average long-term track record. Unfortunately, it has an annual expense ratio of 1.3%, which is much higher than an index fund. But the fees are going to Goldman, so at least Tillerson will be keeping it in the Trump cabinet family.

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