We were discussing the dangers of the fiscal cliff. Well that has been averted. Apparently the Estate Tax exemption will remain at $5 Million per person/10 Million per couple for the foreseeable future. Those who made preemptive gifts in 2012 will need to file those gift tax returns on April 15. And given the rising real estate values (for now) those gifts were probably a good thing. The Medicare tax holiday is gone. So everyone will see a little less in their paychecks from now on. Most of the other Bush Era tax cuts were left intact including alternative minimum tax relief. We would be happy to review your individual situation to discuss these matters.
Tag Archives: estate tax
Portability of Estate Tax Exemption
Susie and Nate have an estate of $5 Million. Everything is in joint name and Nate dies in January, 2012. Since Susie inherited everything, she figured no estate tax return was needed. She went to see Joe Probate, a local probate attorney, and he confirmed, “nuthin to probate”, he said. Susie went merrily on her way. In January, 2013, the estate tax exemption went down to $1 Million. Susie died in June of 2013. Her kids go to Joe Probate again, and he says, go see the accountant in town, that the estate is over $1 Million, so there is a potential estate tax. So, when they go to the Accountant, the accountant asks where was Nate’s Federal Estate Tax Return for 2012. The kids shake their heads, they ask Joe Probate, he says none was required. However, because Susie never filed an estate tax return for Nate, she did not capture his portability rights. She could have claimed, 1/2 of his property on a timely filed Federal Estate Tax return for Joe (15 months for portability return). Because she failed to do so, her estate will not get to use his estate tax exemption. Had she filed that return her kids would have had to pay an estate tax upon her death of $660,000. Instead, they will have to pay an estate tax of $2 Million. So it is very important for anyone dying in 2011 and 2012 to file those Federal Estate Tax returns within 15 months of the date of death.
Following up on the Yankees
Let’s assume that the Steinbrenner estate was properly planned. What would that have entailed? (1) Delaware situs trusts. Delaware law permits unlimited term “dynasty trusts”. This would permit a Trust to be formed which would last forever. What would be the tax implications of that. No transfer tax until George Steinbrenner’s grandchildren die. That means that the Yankees would be in the family for two generations without estate or GST tax. That means that as long as the team is kept in the family, the team, the stadium, and the YES network all stay in the family. Further, suppose that the YES network gets spun off down the road, so long as the family gets stock from the takeover candidate that transaction is tax free until they cash in the stock. So, for example if FOX bought the YES network and gave NEWSCO stock to the trustees, the transaction would not be taxed. Further even if the team were sold, it could be sold in a tax deferred way to increase cash flow to the beneficiaries. This is a decision for the family, not constrained by taxes or charitable trustees. (2) The Trust would provide that family members serve on the mandatory investment advisory board or as investment trustees. This would avoid implication that the trust is a NY situs trust, while maintaining their control over investment decisions. (3) The trust would provide for sprinkling of income among generations in the Trustee’s discretion. This would permit spendthrift protection for the trust should one of the beneficiaries marry badly or get sued.
Two Owners Two Different Results
As reported in the news, the iconic owner of the New York Yankees, George Steinbrenner died on July 12, 2010. Because he died in 2010, his wealth and the New York Yankees get to stay in his family without the payment of any estate tax. On April 6, 1997, Jack Kent Cooke passed away. He was a very wealthy man, reputed to be in the billions of dollars. He also owned the Washington Redskins, who during his ownership won three Super Bowls. In order to avoid the crippling nature of the estate tax and in an attempt to keep the Washington Redskins under control of his son, John, Mr. Cooke placed the bulk of his estate in a charitable foundation. Because the team was worth a reported $800 Million dollars and needed an owner per the NFL rules, it had to be sold. John Cooke and Dan Snyder each bid on the team. Snyder’s bid was higher and the Trustees had to accept his bid despite their love for the Cooke family.
Let’s look at the facts, Jack Kent Cooke by all indications wanted his son to own the Redskins and used a tax advantaged method to get it to him. George Steinbrenner due to timing of his death will if his estate was properly planned be able to leave the New York Yankees in his family without estate tax or generation skipping tax for two generations. This means that there will probably be a Steinbrenner running the Yankees for the rest of my life and the lives of anyone reading this blog. The Redskins are now owned by Dan Snyder, not John Cooke. A simple twist of fate and tax.
What should the boys do?
A little post-mortem estate planning. First the wife’s executor should disclaim $1.0 Million of assets preferably in the stock of the company (we’ll explain later). That way, his estate gets to use its $1.0 Million exemption and her estate gets to use her $1.0 Exemption. This reduces the tax by $500,000. Not there yet. However, since she disclaimed her interest in the business, it is still worth $2.5 Million, but her interest may be subject to some discounts as high as 25%. This means that her interest may only be $1.0 Million. That leaves the IRA and the houses and the condo to be taxed at $700,000. Sell the houses, since there is no capital gains there and pay the taxes with the proceeds. That leaves the $800,000 IRA which can be drawn down over time.