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Two Owners Two Different Results

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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.

As we think about July 4

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You know the American Revolution had an element of tax revolt in it. I say this because a Government must be careful to leave enough to its citizens that they might invest it and grow it and use their money to create. As we enter the mid-term election cycle we have the one thing the Chinese don’t have, the freedom to change course and the freedom to object to the direction this country is heading. Most of you know my Republican political leanings, and as a tax attorney what’s best for me, may not be what’s best for the Country. I thank God that I live in the United States. I would not trade living here with living in any other Country in the World. We may have a rough patch of road ahead, but I know that America will rebound. That free Americans will use their freedoms to move forward. It is amazing to me how quickly we can lose our freedoms. This leads me to my tax tale of the day. A girl, Blonda went into a tanning salon and found out that she had to pay 10% more for her tan than last week. Her best friend, Bambi, belongs to the Hot and Hotter Fitness Club. Hot and Hotter in addition to a few weight machines, saunas and bikes have tanning booths (which is included in their monthly fee). The exact same tanning booths that Blonda’s tanning salon has. Bambi pays no surtax, but Blonda does. Makes a lot of sense, right? Have a great weekend.

What should the boys do?

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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.

What to do in 2011

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As much as it pains me to say, there may be only a $1 Million exemption in 2011 for estates. So, let’s look at Bruno who owns Bruno’s Shoe Store located in a condo retail park in Fredericksburg, VA. He also made the smart move in 2005 to add a web-site to sell shoes on-line. This has increased his sales greatly. At the end of 2010 his annual sales are $1 Million. He takes out of the store after paying salaries, inventory and usual operating expenses about $300,000 a year. He owns the business as a Sub-chapter S corporation per the recommendation of his accountant. The Condo is owned by an LLC which he and his wife own together. The condo is worth $125,000 and there is no debt. He and his wife own a home in Chancellorsville worth $300,000 and a cabin at Lake Louisa worth $200,000. His retirement account has $800,000 in it and it leaves everything to his spouse. On January 1, 2011, while he is doing inventory a shelf full of shoes falls on top of him, killing him instantly. When he doesn’t come home for dinner his wife calls the store, no answer and then calls the police who discover his body that evening at the store. They inform his wife who is so grief stricken that she has a heart attack and dies two hours later, leaving two adult children, Bruno, Jr. and Viggo. They both worked in the store th elast two years and want to continue the business. They appear at the offices of Slim Shades the noted estate tax attorney, to get advice about the tax effects of all of this.