Baseball pioneer George Steinbrenner, owner of the famed New York Yankees' franchise, died from a heart attack on July 13, 2010, at age 80. Checking in at number 341 on Forbes' list of richest Americans last year, the Steinbrenner fortune has been estimated at $1.1 billion.
Many publications, including the New York Post, have pointed out that, tax-wise, Steinbrenner chose a great year to die. Due to a quirk in the federal estate tax law, there are no estate taxes for those who die in 2010.
Those who died in 2009 paid a 45% tax for every dollar over $3.5 million ($7 million for married couples who did the proper estate tax planning). There are no estate taxes this year, but next year, the estate tax comes roaring back with only a $1 million exemption and a 55% tax rate.
As the Post article and others have pointed out, this led to a huge tax savings for Steinbrenner's widow and four children of $500 million (based on 2009 levels) or $600 million (compared to the 2011 limit). Not bad!
So what do Yankees' fans think about this? They should be pretty happy (assuming, that is, they like having the Steinbrenner family own the Yankees). Heirs of other sports franchise owners have been forced to sell teams to pay estate taxes. For example, in Michigan, the Detroit Pistons are for sale because owner Bill Davidson died in 2009. The estate needs money; his heirs need to plan for the large estate tax bill that will be due one day, because he died before 2010.
In fact, there's another quirk about the estate tax law that makes it even less likely that the Steinbrenner family will ever sell the team.
The estate tax loophole has a catch. In 2010, heirs of the very wealthy do not get to enjoy a typical tax savings called "step-up in basis". What does this mean? Normally, when someone dies, their heirs receive the assets at the tax value they are worth as of the date of death. So, when the heirs sell that property, they only pay capital gains taxes on any increase in value after the date of death.
For 2010 estates, however, these normal tax savings are gone (above a certain dollar level). This means that the Steinbrenner heirs have the same tax "basis" that George did when he bought the franchise back in 1973 for a mere $10 million.
In other words, if they chose to sell their 55% ownership in the Yankees' parent company (which is valued at $1.6 billion), they will have to pay taxes on every dollar over $14.3 million (which is $10 million plus $4.3 million extra that married couples are permitted to credit towards their tax basis amount). This would lead to a huge tax bill to pay based on 55% of stock worth $1.6 billion!
This means the Steinbrenner family will have no choice but to hold onto the New York Yankees' stock and not sell it, unless they want to pay this large tax. Instead, they'll likely pass down the stock from generation to generation, unless of course a new tax law gets passed which changes their situation.
Wow, this is complicated! And it's all because of this one-year estate tax gap. Everyone knew that Congress would pass a new law long before 2010 to close the gap. But, um, we're still waiting for that to happen. There have been rumors of a retroactive tax -- meaning Congress could pass new laws now and try to apply the tax even to those who already died in 2010.
Most experts feel that would be unconstitutional. Certainly, the Steinbrenner heirs (and heirs of other billionaires who have died this year, like Houston oil tycoon Dan L. Duncan, who died with an estate worth an estimated $8 billion dollars) would agree with those experts. They would undoubtedly file lawsuits to challenge any new estate tax laws that are passed which try to impose an estate tax on them after their wealthy loved ones died.
Does all this estate tax stuff leave your head spinning? We're not surprised. But it's certainly something you may need to worry about. If you have an estate that may potentially be worth more than $1 million (and this figure includes life insurance), it is essential for you to visit an experienced estate planning attorney for a revocable living trust, as part of a complete estate plan.
Unless, of course, you plan to die this year.
Posted by: Andrew W. Mayoras and Danielle B. Mayoras, co-authors of Trial and Heirs: Famous Fortune Fights! and co-founders of The Center for Probate Litigation and The Center for Elder Law in metro-Detroit, Michigan, which concentrate in probate litigation, estate planning, and elder law. Andrew and Danielle are husband and wife attorneys, professional speakers and consultants across the country. Follow us on Facebook and Google+.