Tax Tips
Did 'The Boss' Trump The Ben?
George Steinbrenner’s death may seem untimely to family and friends (and Yankee fans), but it may be extremely timely when it comes to the federal estate tax.
By Kevin McCormally, Editorial Director, Kiplinger.com
July 14, 2010
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When contemplating the potential for this young nation shortly before his death 220 years ago, Ben Franklin thought things looked promising but warned his countrymen that “in this world nothing is certain but death and taxes.”
Well, George Steinbrenner, the legendary owner of the New York Yankees who died July 13 in Florida at age 80, may prove Franklin wrong -- at least when it comes to the federal estate tax.
As things now stand, there is no federal estate tax. It lapsed at the end of 2009 amid bitter congressional wrangling over whether the tax -- long disparaged by critics as “the death tax” -- should be reformed or repealed forever.
Although very few Americans ever paid this tax, Steinbrenner is clearly in the ranks of the wealthy few who would have. With an estate estimated by Forbes to be worth $1.1 billion, the 45% top rate in effect in 2009 could have cost his heirs nearly $500 million. By dying in the limbo year of 2010, the man who believed winning is everything might have won the World Series of Taxes.
Actually, it’s unclear exactly how much dying in 2010 will save Steinbrenner’s heirs. For one thing, any assets that go to his wife or to charity pass tax-free. And, Steinbrenner likely employed an army of lawyers and estate planners to further hold down the tab.
Furthermore, the expiration of the estate tax on New Year’s Day also brought an end a special deal we like to call the Angel of Death tax break. Under the old law, when someone died, the tax on any appreciation of assets owned at the time of death died with them. If you bought a pro sports team for $100,000 and it was worth $10 million when you died, for example, your heirs would pay $0 tax on the $9,990,000 of appreciation because their “tax basis” – the value from which taxable appreciation was figured – was “stepped up” to the $10 million date-of-death value. They paid tax only on appreciation from that point on. Under the current law, the stepped-up basis rule has been replaced – for 2010 only – with “carryover basis.” Although the basis of assets can be increased by up to $4.3 million for heirs, any amount beyond that will be taxed when the heirs sell the inherited assets. At the current capital gains rate of 15%, that could amount to an enormous tax bill on the sale of assets from a $1 billion estate.
There’s also the question of whether the estate tax is really gone for 2010, or just hibernating. It has been widely expected that Congress will -- at some point this year -- reinstate the tax to retroactively cover all deaths in 2010. Kiplinger still expects this to happen, although with each passing day -- and each passing billionaire -- the forecast becomes cloudier.
As more people potentially subject to a retroactive tax die and more heirs have more money at stake, the more likely there will be well-financed challenges to the constitutionality of such a retroactive tax.
Even if Congress does nothing, the estate tax’s lapse will be short-lived. As the law stands now, the “death tax” is scheduled to be resurrected with a vengeance in 2011. In 2009, the first $3.5 million of an estate was tax-free and the rest was taxed at a top rate of 45%. In 2011, just $1 million will be tax-free and the top rate will be 55%.
More likely, Congress will reinstate the tax for 2010 and reform it going forward, probably with a $3.5-million to $5-million exemption and a 35% to 45% top rate.
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Reader Comments (12)
Posted by: Dave at 07/14/2010 03:05:18 PM
George Steinbrenner is totally free from taxes. By dying in 2010 he's avoided the Federal estate tax (probably), but his heirs will pay more income tax when they sell the assets inherited from him. Instead of his heirs getting to step up the tax cost of those assets to the value at death, they have to use George's original cost for those assets.
Posted by: David at 07/14/2010 04:17:29 PM
If you wish to be fair to your readers, next time you may want to include a more in depth discussion of what dying during 2010 means financially to those who wind up with the proceeds of your estate. It's little known or published (Kiplinger should be out front on this...), but this year, even though assets may "transfer" tax free, there will most likely be a huge amount of capital gains tax paid whenever the assets transfer again or are sold. Without getting into a discussion about capital gains tax/rates, etc - NOT having a "tax basis" figure to work from at the time of death (as is the case this year & in future, if nothing is done by congress), puts all assets that transfer at death at risk of having to pay capital gains tax when later sold/tsf'd by heirs/assigns. So, truth is that there may be some relief up front, but what happens to your heirs will most likely be much worse by having to pay capital gains on ALL assets transferred. If you are in a position to lobby for this kind of "tax break," you'd be best advised to discuss FULL ramifications of the lack of a "death tax" with whoever is handling or going to be handling your estate. Do it! Go see your attorney/firm handling your estate and get ALL the facts!
Posted by: kevin mccormally at 07/14/2010 08:29:11 PM
Kevin McCormally of Kiplinger here, with a response for both Dave and David. Come on guys...we don't put EVERYthing in EVERY story. We have been out in front of the carry-over basis rule, including here: http://www.kiplinger.com/columns/taxtips/archive/faqs-on-the-death-of-the-estate-tax-.html Were you guys around in '76, the last time Congress okayed carryover basis? We were, and we covered it then...including how Congress pulled the plug as everyone went running for the exits in fear of the complexities involved. We're still betting it ain't gonna happen. You know, there's one proposal -- aimed at getting around the constitutional question about retroactive tax increases -- that would let heirs take their pick: Use the '09 rules, with a tax and step-up basis...or the '10 rules with no tax and carryover. Imagine all the money lawyers and planners could make helping heirs make those decisions. Yikes! But, believe me, we're following this very closely.
Posted by: Sheila at 07/15/2010 01:41:45 AM
The capital gains on his empire would certainly be the World Series of Taxes. And the paperwork involved would be the longest recorded game in history....with or without rain delays. I am certain his family would be much better off with the 2009 rules. Think of what he paid in 1970's .....and just think of the trail of paper to prove all that was invested to create his empire including television stations etc.....Pulling out his personal and business tax returns for thirty-seven years. Who in their right mind would want to go down that road? What appreciation and what depreciation has been taken and in what years? What gains ...what losses....what write offs ....what write downs....and so on??? If he was as good as a businessman as they say he was and his capital gain was as great as they say, then it would have been better for George to said good bye after the fall classic. I still think Ben Franklin was right and if George's family has to use the 2010 rules Ben was definitely very very right. I found your article to be misleading and in this economy not what you would like to be telling tax payers.....that George got away with murder. Actually I bet his family is lobbying congress to roll back the expiration and re-instate the old rules. People have mistakenly been waiting for the Death Tax to expire in 2010.
Posted by: Gnatman at 07/15/2010 07:38:10 AM
Members of a handful of super-wealthy families have quietly helped finance and coordinate a massive campaign to repeal the estate tax. These families the members of which own the first and third largest privately held companies in the United States and hold about a 40 percent share in the worlds largest retailer, Wal-Mart stand to save a whopping $71.6 billion if their bid succeeds. Read more at Public Citizen...
Posted by: kevin mccormally at 07/16/2010 09:52:37 AM
Kevin McCormally of Kiplinger here with a response for Sheila. Geez...You accuse me of being misleading. Where did I say George got away with murder? Did you read the story? It says we think the tax will come back, retroactive to 2010. Did you read the story? We say the carryover basis rules are a nightmare. Please, read the story.
Posted by: Sheila at 07/20/2010 03:21:12 AM
Yes I read the article. That is why I commented on it. I found it to be headline catching candy and not Kiplingers normal standard of writing. It happens every once in a while, good writers go for the Zing. Here are some lines I particularly did not like where they were leading the reader ......."45% top rate in effect in 2009 could have cost his heirs nearly $500 million".......... To me you seem to be inferring that there is going to be some kind of savings on this 2009 tax of 500 million because George died in 2010..he would not have $500 million in taxes????????????? ............."By dying in the limbo year of 2010, the man who believed winning is everything might have won the World Series of Taxes." This is the line that set me off and you cannot deny that you are again inferring he selected the correct year to die and that there was some benefit to dying in 2010!!!!...."Actually, its unclear exactly how much dying in 2010 will save Steinbrenners heirs"....Same sentiment...Why not say it is unclear how much more dying in 2010 will cost the Steinbrenners heirs?? You chose your theme and stuck with it. Yes you did later in the article mention stepped up value and capital gains but never once say this could be the more costly scenario, as he paid so little for the Yankees or that the cost of the 2010 paperwork will be outrageous. I know it is hard to say exactly what the cost of tax in 2010 would be vs. 2009..but you infer it is to George's advantage and that finally Ben Franklins quote is no longer valid... You...now are trying to defend it to anyone who has taken the time to point out the weak stance you took this time..myself, Dave and David.
Posted by: kevin mccormally at 07/23/2010 10:36:41 PM
Kevin here, with a response for Sheila. Sorry you don't like the way I write. What can I say, I used the conditional sense often? And, yes, I confess that headlines are written with the goal of getting attention. But, riddle me this: How could the carryover basis rule -- with a 15% or even 20% cap gains rate if the Bush tax cuts are allowed to expire as scheduled by George Bush himself -- ever cost heirs more than a 45% estate tax? (Yes, I know, it's tax free if he leaves it all to his spouse. But, sooner or later....) Even if the basis of the assets was zero? As for Dave and David, please note that -- after responding to their comments -- I revised the story to explain the carryover basis rules. I do NOT believe George Steinbrenner chose to die in 2010 to beat the estate tax. The question addressed by my story was how his death this year might interact with the uncertain estate tax rules that continue to affect living Americans.
Posted by: Sheila at 07/26/2010 04:37:56 PM
I think you answered your own question Before or in 2009.... the wife (spouse) could receive it all free of tax In 2010 ......She now has a limit of 4.3 Million of Appreciation (Her setted up bases limit) Then She will be Taxed!! Taxed at the Capitol gains rate when it is sold In 2009 She would not have been taxed at the 45% rate or at the Capitol gain rate. Here is an earlier explanation of 2009 vs 2010 How did the rules work? A husband or wife could leave any amount to a spouse free of estate tax. For bequests to others, in 2009, everyone could leave assets of up to $3.5 million tax-free. Above that level, a 45% tax applied. The high exemption level meant few estates -- by one estimate, less than 15,000 -- actually owed the tax. What replaces the estate tax for 2010? To understand the alternative, you must know the stepped-up basis rule. The old law set the tax basis of inherited assets at their value on the date of death of the owner. Because that new basis was generally higher than the owner's basis, the step-up effectively forgave the tax on any appreciation before the owner's death. If stock that someone bought for $10 was worth $100 when he or she died, $100 became the tax basis for the person who inherited the stock. The heir owed tax only if he or she sold the stock for more than $100 . As the law stands now, heirs are allowed to take a step-up in basis for only $1.3 million of appreciation. A surviving spouse can take an extra $3 million step-up. This means the tax can be forgiven on only $4.3 million of appreciation. For any excess, in 2010, heirs are stuck with carry-over basis, meaning their basis is the same as the original owner's. When the heirs ultimately sell the assets, they'll pay tax on appreciation during the previous owner's life. In the example above, if you inherit that $100 stock, your basis would be $10, and you'd owe capital-gains tax on the $90 of appreciation when you sell. So the estate tax is being replaced by a capital-gains tax on some beneficiaries. The executor is charged with deciding which assets get a stepped-up basis and which do not. The executor's decisions could lead to fights among heirs, some of whom will receive a tax break and some of whom may not. Another hellacious problem will be reconstructing the original owner's basis for the assets stuck with carryover basis
Posted by: Sheila at 07/26/2010 05:28:18 PM
The spouse answer was an easy answer to your question. And limiting transfer to a spouse should not be permitted as it is in 2010. Even if 2009 law still applied... she will eventually have to pass some dollars to her heirs. Who knows what the laws will be when she passes? You asked how could capital gains cost more??? I am not sure if it will. I am certainly not as qualified as you are to know exactly how this will turn out. But it certainly will still cost them a pretty penny in taxes And the no estate taxes in 2010 aura that is around...is just misleading. I have no idea how much they will pay in taxes. What I am sure of is they will pay more in lawyers and accountants than any other estate has. just trying to determine the capital gain nightmare of today and in the future...certainty and finality have their benefits in life and the family of George will not have any certainty or finality...But I still think Ben Franklin was correct. We can be sure of death and taxes
Posted by: John at 07/28/2010 02:20:13 PM
Are you truly still holding on to the thought that Congress may try to retroactively reinstate the Estate Tax for this year? "Let's assume that, as we expect, Congress reinstates the federal estate tax retroactively to January 1, 2010, with a $3.5 million exemption and a rate of 45%." from your article "13 ways to spend $1 Trillion" published July 21. Far too much time has passed and way too many wealthy people have passed away. Those estates have more than ample means and motive to fight any attempted retroactive reinstatement. I can see the attorney in court now, "Well your honor, it is constitutional even though we saw it coming for 9 years and even though we waited 8 months (or more) into 2010 to change it." Don't even get me started on the fact that it is equivalently the creation of a new tax, which cannot be done retroactively.
Posted by: Sheila Riley at 08/04/2010 05:56:31 PM
You asked how could capital gains cost more??? I am not sure if it will. I am certainly not as qualified as you are to know exactly how this will turn out. But it certainly will still cost them a pretty penny in taxes. And the no estate taxes in 2010 aura that is around this nation this year is just misleading. I have no idea how much they will pay in taxes. What I am sure of is they will pay more in lawyers and accountants than any other estate has....I would like to throw this idea out there....certainty and finality have their benefits in life and the family of George will not have any. There is always the unknown factor that will be determined by future growth in Georges assets. I am not sure of this. But how I understand it, there is no answer until you sell the assets on the cost of the tax. If the family holds the assets for decades and they increase substantially, then the capital gains taxes will be on the gains from Georges purchase through the next few decades. If the Capital gains rate changes, then this 2010 concept of what it was to cost you also changes. If the capital gains tax rate changes and value increases so will the taxes on Georges years of ownership... where in 2009 only the increase in value after death years would have been involved in capital gains tax. 2010 means an uncertainty of what the costs to heirs are. In 2009 you knew exactly what it cost you and the future did not matter...You cannot say for certain that the 45 % after the 3.5 million limit to children and none to the wife (for lets say half the value) Would definitely exceed the capital gains in the future. Probably not, but the taxes will still be enormous. We also do not know what the capital gains tax rate may be at the time of sale in future years...It could be higher...Capital gains in twenty years could be 30% or 40% A far fetch consideration A big change in the tax laws could be the determining factor of how or when they would be forced to sell the team..the timing of sale may not align up with timing of tax changes What we are dealing with is an unknown and a continued unknown for years to come But I still think Ben Franklin was correct. We can be sure of death and taxes