By Jeremy Kritt
In a move that Daniel Kaplan of The Athletic, who broke the news, described as “a nod to skyrocketing franchise valuations and the difficulty that trend places on keeping teams in families." National Football League (NFL) owners voted to lower the minimum percentage of a team that a longstanding owner is required to control from 5% to 1% .
Why would owning less of a team help an owner keep the ownership of the team in the family? Consider that in 1920, George Halas, the father of current Bears majority owner Virginia Halas McCaskey, reportedly paid $100 to purchase the Chicago Bears, but that in 2021, Forbes valued the Chicago Bears franchise to be worth $4.075 billion.
When an individual dies, the value of all the property that an individual owned is included in his or her gross estate. If the value of the gross estate, combined with the value of all of the taxable gifts made during lifetime, exceeds the lifetime gift and estate tax exemption amount, currently $12.06 million, the decedent’s estate will have to pay estate taxes at rates ranging from 18% to 40%. When an individual owns an asset valued at over $4 billion, the estate tax liability is astronomical. And when the vast majority of the value of the estate comes from one highly appreciated asset, paying that estate tax liability without selling any portion of the asset can be nearly impossible.
While this rule change will help the families of owners keep control of their team, the NFL actually provided owners with an even more valuable estate planning tool in 2015 when it began allowing ownership through an irrevocable trust. An irrevocable trust is a trust that cannot be modified, amended, or revoked. While the trust can be structured to prevent the beneficiaries from transferring their interests in the trust, the transferor will need to relinquish ownership and control of the property. For that reason, the property will not be included in his or her gross estate at death. Threin lies the opportunity.
So does that mean that the property transferred will never be subject to any transfer taxes? No, the taxpayer can’t get off that easily, as the IRS will still require some transfer taxes to be paid on the transfer. However, for assets that are likely to significantly appreciate in value, such as an NFL franchise, the key feature of transferring assets into an irrevocable trust is when taxes are paid on the transfer, not if.
The transfer of property into an irrevocable trust is considered a gift to the beneficiaries of the trust. If the asset’s value exceeds the annual gift-tax exclusion amount, which is $16,000 recipient this year, then the transfer will constitute a taxable gift that will reduce the taxpayer’s lifetime estate and gift tax exemption amount of $12.06 million, and will be taxable to the extent that its value exceeds $12.06 million.
Critically, however, the asset will be valued for gift tax purposes as of the date of the gift, rather than being valued for estate tax purposes as of the date of death. So, the property will entirely avoid transfer taxes on any amount of appreciation that accumulates between the date of the gift and the date of the donor’s death. To illustrate the potentially immense tax savings that result, consider that the Chicago Bears were valued at approximately $1.19 billion in 2012. If Virginia McCaskey gifted the franchise to an irrevocable trust at that time, and then passed away this year, the family would avoid paying taxes on the $2.89 billion of appreciation that accrued over the last 10 years.
This is only an illustration, as irrevocable trusts can be structured in many different ways depending on the specific characteristics of the asset, the taxpayer, and his or her beneficiaries. In some cases, irrevocable trusts can even be structured to greatly reduce, or even eliminate, the corresponding gift tax consequences of the transfer.
If you’re interested in exploring the benefits of an irrevocable trust for yourself, your business, and your family, please reach out, in confidence, to Marc Lane at mlane@MarcJLane.com or 312/372-1040.
Jeremy Kritt is an Associate Attorney with The Law Offices of Marc J. Lane, P.C.