I made my first trip to the West Coast in 2001.  It was a family vacation.  I am so much of a Raider fan that I located the office building headquarters of the Oakland Raiders and drove the entire family out there just so I could take a picture of the front of the building.  To make a long (and great) story short, we ended up seeing Al Davis getting into his car in the back parking lot.  I told him we were from Arkansas and he got out and talked with us for about twenty minutes.  It was fascinating.  He and ex-Arkansas Athletic Director Frank Broyles were pretty good friends and had even played golf together a few times.  Mr. Davis ended the conversation by thanking us for coming out and being Raider fans.  He slowly got into his car and the last thing he said to us was, “Don’t ever get old.” 

I am an estate planning attorney.  This blog is my only avenue to discuss my interests.  Since Al Davis passed away with a lot of wealth and a football franchise with an estimated worth of $761 million I decided I would combine the two.  Al Davis assumed the controlling interest of the Oakland Raiders in the early 1970′s.  He is more known for his controversial decisions in the 2000′s managing the Raiders than for changing professional football and creating the giant we all know today.  Al was the first coach to institute a true vertical attack passing game while he was in the AFL.  As commissioner of the AFL, he played the integral role in the AFL-NFL merger.  It was his idea for the best “old” AFL (now called the AFC) team to play the best NFL (NFC) team at the end of each year in a “Super Bowl”.  Mr. Davis sued the NFL for violating anti-trust laws when he wanted to move the Raiders from Oakland to Los Angeles and won.  Al Davis hired the first black coach, Art Shell, in the NFL.  He is widely known in the National Football League for going above and beyond the take care of former Raiders in dire straights coining the phrase, “Once a Raider, always a Raider.”  His other catchphrases are pretty much used on an everyday basis in the sports reporting world, “Just win, baby!”, “Commitment to Excellence” and ”The other team’s quarterback must go down and he must go down hard.”

The NFL bans outside corporations from owning franchises, requiring instead that the teams have a single principal owner.  Al Davis owned 47% of the Raiders when he passed.  Al battled the NFL, other NFL owners and other teams on a weekly basis.  His estate’s toughest battle will be dealing with estate taxes all the while keeping the Oakland Raiders intact and within the family.  The current estate tax exemption is $5 million.  That means anything over and above $5 million gets taxed at 35%.  It also appears that, on the outside looking in, Al Davis’s estate would owe $123 million to Uncle Sam for his ownership.  Carol Davis, wife of Al Davis, and their son, Mark Davis, will now own Al’s interest in the Oakland Raiders.  The real question then lies:  For how long?

It appears that Mr. Davis left some thorough and detailed estate and succession planning which ensure that the team will be owned by Carol Mark.  They can’t be forced to sell by their partners, by the league, or by operation of law.  As it relates to the other partners, the team operates as a limited partnership, with the Davis family being the sole and complete owner of the sole general partner.  Under the law of limited partnerships, that gives the Davis family full control over the business.  Mrs. Davis was married to Al for well over 50 years, and Mark is in his 50s.  They are a close family, and it’s believed that they have no desire to sell the team.  Mark grew up in and around the organization, and he has a passion for the franchise.

The other question of the estate tax still remains, however.  The large tax owed has caused many to speculate that the Davis heirs will
have no choice but to sell the team, like other NFL heirs have done.  But, in reality, Davis could have easily escaped estate taxes, at least for now.  The federal estate tax law includes an unlimited marital exemption.  This means that Davis could have passed as much as he wanted  onto his wife — both before he passed away through gifting, and after through his estate plan — and none of it would be subject to the 35% estate tax.  The fact that Al Davis has only one child removes one of the other potential catalysts for a sale.  If multiple children inherit a team and one or more want to cash out, the others may have no alternative to selling the team in order to raise the money to buy out a sibling or two.  The estate of Carol Davis may have to deal with this tax issue when she passes, but there are other ways that Al Davis may have planned for this as well.  He could have purchased life insurance to handle some of that brunt, he could have gifted some of the ownership away to his son or used other planning methods such as charitable giving.

Raider fans, myself included, can rest assured that the team will probably remain in the Davis family for quite some time due to Al’s planning.  The team is young and playing well.  It is still great to be a Raider fan.  Just keep winning, baby.

I want to thank and credit Andy and Danielle Mayoras and Kay Bell for supplying a lot of the information that I used.

The gift tax is the Federal Tax levied on all gifts given during one’s lifetime.  Every person, however, has a lifetime gift tax exemption amount.  The lifetime exemption amount is the dollar amount of gifts that a person can give away without incurring any federal gift tax, but any lifetime gift tax exemption used will reduce the estate tax exemption of the person making the gift.

In 2010 the lifetime exemption from gift taxes was only $1,000,000 with a top tax rate of 35%, but under current law the lifetime exemption from gift taxes has increased to $5,000,000 and the top tax rate remains at 35%.  These numbers, however, will only be in effect for the 2011 and 2012 tax years.  In 2013, the lifetime gift tax exemption is scheduled to decrease back down to $1,000,000 and the top gift tax rate will jump to 55%.

Similarly, the estate tax is the tax that a person’s estate is assessed upon thier death.  Each person currently has an exemption from the estate tax of $5,000,000 with a top tax rate of 35%.  That means that the first $5,000,000 of a person’s estate at their death will not be taxed, however, any amounts over that exemption will be taxed at 35%.  These numbers also will only be in effect for the 2011 and 2012 tax years.  In 2013, the estate tax exemption is scheduled to decrease back down to $1,000,000 and the top tax rate will jump to 55%.

In 2010 and 2011 you can gift up to $13,000 per person, per year without incurring any federal gift tax.  These gifts are referred to as “Annual Exclusion Gifts” and are not subject to the federal gift tax at all and therefore do not use any of the giftor’s lifetime exemption from gift taxes.  Married couples can combine their annual exclusion gifts and gift up to $26,000 per person, per year, but split gifts must be reported to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

Gifts made to a spouse who is a U.S. citizen are entirely exempt from gift taxes due to the unlimited marital deduction, while gifts to a noncitizen spouse are exempt up to the first $134,000 in 2010 and the first $136,000 in 2011.

Name: James Brown

Age: 73

Died: December 25, 2006, Atlanta, GA

Cause: Congestive heart failure due to pneumonia

Family: Six children named in will; many others contending paternity

Estate Mistake: Although he was known for keeping a very tight beat, he left a very loose will and sloppy estate planning, which led to multiple lawsuits and severe tax implications.  His will was contested by several parties, partly because he had not updated the document since 2000.

He also left his mansion and music rights to an irrevocable trust to benefit underprivileged students.  However, the trustees and family are still battling over it.  His assets were not well sheltered so an auction of his personal affects was ordered to help settle the tax bill.

Name: Warren E. Burger

Age: 87

Died: June 25, 1995, Washington, D.C.

Cause: Congestive heart failure

Estate Mistake: Even though Warren Burger was once the Chief Justice of the United States Supreme Court, the 176-word will he left his two children failed to empower his executors and did not plan for estate taxes.

His $1.8 million estate lost $450,000 in federal and state estate taxes.  The estate was tied up in probate of which court costs and attorney’s fees took more out of the estate.  Additionally, even more money was spent because of expenses in going to empower the executors in probate which could have been avoided if the will had granted those powers automatically.

Name:  Sammy Davis, Jr.

Age:  64

Died:  May 16, 1990, Beverly Hills, CA

Cause:  Throat cancer

Family:  Daughter, two adopted sons, wife, two ex-wives

Estate mistake:  Although he made more than $50 million in the his lifetime, Sammy left $5 million.  The bigger problem was he owed $7 million in taxes and had no means such as life insurance to satisfy his the debt.  His widow, Altovise Davis, sold many of his personal belingings at auction to help pay the debt, but reportedly only got about $500,000.  In 2008, Altovise sued two former business partners she claimed tricked her into signing over rights to teh estate.  She died on March 15, alomst 20 years to the exact day of her husband’s death

Sec. 301 reinstates the estate tax and repeals carryover basis. Executors of decedents who passed away in 2010 are permitted to either file IRS Form 706 and apply the 2010 existing laws, or to elect the new $5 million applicable exclusion amount and 35% estate tax rate. Because some decedents passed away early in year 2010 and the normal tax payment date has passed, the required due date for the tax return or payment of tax will be nine months after the date of enactment. For 2010 decedents, the filing date for GSTT returns will also be nine months after date of enactment.

Sec. 302 addresses the gift, estate and GSTT exclusion amounts. The applicable exclusion amount will be $5 million for 2011 and for executors who elect to apply that amount to 2010. This amount will be adjusted for inflation starting in 2012 in $10,000 increments.

The estate tax rate will be 35%. Estate tax equals $155,800 on the first $500,000 and 35% of the excess over that amount, reduced by the unified credit. The unified credit (renamed the applicable credit amount) calculated based on a $5 million estate will be $1,730,800.

The gift tax is again reunified with the estate tax. Therefore, the 2011 estate and gift tax exemptions will be the same.

Courtesy of the American Cancer Society

http://blogs.forbes.com/hanisarji/2010/12/06/obama-announces-estate-tax-deal-with-republicans-35-tax-rate-and-5-million-exemption-for-two-years/

The estate tax exemption was at $3.5 million since the beginning of 2009.  The first $3.5 million of an estate was exempt from taxes and everything on top of that was taxed at around 45%.  It expired in 2010 and it will be back unless Congress does something, however, with exemptions and tax rates that nobody wants.  It could come back with an exemption level of $1 million and a tax rate of 55%.  That would mean that if an individual had $2 million worth of life insurance the first $1 million would be tax exempt but $550,000.00 of the second $1 million would go to Uncle Sam.

It leaves estate planners and clients in limbo.  I have advised my clients to be on a “wait and see” basis.  We have been watching like hawks to see what will happen.  The only thing we now know is we will not know until at the very end of the year at the earliest.

Because many home purchasers could not meet this deadline, the House and Senate have passed the Home Buyer Assistance and Improvement Act of 2010 (H.R. 5623). This bill extends the time for closing from June 30 to September 30.

Chief Economist of the National Association of Realtors Lawrence Yun indicated that this extension of the deadline would be very important. He noted that about “180,000 homebuyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process, particularly for short sales.”

These individuals with contracts by April 30 will now be able to close by September 30 and receive their tax credits.

Sen. John Kyl (R-AZ) and Sen. Blanche Lincoln (D-AR) claim they are close to an agreement for an estate tax compromise. Both advocate increasing the exemption to $5 million and reducing the rate to 35%. They believe that they are near the 60 votes needed for a 10-year phased-in plan.

While it has not been publicly released, one version of the proposed Kyl-Lincoln compromise starts with an exemption of $3.5 million and an estate tax rate of 44%. Over a term of 10 years, the amounts are adjusted to a $5 million estate exemption and an estate tax rate of 35%. However, Sen. Max Baucus (D-MT) is not willing to bring the proposed compromise before the Senate Finance Committee for a formal vote.

Sen. Bernard Sanders (I-VT) is an Independent but participates in the Democratic caucus. He has been joined by Sen. Tom Harkin (D-IA) and Sen. Sheldon Whitehouse (D-RI) in introducing a new estate tax bill.

The three senators sent a letter to their colleagues and outlined the reasons for enacting an estate tax increase for Americans with larger estates. Sen. Sanders notes that a wealthy Houston resident named Dan Duncan passed away early in 2010 with an estimated $9 billion estate. If the Senate does not take action, this estate could be transferred to family with a savings of several billion in estate tax.

Total estate tax savings in 2010 for heirs of Duncan and others with large estates are estimated to be $14.8 billion. This amount is lost revenue to the federal government in a time when all possible avenues for raising revenue are being explored.

Sen. Sanders proposes the “Responsible Estate Tax Act of 2010.” This act would tax the first $3.5 million of an estate at 45%. Estates over $10 million would be taxed at 50%, with estates over $50 million paying tax at a rate of 55%.

In addition, there would be a “billionaire” surtax of 10%. Sen. Sanders would “protect family farmers” by allowing a Sec. 2032A reduction in farm land for heirs who are actively farming of up to $3 million, an increase over the current $1 million limit. Finally, for estate conservation easements, the exclusion would be increased to $2 million and the base percentage to 60%.

This proposal would also incorporate the Obama Administration’s recommendation to set a minimum term for the GRAT of 10 years and also to modify the rules to reduce minority and lack of marketability discounts for family limited partnerships.

Sen. Charles Grassley (R-IA) did not support the Sanders bill but suggested that it may have been useful for Sen. Sanders and his supporters to place a plan on the table. He indicated that there are “quiet supporters of the junior senator from Vermont” and they will be influencing the overall result.

Thanks to Jon Rich of Ducks Unlimited for this information.