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Estate Planning on a Different Court

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It is not often that sports and estate planning intersect, but two of my favorite things did so recently when the New York Times (and many other sources) reported that the Grousbeck family, the controlling owner of Boston Basketball Partners LLC which owns a majority interest in the Celtics, announced that it has decided to sell the basketball team. The Celtics’ statement said the sale was prompted “after considerable thought and internal discussion” by “estate and family planning considerations.” Although the statement was short on details, it is suspected that 90-year-old H. Irving Grousbeck is the one driving the sale. His 63-year-old son Wyc Grousbeck, one of Irving’s four children, owns a relatively small stake in the team himself, but manages his family’s controlling interest.

So why would you want to sell the Boston Celtics, a team that less than two weeks before the sale was announced won their 18th NBA Championship and have most of their team under contract for the foreseeable future? For estate planning reasons, of course! Here’s some insight into what Irving and his estate planning attorneys might be thinking.

Taxes Might Be Driving the Team Bus
Irving and his ownership group bought the team for $360 million in 2002. Today, after winning its latest championship, the team is worth an estimated $4.7 billion. That’s a nice return on investment, but nothing comes without a price.

If Irving dies owning an interest in the Celtics, that interest will be an asset of his estate, and the value of that interest will be subject to estate tax at his death. Although Irving hails from Northampton, Massachusetts (which might explain his interest in owning the hometown team), he currently lives in Portola Valley, California. Although the weather may have played a part in the decision to move west, there is also an estate tax advantage. California (unlike Massachusetts) is one of the majority of states that do not impose a separate state estate tax on its residents.

However, when you own an interest in an asset that’s worth billions of dollars (not to mention the value of your other assets), you need to worry about the federal estate tax, which is a tax imposed on assets owned at death which exceed $13.6 million (in 2024). Assets over this threshold are taxed at a whopping 40%.

So how does selling the team help Irving potentially save estate tax for his family? If Irving sells his interest, he will still have the same amount of assets (less some capital gain tax of course), but rather than an interest in a basketball team, he will have cash. Cash is much easier to plan with. Here are some ways Irving might use that cash to save some estate tax:

  • Irving can give a bit of that cash to anyone he likes. The gift tax annual exclusion allows Irving to give $18,000/year to any person without having to pay a gift tax or file a gift tax return, and without reducing the $13.6 million federal estate and gift tax exemption Irving has to use against the value of his estate at his death. But even after giving annual exclusion gifts to Wyc and his siblings, and to Jayson Tatum, Jaylen Brown, Jrue Holiday, Derrick White, and the rest of the team, Irving will still have a lot left.
  • Irving can pay tuition for his grandchildren without limitation – gifts made to an educational institution for tuition (or to a medical institution for medical care) can be made in an unlimited amount without any gift tax implications.
  • Next on the tax savings idea list may be giving a bunch of money to charity, which will reduce Irving’s taxable estate without reducing his exemption. Doing so will also provide a nice income tax benefit to Irving currently.
  • Irving might also want to consider making larger, “taxable” gifts before the end of 2025. The current federal estate tax law is scheduled to “sunset” or end on December 31, 2025. If Congress does not act before that date, the prior law will come back into effect. This means that the current $13.6 million estate and gift tax exemption will drop to approximately $7 million. Because making taxable gifts during your lifetime reduces your estate/gift tax exemption, Irving may be thinking about making some larger taxable gifts to take advantage of his $13.6 million exemption before that exemption drops down to $7 million and he loses the opportunity to give away that extra $6.6 million estate and gift tax free.
  • Irving may also wish to consider “skipping” a generation with his gift-giving, as giving gifts directly to grandchildren will avoid estate tax on those assets when his children pass away.

Again, easier to do any of these things with cash than with an interest in a basketball team. If Irving is serious about gifting, he can reduce the value of his taxable estate significantly, benefiting his family and charity in the short term, and benefitting his family in the long term by reducing the estate tax they will have to pay at his death. Keep in mind that for every dollar Irving gives away he is likely saving his family $0.40 in estate tax when he dies.

Another reason to cash out now is the estate tax that is likely to be due at Irving’s death. Whether Irving dies before or after the current estate tax law sunsets, and even if Irving makes gifts to reduce the value of his estate, the federal estate tax payable on Irving’s estate will be significant. And the IRS does not accept Celtics tickets, even if they are courtside playoff tickets, in payment of the estate tax bill. They deal in cash only. So, better to liquidate a large asset now and free up some cash for the estate tax bill that’s coming due. When you are 90 years old, that bill could come due and payable sooner rather than later.

Succession Planning Is Difficult On and Off the Court
When you have multiple children and one special asset, planning can be challenging. That asset could be a family business, a beloved vacation home, or a racehorse. All of these things are valuable, valued by some or all family members, and illiquid – a difficult combination.

Wyc has done a great job being the face of the majority ownership group for years. However, Irving probably wants to benefit each of his children equally in his estate plan, even if only one of them has given him the joy of an NBA championship this year.

If Irving dies owning the team, Wyc may want to keep the team, but his siblings may want to sell, creating potential family disharmony. Sometimes, it’s possible to give one child who may be involved in the family business, for example, that particular asset and give other assets to the other children while still equalizing the value of assets everyone receives and maintaining family harmony. And it may even be the case that Wyc’s siblings care nothing about basketball and would be happy for him to receive Irving’s ownership interest in the Celtics when Irving passes if they get other assets of equal value. The problem for Irving is that when you have a basketball team that’s worth a whole lot (and likely to keep appreciating in value, at least in the short term) it’s hard to equalize things for your other three children unless you have a whole lot of other assets. Selling Irving’s interest in the team now will allow for easier equalization of his assets among his children at his death, which will simplify Irving’s estate. This is an issue faced not just by Irving, but by the owners of all professional sports franchises.

Although we estate planning attorneys may make it look easy, estate planning is complicated – especially for those individuals who hold our beloved sports teams’ destinies in their hands. Assuming you don’t own a professional sports franchise, your personal estate planning situation may not be as complex, but good estate planning advice is important for everyone who wants to make sure their assets pass efficiently and harmoniously to their intended recipients.

Maria Baler, Esq. is an estate planning and elder law attorney and partner at Samuel, Sayward & Baler LLC, a law firm based in Dedham (and a Boston Celtics fan). She is also a former director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA), and a past President of the Board of Directors of the Massachusetts Forum of Estate Planning Attorneys. For more information, visit www.ssbllc.com or call (781) 461-1020. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney.
August 2024
© 2024 Samuel, Sayward & Baler LLC

 

The Certainties in Life: Death and Taxes

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5 Things to Know About Alternate Valuation for Estate Tax Purposes

Federal Estate Tax 

When a United States citizen or resident passes away, the estate of the deceased person may be required to file a federal estate tax return and may have to pay a federal estate tax. The estate tax is a one-time tax that is payable after death on the value of your “estate,” which is essentially any assets you own or control at the time of your death. An estate tax return is due on the nine-month anniversary of the deceased’s date of death.

The good news for most people is that the federal estate tax exemption is $12.92 million per person as of January 1, 2023 ($12.06 million in 2022). This means that if the value of the assets you own at the time of your death (your so-called “taxable estate”) is less than the exemption amount, you do not have to file a return or pay a federal estate tax.  A surviving spouse may elect to assume their deceased spouse’s unused exemption, which allows married couples to pass $25+ million combined.  Estate tax is also not payable on the value of assets left to your surviving spouse or to charity. The federal estate tax exemption is adjusted annually for inflation.  The current federal estate tax law is scheduled to sunset on December 31, 2025, and if not extended by Congress prior to that date will cause the estate tax exemption amount to drop to $5 million, adjusted for inflation.

Massachusetts Estate Tax

However, if you pass away as a Massachusetts resident and the value of your taxable estate is $1 million or more, currently your estate will have to pay a Massachusetts estate tax. The Massachusetts estate tax is a one-time tax payable to the Commonwealth on the transfer of assets from a deceased person to their beneficiaries. The Massachusetts estate tax is also due 9 months after the date of death, and any estate tax due must be paid by that time to avoid interest and penalties from accruing, even if the filing of the return is extended

  1. What is Alternate Valuation?

How do you determine the value of a deceased person’s “estate”? Typically, assets are valued in one of two ways for estate tax purposes: either using the date of death value or using “alternate valuation.” The date of death value of an asset is the fair market value of the asset on the decedent’s date of death. Alternate valuation evaluates the fair market value of an asset 6 months after the decedent’s date of death (or on the date of disposition if the asset was distributed, sold, exchanged, or otherwise disposed of prior to the 6-month date).

  1. Using Alternate Valuation

When filing an estate tax return, the estate can elect to use the date of death value of the deceased’s assets, or the alternate value.  Alternate valuation can only be used if the overall gross value of the estate is less than the date of death value and the estate tax calculated on the alternate value is less than the estate tax liability for the value of the estate as of the date of death. Alternate valuation must be elected for all of the assets in the estate. You cannot “cherry pick” certain assets to use the alternate valuation instead of the date of death value; the election for the assets is all or nothing.

  1. Who Elects Alternate Valuation?

Alternate valuation is elected by the individual administering the estate; this is often the Personal Representative (Executor) of the estate or Trustee of the deceased’s Trust if there is no probate estate. The Personal Representative or Trustee elects alternate valuation on the deceased’s estate tax return and reports both the date of death values and the alternate values on the return.

  1. Assets that Fluctuate in Value

Alternate valuation applies only to assets that change in value due to market conditions, such as real estate and stocks. If electing alternate valuation, all assets that fluctuate in value must be valued as of the date of death and as of the alternate valuation date (unless they have been sold or distributed prior to the alternate valuation date, in which case they are valued as of the date of sale or distribution). For assets that that do not fluctuate, their value is locked in as of the decedent’s date of death (such as bank accounts and life insurance).

  1. Why to Use vs Not Use Alternate Valuation

Deciding whether to elect alternate valuation is something that should be explored carefully with an experienced estate planning attorney or tax expert. The choice of whether to elect alternate valuation depends on individual circumstances, financial goals, and consideration of tax consequences. The potential estate tax saved by using alternate valuation should be weighed against other potential tax implications, such as changes to the step-up in basis and the impact of using alternate valuation in calculating capital gains.

If you have questions about the estate tax, how alternate valuation is assessed, and/or what can be done to reduce the estate tax that may be owed on your estate, please call our office and schedule a time to meet with one of our experienced estate planning attorneys.

June, 2023

© 2023 Samuel, Sayward & Baler LLC

 

 

Five U.S. Supreme Court Decisions that Impacted Estate Planning

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Last month’s leak of a draft U.S. Supreme Court opinion that would overturn the constitutional right to abortion in most circumstances has led to the Court dominating the news yet again and serves as a reminder of the far-reaching consequences of the Supreme Court’s decisions. Although the handful of decisions on hot-button issues released by the Court every June frequently dominate the headlines and the public’s conception of what the Court does, it is important to remember that the Supreme Court also hands down numerous “under-the-radar” decisions that have far-reaching impacts on all areas of the law, including estate planning and elder law. As the month of June begins and the Court prepares to wrap up another term, We thought now would be a good time to showcase five Supreme Court decisions that have impacted estate planning and elder law.

  1. Nichols v. Eaton (1875): Considered by some legal scholars to be the most important trusts and estates opinion ever produced by the Supreme Court, it could be argued that this decision laid the foundation for modern estate planning. Decided nearly 150 years ago, this case validates the use of “spendthrift clauses” in trusts. A spendthrift clause prohibits the beneficiary(ies) of a trust from transferring their interest(s) in the trust to a third party, either voluntarily or involuntarily. While this prevents, e.g., an impatient beneficiary from selling their income interest in a trust in exchange for a lump sum, far more consequentially, it also prevents potential creditors (including those with valid claims) from accessing a beneficiary’s interest in the trust. This means that, so long as a beneficiary’s interest stays in the trust, their creditors will not be able to access it or benefit from it. In the wake of this decision, spendthrift clauses have become ubiquitous in modern estate plans, to the point that it is rare to see a modern trust that doesn’t contain a spendthrift clause. It is the validity and enforceability of spendthrift clauses that makes the use of lifetime continuing trusts increasingly popular and common in modern estate plans.
  2. United States v. Windsor (2013): It is a happy coincidence that the Supreme Court’s tradition of releasing opinions on hot-button issues in June has meant that several monumental decisions affecting LGBTQ rights have been issued during Pride Month, giving members of the LGBTQ community added reason to celebrate each June. Among those decisions was United States v. Windsor, which struck down the Defense of Marriage Act nearly a decade ago. Signed into law in 1996, among other things the Act defined “marriage” as between one man and one woman for purposes of federal law, meaning that even if a same-sex couple was legally married under the laws of their state, that marriage was not recognized by the federal government. As a result, married same-sex couples were unable to, e.g., file joint income tax returns, apply for survivor’s Social Security benefits upon the death of a spouse, take advantage of the more favorable asset limits for married couples applying for Medicaid long-term care benefits, or take advantage of the unlimited marital deduction for federal gift and estate taxes. This frequently resulted in estate and long-term care planning for same-sex married couples being more complicated and costly while still not always achieving the same outcomes that were possible for opposite-sex married couples. Fortunately, the Windsor decision more or less leveled the playing field for same-sex married couples, and recent actions by lower federal courts have attempted to remedy some of the wrongs suffered by same-sex married couples while the Act was in effect.
  3. Clark v. Rameker (2014): This case deals with creditor protections for tax-qualified retirement assets (e.g., 401(k)s, IRAs, etc.). While federal law has long protected these assets from the reach of creditors in bankruptcy proceedings, this case dealt with whether this protection extends beyond the original contributor to the plan to also cover beneficiaries who inherited these assets. The Supreme Court ultimately held that the creditor protection only applies to the original contributor and their surviving spouse, and not to inherited beneficiaries, ultimately changing the calculus for estate planners in terms of whether to name a trust or an individual as the beneficiary of such assets. By naming a lifetime continuing trust with a valid spendthrift clause as the beneficiary of these assets as opposed to an individual, it is possible to maintain creditor protection for these assets.
  4. Sveen v. Melin (2018): While it is undoubtedly best practice to update beneficiary designations after a divorce, for a variety of reasons this doesn’t always happen. As a result, many states, including Massachusetts, have enacted “revocation-upon-divorce” laws, which automatically revoke the designation of an ex-spouse as the beneficiary of, e.g., a life insurance policy. In 2018, the Supreme Court was asked to decide whether the Constitution permitted these laws to apply retroactively to beneficiary designations made prior to their enactment. While the Court ultimately held that these laws can apply retroactively, the protracted litigation in this case nonetheless highlights the importance of making sure to update your estate plan, including beneficiary designations, in the wake of major life changes such as divorce.
  5. North Carolina v. Kimberley Rice Kaestner 1992 Family Trust (2019): In the modern era, it is more common than ever for families to wind up spread out across the country. Gone are the days where multiple generations of a family can be counted on to live in the same town or even the same state. This makes it more likely that a trust will be created in one state, have a trustee in a different state, and have beneficiaries in one or more additional states. With the only constants in life being death and taxes, it is not surprising that all of these states might want to impose taxes on this one trust. Fortunately, the Supreme Court has taken notice of this and begun to establish guidelines for when states are constitutionally permitted to tax a trust. In 2019, the Court held that the mere fact that a discretionary beneficiary of a trust (i.e., a beneficiary who had no right to demand or force distributions from the trust) lives in a state is not sufficient to give that state the authority to tax the trust. Although this decision was fairly fact-specific, it nonetheless has provided some guidance to estate planners on the tax consequences of trusts that touch multiple states.

With the exception of the Windsor case, which was hotly contested and decided on a 5-4 basis with three rather vociferous dissenting opinions, none of the Supreme Court cases mentioned here were particularly controversial or headline-grabbing. In fact, most dealt with fairly technical issues of interpretation. Nonetheless, they should all serve as reminders that even “boring” decisions by the Supreme Court can have a far-reaching impact on the law.

June 2022

© 2022 Samuel, Sayward & Baler LLC

How To Choose A Fiduciary When There Is No Obvious Choice

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Attorney Suzanne Sayward discusses how to choose a fiduciary when there is no obvious choice, for this edition of our Smart Counsel for Lunch Series. Please watch and if you have any questions or want to learn more please call us at 781 461-1020.

And don’t forget….

to join us for our next Smart Counsel webinar on Thursday, February 24th when Norfolk County District Attorney Michael Morrissey and Senior Affairs Coordinator Gayle Bellotti, will share their expertise on fraud prevention, cyber hacking, scams and identity theft.

Attorney Maria Baler will round out the panel and will speak to the importance of having updated estate plan documents that permit trusted individuals to assist you if necessary, including the ability to access your digital assets. In addition to hearing from our panel, attendees will have the opportunity to ask questions.

Join us virtually for this presentation on Thursday, February 24, 2022 from 6:00 pm to 7:30 pm. Contact Victoria Ung at 781/461-1020 or ung@ssbllc.com to reserve a spot for you and a friend.

The program is free but registration is required.

Wills • Trusts • Elder Law • Long-Term Care Planning • Estates

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