I handle very simple estates in my practice and Ralph's estate will be uber-complex. But the following rules should still apply:
1) Ralph bought the team for $50,000 or so. That is his "cost basis". He has invested other funds into the team by way of stadium improvements (not sure how much he paid and how much the taxpayers picked up), other team/business expenses. If we were to say he has spent another $5 million on team improvements, his adjusted cost basis is $5,050,000. If he sells the team this year for $800 Million, he has a capital gain of approximately $795 Million. In 2012, the long term capital gains tax rate is 15% (I believe) so he'd pay approximately $120 million in taxes just on the sale of the investment/business.
2) If Ralph holds onto the $675 Million (795-120 taxes=$675 million) and dies with this amount of cash in the bank, the federal estate tax exemption is going to fall back to $1 Million (unless he has a wife in which case he can transfer the whole estate to his wife on death tax free). He can also set up Credit Shelter Trusts, etc. to defer the payment of estate tax until the death of his wife. But let's just say his executor wants to pay the whole tax while administering Ralph's estate rather than set up a QTIP election for deferred estate tax. They would combine Ralph's other assets with the $675 Million (say he has another $100 Million in assets) so he has a taxable estate of $775 Million. If they apply the estate tax rate of say 50%, he pays $387 million in taxes, his family walks away with the balance of $387 Million.
3)In the final example, if Ralph doesn't sell the team, upon the date of his death, his estate (and beneficiaries) take the stepped up basis in the asset. That means his estate will not have a cost basis of $50,000 (or $5,050,000) but their cost basis will be the fair market value of the team on the date of death. Therefore, even though the asset itself worth $800 Million will be considered an asset of the estate, the estate will not have to pay capital gains tax on it if it is sold for $800 Million (on the next day after his death). If the estate sells the team for $900 Million one month after death, let's say, they will have to pay tax on the $100 Million dollar gain.
Using the same numbers as above, if Ralph doesn't sell the team and keeps it as part of his estate, the $800 Million team plus his other assets of $100 Million is a gross estate of $900 Million. If you apply a 50% tax rate, the estate pays $450 Million and the family walks away with $450 Million.
So, it seems the easy answer is selling the team now is tax prohibitive because he would pay a total of $507 Million in taxes (Capital gains plus estate tax) as opposed to leaving it in his estate for an estate tax of $450 Million.
Question for CPA/Accountants/Finance Guys/Attorneys: Isn't it better to sell the team now (pay the capital gains tax rate of 15%) before the capital gains tax increases significantly and the estate tax rate increases even more so as we appear to be heading toward a financial crisis. I think Ralph and his family (and their estate planners) are overthinking this. The safe bet is to sell the team now (2012) before tax rates go haywire in the next four years.
Edited by BringBackFergy, 26 November 2012 - 10:10 AM.