What do you have in common with an NFL owner?

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Longtime Buffalo Bills owner, Ralph C. Wilson, Jr., died on March 25, 2014 at age 95.  Loyal Bills fans have been heartbroken by their team many times.  They are the only team to lose four consecutive Super Bowls.  Regardless, their fans do not want to see the team leave Buffalo.  During his lifetime, Wilson was committed to keeping the team in Buffalo.  In 2013, he agreed to a ten-year stadium lease.  However, he reportedly told the Buffalo News in 2007 that once he died, the team would be sold.  He was not interested in giving the team to his wife or children to run.  Consequently, Wilson’s death was a day that many Bills fans dreaded because of the uncertainty it meant for their team.

Buffalo’s losing the team would not only be a sad development for Bills fans, but for football fans generally.  The Bills are the only NFL franchise that actually play in the state of New York, in the Buffalo suburb of Orchard Park.  Both the New York Jets and the New York Giants play in East Rutherford, New Jersey (nine miles outside of New York City).  It takes years for expansion teams and transfer teams to develop the kind of fan base and loyalty of long-established teams such as the Bills.

So, what do you have in common with an NFL Owner?

Capital Gains Taxes.  You probably own capital assets.  You may not own a professional sports franchise, but maybe you own stocks or mutual funds in a brokerage account you opened when you were younger.  Those investments have now increased in value.  Or maybe you bought a house ten years ago and it has appreciated in value.  Ralph Wilson reportedly bought the Bills in 1959 for $25,000.  The team is valued at an estimated $870 million today.

Capital gain is the difference between your basis (amount you paid for the investment) and its eventual sale price.  Short-term capital gains, i.e. gains on investments held less than one year, are taxed as ordinary income.  As of 2013, long-term capital gains are taxed at 15% for most taxpayers (20% for single persons with $400,000+ income or married couples with $450,000+ income).

If Wilson sold the Bills during his lifetime, he would have owed capital gains taxes on the approximately $869,975,000 appreciation.  Assuming he sold the team during his lifetime in 2014 and was subject to the highest long-term capital gains tax rate (and not considering other factors such as the Medicare surcharge effective in 2013 to fund the Affordable Care Act) Wilson’s capital-gains tax bill would have been roughly $173,995,000.

By holding onto the team until his death, Wilson’s estate gets a “stepped-up basis.”  Rather than paying capital gains taxes on $869,975,000 appreciation, Wilson’s estate will pay capital gains only on the sale price minus the team’s value on his date of death.  If the team was worth $870,000,000 when Wilson died, and sells for $870,000,000, Wilson’s estate will pay no capital gains tax.

You may not own an NFL franchise, but maybe you bought your family home in 1973 for $35,000 and it is now worth $2 million.  Selling it during your lifetime will generate long term capital gains on $1,965,000 worth of appreciation.  Assuming you and your spouse are able to exclude $500,000 of the appreciation from the sale of your primary residence, you might still end up with a capital gains tax bill of $219,750 (15% of $1,465,000).  If you instead leave the house to your children at your death, your children would get a stepped-up basis and pay capital gains only on the difference, if any, between the value on the date of sale and the value on your date of death.

Estate Taxes.  Wilson died in 2014, when the estate tax exemption as indexed for inflation was $5,340,000.  The estate tax exemption is the amount a person can transfer at death without incurring estate taxes.  The top estate tax rate is currently 40%.  If the team is currently worth $870 million, a 40% estate tax would be approximately $346 million.  Some estate planners advise clients to put life insurance policies into place to fund estate tax liabilities.  Reportedly both Bon Jovi and Donald Trump have expressed interest in purchasing the Bills.  Regardless of how it is funded, the estate tax liability will be a factor in any sale of the Bills.

What does all of this mean for you?      Assets which fund a traditional family trust at the death of the first spouse will not receive a fair market value basis step-up at the death of the surviving spouse.  For combined estates under the single estate tax exemption amount of $5,340,000, planning to preserve basis step-up at the surviving spouse’s death may be a primary focus and estate tax liability may not be a concern.  Older estate plans with marital and family trusts should be reviewed to ensure you do not lose the benefit of a stepped-up basis.  Mid-sized estates, between $5,340,000 and $10,680,000 should be evaluated with the goal of balancing capital gains and estate tax planning.  Large estates over $10,680,000, should still be evaluated with the primary goal of minimizing estate taxes.

Contact our Denver estate planning attorneys if you would like guidance about preserving your hard-earned wealth for future generations.