Baseball pioneer George Steinbrenner, owner of the famed New York Yankees franchise, died from a heart attack on July 13, 2010, at age 80. Checking in at No. 341 on Forbes' list of richest Americans last year and No. 880 on this year's World's Billionaires list, the Steinbrenner fortune has been estimated at $1.1 billion. (See "#341 George Steinbrenner" and "#880 George Steinbrenner III").  Many people think that the Steinbrenner family hit a home run with estate taxes when George Steinbrenner passed away. Why? In the year 2010 there are no estate taxes. In fact, 2010 is the only year with no estate taxes--in 2011 the estate tax exemption swings back to $1 million. If Steinbrenner had died in 2009 or 2011, his widow and four children would have paid an estimated $500 million to $600 million in estate taxes. Not a bad savings!  So what do Yankees fans think about this? They should be pretty happy, assuming they like having the Steinbrenner family own the Yankees. Heirs of other sport franchise owners, such as the Miami Dolphins and Washington Redskins, have been forced to sell teams to pay estate taxes.  In fact, there is another reason why it is even less likely that the Steinbrenner family will ever sell the Yankees. The nonexistence of estate taxes in 2010 comes with a catch--no step-up in basis. This could be a huge strike-out for the Steinbrenner heirs.  In 2010, heirs of the very wealthy do not get to enjoy a typical tax savings called a step-up in basis. What does this mean? Normally, when someone dies the heirs receive the assets valued as of the date of death. As a result, when the heirs sell the property, they only pay capital gains taxes on the increase in the value of the property after the date of death. For 2010 estates, however, these normal tax savings (above a certain dollar level) are gone.  This means that the Steinbrenner heirs have the same tax basis that George did when he bought the franchise back in 1973 for a mere $10 million. In other words, what if they choose to sell their majority ownership in the Yankees? The franchise is valued at $1.6 billion, so their 55% interest would be worth about $880 million. If they sell the stock, they would have to pay capital gains taxes on every dollar over $14.3 million ($10 million plus the $4.3 million that married couples are permitted to credit toward their tax basis amount).  Can you imagine the capital gains tax on stock worth $880 million in addition to other assets? The Steinbrenner family will have no choice but to hold onto the New York Yankees' stock or pay a monumental capital gains tax. Most likely, the Steinbrenners will pass the stock down from generation to generation unless the tax laws change.  Wow, this is complicated! And it's all because George died in a year when there were no estate taxes and no step-up in basis. Everyone thought that Congress would pass a new law long before now to eliminate the 2010 tax anomaly, but we're still waiting for that to happen. There have been rumors of a retroactive tax--meaning Congress could pass new laws and try to apply the new tax laws to those who already died in 2010.  Most experts feel that would be unconstitutional. Certainly, the Steinbrenner heirs--and heirs of other billionaires who have died this year, like Houston oil tycoon Dan L. Duncan, with an estate worth an estimated $8 billion--would agree with those experts. They would undoubtedly file lawsuits to challenge any new estate tax laws that are passed which impose an estate tax on the estates of their wealthy loved ones who died in 2010. Danielle B. Mayoras and Andrew W. Mayoras, co-authors of Trial & Heirs: Famous Fortune Fights!and husband-and-wife legacy expert attorneys. Download The Intelligent Investing Podcast Here.
Passing away in a year with no estate taxes might seem like good timing, but there is a catch.