Disney Deal Gives George Lucas a Billion-Dollar Tax Break

Timing and structure of $4 billion sale maximize the director’s ability to make the transition from Star Wars empire to educational pursuits without forcing him to take Steve Jobs’ place on the Disney board.

When Disney decided to buy Lucasfilm, the Web exploded with speculation about new Star Wars movies, but strip away the special effects and science fiction mythology and George Lucas is really just another entrepreneur who’s ready to retire.

Like most self-made successes, most of Lucas’ wealth is wrapped up in the business he built. He never took Lucasfilm public or invited in outside investors, so until Disney came knocking, he still owned it all.

And with no creative heir apparent with the cash to buy him out, it was inevitable that either he or his estate would eventually need a succession plan.

Unlike Steve Jobs of Apple, who was forced into a Disney buyout and became the company’s top shareholder, Lucas went willingly — and moved fast to take advantage of huge tax breaks set to expire in a few months.

“He and I started talking about this about a year and a half ago,” Disney CEO Bob Iger told shareholders. “But only decided pretty recently that this is something that we both wanted to

In other words, something pushed Lucas to accelerate the deal. That motivating factor may be personal, but the likely shape of Washington tax policy beyond December 31 probably didn’t hurt.

An all-time charitable blockbuster

Lucas has vowed to donate the vast majority of his fortune — now including his $4 billion Disney payout — to non-profit educational groups like the George Lucas Foundation, which runs Edutopia.org and other teacher-oriented initiatives.

He’s even signed the gazillionaire Giving Pledge along with Warren Buffett and Bill Gates to make it official, which means he’s not exactly looking to game the estate tax system on behalf of his kids.

On the other hand, pushing the buyout button now lets him lock in current capital gains rates on behalf of his foundation down the road.

The normal rule of thumb is that any time you can defer recognition of income and the associated tax liability, you should do it.

But with the capital gains rate set to rise to 20% for people in Lucas’ tax bracket and the new 3.8% Medicare contribution on investments kicking in, delaying the deal could have cost Lucas and his charities hundreds of millions of dollars.

While it’s hard for anyone but the Lucasfilm accountants to know what the company was worth before the deal, if you crunch the numbers from places like Forbes, it looks like “fair value” here was around $2 billion.

That leaves Lucas with roughly a $2 billion long-term capital gain, which translates into a $176 million lower tax bill now versus what he would’ve had to pay if he’d waited a few months.

Politics and philanthropy

Jumping the gun to take advantage of the current tax environment seems a little paradoxical when you consider Lucas’ track record for contributing to Democratic politicians.

But the director didn’t amass a multi-billion-dollar empire by failing to listen to the money people, who probably told him how many computers an extra $176 million can buy for classrooms.

Either way, if Lucas was banking on a Romney win this time around, he might have taken his time at the bargaining table.

Romney has made it a personal mission to keep capital gains rates low if elected, which means only someone who’s really convinced Obama is getting four more years would have forced Bob Iger and company to rush out a press release last week.

As always, what’s going on in Lucas’ head is a mystery even to his biggest fans, so we may never know whether politics or the weather changed his mind.

What we do know is that he has no interest in following fellow nerd legend Steve Jobs onto the Disney board of directors.

When Jobs lost Pixar back in 2006, he ended up with a 7.7% stake in Disney and a seat on the board as a consolation prize.

He never sold a share, preferring to cash the dividend checks and eventually hand the stock to his still-obscure trust.

This time around, Disney is giving Lucas 40 million shares of stock worth another $2 billion as part of this transaction, which makes him the company’s biggest living individual shareholder.

But unlike Steve Jobs, Lucas has already told Disney he wants to sell the shares — and Bob Iger has promised to cash him out in the next two years.

Don’t be surprised to see that stock move to the George Lucas Foundation in about a year, when it technically becomes a long-term holding and the donation nets a much bigger tax deduction.

After that, Iger can buy his shares back from the foundation and fund its operations for decades to come.

Meanwhile, that charitable gift — plus whatever chunk of cash Lucas cares to hand over in the current tax year — should defray the IRS bills substantially.

Humbler high-net-worth entrepreneurs can’t do that, but George Lucas has the pull to dream a little bigger than average.

After all, the Star Wars movies along have grossed over $10 billion over the decades in licensing and ticket sales, and he’s still got the $1 billion Skywalker ranch and an estimated $200 million to $300 million in cash to keep his family from starving.

Now that he’s “retiring” to build technology to teach tomorrow’s kids, his life might finally be getting interesting.

Scott Martin, senior editor, The Trust Advisor

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