Hal Steinbrenner

The complaint, filed Dec. 27 in Tampa, Florida federal court, seeks to reclaim the funds issued to Steinbrenner on Dec. 28, 2009. The refund stemmed from disputes between Steinbrenner and the Internal Revenue Service over the 2001 tax year and audits of the Major League Baseball team’s parent company for 2001 and 2002, according to court papers.

Harold Steinbrenner, known as Hal, is one of the children of George Steinbrenner, the former Yankees owner who died in 2010. George Steinbrenner and the IRS settled the issues raised in the audit in an agreement accepted on March 1, 2007, according to the complaint.

That agreement resulted in adjustments to the tax returns of the beneficiaries of a family trust, including Hal Steinbrenner’s 25 percent share. According to the complaint, Hal Steinbrenner paid his taxes in 2008, and then filed an amended 2001 tax return in 2009 seeking a refund because of a $6.8 million net operating loss carried back from 2002.

Paid Refund

The IRS paid the refund — and then said that the refund claim should have been filed by March 1, 2009, more than five months before Hal Steinbrenner sought the refund.

“Hal Steinbrenner’s representatives had no knowledge of the lawsuit and had received no prior notices regarding this matter from the IRS or any other governmental agency,” Alice McGillion, a family spokeswoman, said in an e-mailed statement.

Grant Williams, a spokesman for the IRS in Washington, declined to comment on the lawsuit.

The case is U.S. v. Harold Z. Steinbrenner and Christina L. Steinbrenner, 11-02840, U.S. District Court for the Middle District of Florida (Tampa).

Source: Bloomberg News

Posted by Steven Maimes, The Trust Advisor.

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Last December, we had clarity on the federal estate tax. The Democratic majority in the House was moving fast to extend the 2009 exemption and rates, and it looked like the Senate would soon follow.

Now, almost a year later, there’s no fix in sight. As a result, there was no estate tax this year and visibility on what estates will end up paying in 2011 has eroded to zero.

Even on Capitol Hill, nobody knows what kind of tax liability people who die two months from now will owe the IRS.

When asked to give a forecast, Michael Briggs, an aide to Senator Bernie Sanders of Vermont, simply says the future of the estate tax is now “totally unpredictable.”

Sanders is one of the members of Congress who’s both most keyed into developments on the estate tax front and — until the November election — most keyed up about making sure no more billionaires die without leaving the federal government a piece of their fortunes.

If his office now acknowledges that there’s no way to tell what’s going to happen next year, ground-level practitioners have even less guidance as they try to prepare their clients for literally anything.

“There’s too much out there, and that makes it so difficult to advise clients,” says Barbara Kogen, a partner at Beverly Hills CPA firm NSBN.

The mood on the street ranges from wry amusement to outright frustration.

“I have given up,” says Andrew Tignanelli, a Baltimore CPA and planner. “This is a perfect example of the totally dysfunctional nature of Washington. Sadly, they are not even ashamed.”

Tired of “all or nothing” outlook

Part of the problem is that even if advisors take the most likely scenarios into account and ignore everything else, there’s still too much ground to cover.

If Congress does nothing, this section of the tax code will automatically reset to 2000 levels on January 1. That means estates will owe the government up to 50% of their taxable value over $1 million.

And since this expands the number of families who have to worry about the tax from zero to about 2 million, advisors who had hoped for a fix before the end of the year are now having to scramble to make sure that even their mass market clients have their estate plans in order.

On the other hand, the most likely alternative would be to either reinstate the 2009 rules or set up a bipartisan compromise between Republicans who want the tax abolished outright and Democratic-leaning types like Sanders who wouldn’t mind charging really big estates even more.

But the 2009 rules would roll the exemption back up to $3.5 million, ensuring that only the biggest fish in any advisor’s book — the 280,000 richest families — would need to worry about their heirs owing the federal government a single dime.

Furthermore, since we would only be rolling back the status quo a year, those clients probably got their trusts and other arrangements in place back before 2009.

Uncertainty leaves too many clients at risk

While probably about 60% of most RIA firms’ bread-and-butter clients have their trusts together as well, that could still leave hundreds of thousands of families rushing to shield their assets ahead of the January 1 reset.

Throw in the post-election uncertainty surrounding the Bush income tax cuts, capital gains tax rates and dividend taxes, and you’ve got plenty of planners who blame Congress for stalling until it’s too late to do much real tax planning of any kind.

“It is inexcusable,” says Todd Ganos, a principal in Monterey firm Doolittle & Ganos.

“When the majority party had 60 seats in the Senate, it could have made permanent whatever solution they proposed,” he adds. “But they did nothing.”

Ganos believes that ultimately the 2009 rules will be put back in place for the estate tax and that President Obama will end up allowing the incoming House Republican majority to extend the Bush income tax brackets as well.

In theory, whatever solution Congress comes up with can be made retroactive. Over the course of this year, tax gurus repeatedly raised this point as a possible hitch for the estates of the several billionaires — including George Steinbrenner, pipeline mogul Dan Duncan and others — which would otherwise pass on without owing the IRS anything.

Some estate planners currently hold out the possibility that a fix will end up covering everyone who dies after January 1, effectively preventing any family from being subject to the almost universally unpopular $1 million exemption.

Rick Shapiro, a Connecticut planner, has dug into the issue with several tax lawyers and CPAs and has tentatively concluded that a retroactive change to the tax code is theoretically possible.

He bemoans the “lack of clear direction” and notes that previous generations of estate planners would have found the freak temporary abolition of the estate tax for a single year vanishingly improbable at best.

In any event, nobody we talked to was inclined to think that a retroactive tax fix would be extended all the way back to this year.

Barbara Kogen sums it up best: There will be no retroactive reinstatement of the estate tax for 2010 because, at this point, too many billionaires have died.

“Steinbrenner, Duncan in Texas, all those people dying, their heirs have the deep pockets and a lot to lose,” she explains. “They’re willing to pay the legal fees. It’s clearly way too late to fix this retroactively.”

Maybe after a year of forgoing billions of dollars in potential estate tax revenue, fielding a few complaints from mere millionaires bristling at their heirs owing a few thousand dollars will get the new Congress to do something next year.

“Chances are we won’t get anything in 2010,” Kogen says. “I think people hope something could happen early in 2011. I hope we get some clarity soon either way.”

Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and reporting.

Permalink: http://thetrustadvisor.com/news/estate2011

Kluge, for example, amassed about $6.5 billion in his lifetime, making this self-made media baron the 35th richest man in America when he died on September 7.

Although the details of John Kluge’s will haven’t been made public, his lawyers would have at least thought about putting some or all of his taxable wealth into a qualified terminable interest trust (QTIP).

A QTIP is a form of marital trust that gives executors up to 15 months to choose whether to pay the prevailing estate tax liability — currently zero — or deferring the bill until the surviving spouse dies.

These trusts are traditionally favored in complex situations like Kluge’s (four wives, three kids) because they also limit the surviving spouse’s access to the underlying assets, but their flexibility has also made them popular tax planning vehicles.

“The control part is very important, but even totally harmonious families were using QTIP trusts purely for tax purposes,” explains Donna Barwick, a senior fiduciary officer at Wilmington Trust’s Atlanta office.

As far as harmonious families go, Kluge’s fellow billionaire George Steinbrenner was happily married to the same woman since 1956. But based on published reports, he probably put most of his $1.1 billion estate into a QTIP trust — not to keep Joan from spending their children’s inheritance, but for the tax treatment.

Smart planning in any other year?

Far from being the cut-and-dried billion-dollar windfall that Forbes and other publications are fretting about, the one-year repeal of the federal estate tax actually creates new headaches for blue-chip estate planners.

A lack of guidance from Washington is at the top. Unless Congress acts this year to change the rules, the estate tax is set to return January 1 at a maximum rate of 55% for all assets over $1 million.

Dan Rubin, a top estate planner at New York City law firm Moses & Singer, agrees that QTIP is probably the way for billionaires to go, but the details can be tricky

For one thing, no one knows for sure if the benefit of having no estate tax will in 2010 will be passed on when the spouse dies.

And the Kluge or Steinbrenner lawyers may not be able to defer the liability even if they wanted to.

“Normally in order to get the deferral, an election would need to be made on the estate tax return,” he notes. “With no estate tax on the books this year, there’s some question whether you can even make that election.”

Getting the better basis

Estate tax elections aside, simply having the assets in a QTIP-capable trust shields billionaire heirs from a bit of their future capital gains burden.

Although there’s no 2010 federal estate tax, the current basis rules mean that beyond a certain threshold ($1.3 million plus $3 million extra for spousal property) inherited property no longer “steps up” on the previous owner’s death.

A QTIP trust gets that spousal exemption while other forms of trust do not, Dan Rubin explains.

“If you rewrote a billionaire’s will in 2010 to exchange a QTIP trust and put in a credit shelter trust instead because you thought you no longer needed the marital election, you would be wasting $3 billion in basis allocation,” he says.

Rubin also notes the persistence of state estate taxes. As a Palm Beach resident, Kluge wasn’t worried about Florida taking a piece of his fortune, but George Steinbrenner’s lawyers did need to deal with New York’s tax code.

“Steinbrenner’s attorney is a close friend of mine,” says Donna Barwick. “My guess is that Steinbrenner’s estate was so well planned that this was not an issue. You could say that about any billionaire, no matter what the exemptions are in any given year.”

Visibility still hard to come by

For estate planners who are working with slightly smaller clients, the sad fact is that it’s already late September and nobody really knows whether the estate tax will reset 2-1/2 months from now with an exemption of $1 million, $5 million or somewhere in between.

Senator Mitch McConnell (R-Kentucky) has introduced a bill that would “patch” the tax code and reset the estate tax (and the capital gains treatment of inherited assets) at 2009 levels.

But McConnell aide Don Stewart tells The Trust Advisor he isn’t holding his breath for any progress on the bill before the November election.

A lame duck Congress may go either way. On one hand, a $1 million exemption will generate extra revenue for a cash-starved government. But on the other, exposing upper-middle-class families to an added tax burden is still extremely controversial in Washington.

However the new rules end up, the prospect of making them retroactive to the start of 2010 looks slim. Every billionaire that dies only raises the odds that any attempt to tax these huge inheritances will end up in years — maybe decades — of litigation.

If so, even the best executors have a lot of work ahead of them.

Billionaire George Steinbrenner, owner of the New York Yankees, died this week at the age of 80. He was a man with the Midas touch and possessed a perfect instinct for impeccable timing.

Timing again was on his side for dying in a year with no federal estate taxes on the books. News reports from NBC, the Washington Post and the New York Times brought this to the public’s attention.

The Trust Advisor Blog ran a story in January on this topic. At the time, many of our readers and our contributors said this was too good to be true. And as often is the case, when something is too good to be true, it seldom is.

Now that the genie of public outrage is out of the bottle, there will certainly be an argument over whether Steinbrenner’s heirs will avoid up to $600 million in estate tax. Lawmakers in Washington are already using his good name to prevent billion-dollar estates from passing tax-free.

Senator Bernard Sanders (I-VT) and four co-sponsors have introduced a bill that would retroactively return the estate tax to the 2009 exemption level of $3.5 million with a progressive tax rate structure starting at 45% with a 10% surcharge on billionaires.

The debate started last March following the death of Texas pipeline mogul Dan Duncan, who died at 77 with an estimated net worth of $9 billion, ranking him as the 74th wealthiest person in the world. Under the Sanders proposal, that $9 billion would generate billions of dollars in government revenue.

Lawmakers had a chance to fix the estate tax several months ago, saving Duncan and Steinbrenner’s heirs millions, in a proposal that would have given Republicans just about everything they asked for, including a $5 million exemption rising with inflation and a maximum of 35% maximum rates. But because of party bickering, lawmakers couldn’t agree—and here we are.

Public outcry over billionaire dying tax-free makes great political theater, matching the fuss created in 1995 when President Bill Clinton and Congress plugged the expatriation loophole that let billionaires like Ken Dart escape U.S. estate taxes by renouncing their citizenship and moving to Belize.

Some of the strongest outrage has come from Congress itself. When asked to summarize Senator Sanders’ position, aide Michael Briggs pointed me to a speech he made the day Steinbrenner died.

“We have a situation now where the very wealthiest people in this country are seeing that when someone in their family dies, the estate tax is zero,” the senator said, concluding with “In my view, it is immoral it is unfair that while the middle class struggles to survive, millionaires and billionaire’s get tax breaks.”

Where the rhetoric meets the road

Given that sentiment, it’s not surprising that Sanders and his allies are pushing a bill that would retroactively tax Steinbrenner and others who have died in the last seven months. Meanwhile, Blanche Lincoln of Arkansas and John Kyl have revived their bipartisan proposal, and more would-be fixes and compromises will probably emerge over the next few months.

Right now, it’s all still political theater, says estate planner Phil Kavesh.

“I think this is definitely not going to get resolved until the November election, and at this point will probably be pushed back to January when the new Congress takes office,” he says.

The logic is a little cynical, Kavesh admits, but everyone I talked to agrees.

On one hand, every billionaire who dies is an embarrassment for lawmakers who were supposed to close the loophole last year.

But on the other, the longer the Senate keeps us all in suspense, the more time both Democrats and Republicans have to collect contributions from the upper-middle-class families that will be exposed to the estate tax next year if nothing happens.

“If the estate tax came back next year with only a $1 million exemption, that would be devastating for a lot of relatively middle-class people,” Kavesh notes.

More complicated than it looks

While some members of Congress may think it will be easy to bang out an amendment that raises the exemption back to $3.5 million, by the time November rolls around the budget could tie their hands.

Thanks to “pay as you go” rules, in order to exempt more estates from the tax means finding about $60 billion in additional revenue, or cutting that much from federal spending. Neither is an especially attractive option, but Sanders, Lincoln, Kyl and others are working on solutions.

The Sanders bill, for example, would create a special “billionaire’s tax” designed to spare 99.7% of all families from paying any estate tax at all, while skimming off 65% of what high rollers like Steinbrenner leave behind.

Retroactive headaches

“If I were the executor for the estate of Art Linkletter, George Steinbrenner, Dennis Hopper or any of the other wealthy people who’ve passed away in the past six months, I would be stalling any distributions until I got some clarity,” says Bill Ahern, policy director of the non-profit Tax Foundation.

That’s because Sanders wants to make his tax retroactive to the beginning of 2010 to bring in revenue from the billionaire deaths we’ve seen so far this year—assuming, of course, that they left any taxable assets behind and not in trusts or other tax-shielded vehicles.

“Sad but true, when people mention these billionaires dying in a year of no estate tax, I wonder in the back of my mind how much they would have paid last year,” Phil Kavesh says. “These people can afford very sophisticated legal counsel to avoid estate tax, but this topic has such political cachet that it may trap people in the upper middle class as well.”

Although Max Baucus and the Senate Finance Committee have backpedaled away from retroactivity as the year drags on, it’s anything but a dead issue, Bill Ahern says. As long as it gets the votes, it has a good shot at fending off any constitutional concerns.

“The Supreme Court has been very kind to retroactive taxation, especially within one year,” says Ahern.

Phil Kavesh isn’t so sure. “Quite frankly, retroactivity might not be a workable solution at this point in the year,” he says. “Enough big estates have been affected so far that there is a lot of money at stake, and that means a lot of money to fund fights in the court system that could go on for years.”

The silver lining for estate planners

As a result, Kavesh suspects we could end up with the $1 million exemption after all, at least for as long as it takes to work out a budget-neutral compromise.

Either way, he says it’s the best of times and the worst of times for estate planners. Those who can cope with all the moving parts in play can book a lot of business.

“What with the tax environment shifting as it is, a lot of my clients are seriously looking at taking measures before the end of the year,” he says.

“There’s a lot of rumbling about additional restrictions on certain types of trusts going forward, so whatever happens to the exemption, the time for them to act is now.”

Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes and Scott Martin contributed to the research and reporting.

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