When New York Yankees owner George Steinbrenner died this month, he left an estate with an estimated value of $1.15 billion, primarily the Yankees major league baseball team. The fact that he died in 2010, during the one-year repeal of the federal estate tax and the Generation Skipping Transfer (GST) tax, was especially good timing for those he left behind. In baseball, timing is important to hitting the ball. Estate planning attorneys know that Steinbrenner’s timing was a homerun—and may have saved his heirs more than $500 million in estate taxes.
But this year, along with the repeal in the estate tax came a change in the rules for calculating the income tax basis for heirs. In previous years, heirs who inherited property got a step-up in the property’s income tax basis to the property’s fair market value. Upon eventual sale of the property, the heirs would only pay capital gains tax on the difference between the future sales price for the property and the property’s value at the time they inherited it.
For people dying this year, they leave their property to their heirs with an adjusted carryover basis instead of the stepped-up basis. When the heirs sell the inherited property, they will pay capital gains tax on the difference between the future sales price for the property and the adjusted basis of the property in the hands of the decedent. This can make for quite a difference in the income tax owed by Steinbrenner’s heirs down the road.
Let’s assume that Steinbrenner’s only asset is the Yankees and it’s worth $1.15 billion. Every indication right now is that the franchise will stay in the family, but if the Steinbrenner heirs decided to sell, they’d be income taxed on the difference between the value of the team at the date of sale and the adjusted basis of $11.3 million (the $10 million Steinbrenner paid when he purchased the team in 1973 plus $1.3 million in additional basis which his executor can allocate to assets Steinbrenner owned at his death in 2010). Thus, if the heirs sold the team they would owe capital gains tax on $1,138,700,000.
If Steinbrenner had died next year, his estate would have owed estate taxes at 55%, or $632.5 million. Instead his heirs might owe $227 million in capital gains taxes (at a 20% rate).
Steinbrenner hit a home run in 2010 by avoiding the potentially huge amount of estate tax or GST tax that might have been levied on his estate, but it wasn’t a grand slam… his heirs lost the step-up in basis that they would have gotten in any other year.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorney, Inc.
6050 Santo Road, Suite 240
San Diego, CA 92124