Now, I've never met the man, and I do not know the man's business nor do I know much about the man's personal wealth other than what is in the public domain, but something really bugs me about the reason he is giving for wanting to sell the team. Frankly, I think it is a public relations snowjob - and here's why:
1) Drayton McLane has been trying to sell the team for years, unsuccessfully. He had a deal fall through just a few years ago because the buyer, Jim Crane, was concerned about the economy.
2) There may be a very large estate tax when the SURVIVOR of Drayton and his wife, Elizabeth, dies - but there will be a large capital gains as soon as he sells the team. Moreover, the Drayton family will still have a super large taxable estate. So let's talk taxes:
- Let's say the McLanes are worth about $1.5 Billion. and the Astros make up about $450 million of that. If they were both to pass in 2012, and the estate tax law reverts to pre-2001 levels, they would owe an estate tax of about $825 million assuming nothing goes to charity. (Incidentally, I believe that they would donate substantial sums to charity.)
- Now let's say Drayton McLane sells the team for $450 million and pays a $70 million capital gains tax (because he bought the franchise for about $100 million and there is a 20% capital gains tax in 2011). The McLanes would then have an estate worth $1.43 Billion. If they were both to pass in 2012, then the estate tax would be $786.5 million - a savings of $38.5 Million. However, because of the payment of the capital gains tax, there is a net loss of $31.5 million in taxes.
- If the McLanes wait until Drayton passes before selling his interest in the Astros, it will receive a step-up in basis. This means that there will not be any capital gains tax due because the team will receive a basis equal to the fair market value on Drayton's death.
- One might argue that if Drayton McLane does not sell the team while he is alive, his estate must sell it in a firesale to raise capital to pay the taxman. This argument really only works if Drayton and Elizabeth die in the same year because if they were working with even a semi-competent estate planning attorney, they could guarantee the tax gets postponed until the second to die.
- Well - what if they did both die within the next two years, then there would be a firesale and they wouldn't receive as much for the team. This may be true, but would that firesale cost them $38.5 million PLUS the time value of the interest? Probably not.
There are many reasons to sell an asset like a baseball team, but estate planning should not be one of them - except to the extent that the McLanes wish to simplify their life and have come to the realization that their children do not wish to be in the family business.
So why does the MLB article upset me so? Mainly because of the implication that he's selling off the team to avoid the estate tax and for the reasons stated above, I think that would be a bad decision. Since I believe Mr. McLane is a smart man who doesn't make many bad decisions, I think he's selling the team for personal and business reasons - not estate planning reasons.