Drayton McLane Theoretically Selling Astros Because of Estate Planning Issues?

I've read a few articles on the internet lately, including this one at MLB.com, which report that Drayton McLane, owner of the Houston Astros, is selling the team for "Estate Planning Reasons".

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.

3) There is a throwaway line at the end of the MLB article which reports that Drayton's children "never entertained taking over the club." To me, this is far more important than any tax planning reason they could have for selling the team. If the children wanted the business, Drayton and his attorneys could easily have found a way. Most likely he would have borrowed heavily against the team to reduce its value, transferred it in a part sale-part gift transaction, and then used the liquidity to pay any taxes.

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.

Passing of a Legend - George Steinbrenner

Regardless of whether you are a Yankees fan or not, we should all pause for a moment to reflect on the valuable contributions that Mr. Steinbrenner has give to baseball. He was a great promoter who heavily invested in his team. He single handedly reshaped the way owners thought about free agency and owning their own television rights. And, perhaps most importantly for other owners, he helped steer baseball into its greatest era of profitability.

George Steinbrenner, and minority partner E. Michael Burke, bought the New York Yankees (and some parking garages) from CBS in January of 1973 for $10 million. In 2009, the Yankees were valued at $1.5 billion by Forbes magazine. I am uncertain as to how much of the franchise Mr. Steinbrenner owned at his death, but according to the Forbes 400, he was worth $1.15 billion in 2009.

It is interesting to note that the Yankees franchise itself is very heavily leveraged, and that most of his wealth is tied up in the YES Network. I'm sure that this was done on purpose so that the franchise could be passed on to his children more easily.

It is a bit gruesome to think about, but by George - he passed away in the correct year as far as taxes go. This year, there is no federal estate tax (unless Congress tries to enact a retroactive tax). Moreover, since Mr. Steinbrenner passed away while he was domiciled in Florida, his estate does not owe a state Estate tax either.

What does this mean? Well - in almost any other year his estate would owe the federal government upwards of $500 million in estate taxes. Instead, his heirs merely have to pay a modified capital gains tax when and if they sell George's assets.

Proper estate planning is important, but sometimes it helps to be lucky too.