Donald Sterling's Sale of L.A. Clippers: Taxes Cut his PaydayJune 05, 2014
A lesson in how income, gift and estate tax planning can impact Donald Sterling and his heirs.
It looks like Donald Sterling will be selling the Los Angeles Clippers for $2 billion. He bought the Clippers back in 1981 for $12.5 million. That’s a cool $1,987,500,000 gain (15.5% annual rate of return over the past 33 years). Nice investment, but poor tax planning…
SELLING BEFORE DEATH
As of right now, Sterling will be charged a capital gains tax, Medicare surtax and California taxes on the gain totaling $737,362,500 as illustrated below.
|Tax||Percentage||Calculated tax dollars|
|Long term capital gains rates||20%||$397,500,000|
|California taxes on the gain||13.3%||$264,337,500|
The Medicare surtax does not apply to non-passive business assets, but the NBA gave Sterling a lifetime ban. The IRS will likely contend that he couldn't meet the 500 hours per year management-related activities test if he was banned from all operations. A 2 billion dollar sale would leave Sterling with $1,262,637,500.
But Donald Sterling is 80 years old and recently declared mentally incapacitated by neurologists. Putting aside the fact that the NBA was trying to force Sterling to sell his franchise, he would have been far better off holding the team until he died. As it stands now, after applying the estate tax exclusion amount, the estate tax on the $1,262,637,500 comes in at $502,919,000, leaving Donald’s heirs with $759,718,500 as illustrated below. ($1,240,281,500 paid in combined income and estate taxes!).
|Sale Amount – Tax Bill||$2,000,000,000 - $737,362,500|
|Estate tax exclusion amount||$5,340,000|
|Estate tax on the $1,257,297,500||$502,919,000|
|Amount left to Heirs||$759,718,500|
SELLING AFTER DEATH
Had the sale occur after his death, his estate would have paid $797,864,000 in estate taxes, no taxes on the sale of the team (the franchise would have received a step up in basis to the fair market value at death), and the heirs would have been left with $1,202,136,000. That’s $442,417,500 more than selling before his death! (Illustrated below).
|Sale Amount – Tax Bill||$2,000,000,000 - $0|
|Estate tax on the $1,994,660,000||$797,864,000|
|Amount left to Heirs||$1,202,136,000|
|Amount gained by waiting until after death to sell franchise||$442,417,500|
BEST OPTIONS FOR SELLING NOW
So, what should Donald Sterling do now to mitigate this tax nightmare? Make a huge gift to his heirs and pay gift taxes now of course! If he waits until he dies to give the money away, the whole $1,262,637,500 is included in his estate, and the heirs only receive their share after Uncle Sam collects his 40%.
|Gift Amount to Heirs||$903,409,643 (net of gift exclusion amount)|
|Bequest Amount at death||$759,718,500|
|Gain for Heirs if he gifts now||$143,691,143|
The illustration above demonstrates my point. If Donald gifts $903,409,643 to the donees today, net of the gift tax exclusion amount, he will pay $359,227,857 in gift taxes ($903,409,643 + $359,227,857 = $1,262,637,500, the amount soon to be sitting in his checking account). Now the heirs end up with $903,409,643, as opposed to the $759,718,500 if he waits until death ($143,691,143 more to the heirs).
It’s really tough to get an individual to pay gift taxes while they are alive, but as you can see from this example, if the numbers are really big the tax impact and net amount to the heirs can be quite drastic.