January 4, 2019

Paul Allen’s Passing Reminds us of Key Estate Planning Preparations

The recent passing of Microsoft co-founder Paul Allen has brought the sporting public’s interest back to the realm of estate planning. The Seattle icon’s assets are estimated to be worth in excess of $26 billion, and they include the NFL’s Seattle Seahawks and the NBA’s Portland Trailblazers. There is some intrigue as to the succession plan for each franchise, and fans will watch closely as assets pass through a variety of legal hoops over the next few years (pardon the pun).

 

To keep the basketball analogy going, the clock is ticking for the executor of Mr. Allen’s estate: his sister Jody, who is also serving as Trustee of several trusts, and her team of legal and tax professionals. These men and women have nine months from the date of Mr. Allen’s death to assess the value of all of the things Mr. Allen owned – from the large, easily-valued items like Microsoft stock, down to his clothes, furniture, and personal belongings – and determine the estate tax due. Sometime next summer, this team will have to file estate tax returns (or extensions) with the IRS, with Mr. Allen’s home state of Washington, and with some states in which he owned property. Estimated estate tax payments will have to be made at this time as well – no extension is allowed on the payments.

The amount of tax due will depend largely on two factors: the reported value of assets and the deductions taken against the estate value. Mr. Allen was not married at the time of his death, so there will be no marital deduction on his estate returns. He was, however, very charitable during his lifetime. In the event Mr. Allen’s estate plan includes transfers to charitable beneficiaries, then deductions will be taken for these gifts on his estate returns. The assets “left over” after these charitable gifts will comprise the taxable estate and will be taxed at a variety of rates.

 A tight spot for many estates is that the IRS and the various state revenue offices only take payment in cash. If the team administering an estate is able to easily identify cash that can be used to pay the tax (or if there are investments or real estate that can be sold), then there is no liquidity problem. Life insurance policies can serve as a great source of funds to pay the tax bill as well. Liquidity issues arise when there is no plan to pay for the tax and the decedent’s assets are hard to value and even harder to sell. This situation arises most often when someone’s assets are primarily tied to a family business or to a particular real estate property.     

 The sporting world presents us with a historical precedent in this light that, with proper planning, Mr. Allen’s estate will likely avoid: that of Joe Robbie. Mr. Robbie went from depression-era high school dropout to becoming the first owner of the Miami Dolphins football team. Mr. Robbie had a will and a revocable trust which provided that, upon his death, income was to be paid to his wife for the rest of her life. Unfortunately, Mr. Robbie’s assets were all tied up in the football team and the stadium when he died in 1990. Both the team and the stadium were sold at fire sale prices in order to pay the estate tax and provide the spousal income.

It is far too soon to tell what sort of plan is in place for ‘Hawks and ‘Blazers fans — all we can do is sit back and watch while we hope for championship parades and regularly beating the Lakers. If you would like to be more proactive than that and want to get a plan in place for your family, we’re here to help. The Arnerich Massena team is committed to helping our clients understand the issues they are facing and then working with our clients’ legal and accounting teams to get a comprehensive plan in place.