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Estate Planning and Tax: The Late Jerry Buss Shows the Value of an Estate Plan

This week in February, 2013, the legendary Jerry Buss lost his battle with cancer. Sports fans, like myself, view Dr. Buss’s accomplishments unmatched in the sports world. For the uniformed, Dr. Buss owned several sports franchises in Los Angeles, most notably the L.A. Lakers of the NBA. During his tenure, Dr. Buss maintained high profile superstars in Los Angeles such as Kareem Abdul-Jabbar, Magic Johnson, Shaquille O’Neal, and Kobe Bryant. Further, his prized Lakers won an unfathomable 10 NBA Championships since his purchase of the franchise in 1979 for a then-record $67.5 million.

As a sports fan and a Laker fan, Dr. Buss will be sorely missed. However, as an estate planning professional, Dr. Buss has continued to teach us lessons even from the grave.

By way of background for the uninformed, talks of the fiscal cliff and the expiration of the estate tax exemptions and estate tax rates dominated the tax community at the end of 2012. Many estate tax professionals anticipated the estate tax exemption to be reduced from $5 million down to $1 million or $3 million at the absolute max. In addition, many estate planners believed the estate tax rate would increase from 35% back to the high 55% tax rates. In preparation for this dramatic change, many Americans worth more than $1 million frantically acted to take advantage of the gift tax to get their estates below the believed $1 million or $3 million threshold.

At the last minute, Congress finally acted by enacting the American Tax Relief Act of 2012 on January 2, 2013. From an estate planning perspective, the new Tax Act “permanently” left the exemption amount at $5 million ($5.25 million with inflation adjustments) and only increased the rate to $40 million. This means that a person could transfer assets worth $5.25 million ($10.5 million if married using portability) upon death (or during life via a gift) free of tax. It also means that if a person passed with assets in excess of the $5 or $10 million threshold, then the transfers would be taxed at a 40% marginal rate.

While this was great news for the general population, it was bad news for the estate planning professional. As one could expect, many more Americans pass with an estate worth $1 or even $3 million than do with an estate worth in excess of $10.5 million. In fact, most statistics show that the estate tax only affects less than half of a percent of all estates. In short, the recent Tax Act of 2012 has forced many estate planners and professionals to change and even reevaluate their practices. However, estate planning and tax professionals who think this way are missing the boat.

It is true that most estates or family businesses are not worth $1 billion the Buss family businesses are allegedly worth. However, the tax side is merely one aspect to a formidable estate plan. For years, Dr. Buss entrusted his children to manage business affairs and one can only assume that following his passing, his children will continue to manage the affairs of the family business. Even if there is not a family member or a responsible family member to manage the affairs of a family business, a business owner should plan for the worst whether the business is small or large.

For massive estates, like the Buss family, further steps should be taken to avoid large estate tax bills. In the case of closely-held businesses, owners should make sure there enough liquid assets to pay any taxes that may become due upon an unexpected tragedy. Many business owners set up trusts or purchase life insurance policies to cover tax burdens. Without a proper plan in place, the family may be forced to sell a business to cover estate taxes.

Regardless of the size of the business, large or small, Dr. Buss’s passing reminds us that it is critical for a family business to always look to the future. Do you or your client’s family business have an updated estate plan in place? If Jerry Buss can take the time to plan for the future so can you.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone listed on this page.