Steinbrenner's death raises estate tax issue - Investment News

There have been lots of articles in the press today about the death of George Steinbrenner.

One of the pieces called him the best-known owner in professional sports, which I think is probably true (BTW: the portrayals of Steinbrenner in Seinfeld were always funny).

Since I am in the investment management business, I naturally was interested in some of the investment and estate planning issues raised in Steinbrenner's passing.

Although I doubt he planned it that way, Steinbrenner picked a good year to die from an estate tax standpoint, as the attached article from the Investment News points out:

The late New York Yankee owner, who died on Tuesday of a heart attack, left an estate estimated to be worth $1.15 billion, consisting primarily of his share of the Yankees' YES broadcasting network, according to Forbes. But in all likelihood, the tax man will take the collar on this one — and won't get a penny from the Boss' estate.

Indeed, Mr. Steinbrenner's family looks set to inherit his estate practically tax-free, thanks to the expiration of the federal estate tax in 2010 and the light tax regime of the Boss's home state, Florida. By comparison, New York state has a 16% estate tax.

“It is the ultimate home run,” Ronald Aucutt, a partner at law firm McGuireWoods in McLean, Va., told Bloomberg.

Steinbrenner's death raises estate tax issue - Investment News

A number of the articles have focused on the fact that Steinbrenner bought the Yankees in 1973 for $10 million, and today the Yankees are estimated to be worth $1.6 billion. So I pulled out my calculator, and figured this was a compound return of 14.7%.

http://www.nytimes.com/2010/07/14/sports/baseball/14steinbrenner.html

As it turns out, any way you look at it, the Yankees were a great investment, assuming they will be selling.

That said, according to the articles, while the Steinbrenner family has no plans to sell, it is not really clear who would actually pay that type of money for the Yankees. True, they are on the top of the Majors, but they also have the highest payroll in the league, and highest costs.

If the Yankees falter (we can only hope, says Red Sox nation!), attendance would surely decline (see: New York Mets). In other words, buying the Yankees today is like buying a high P/E stock - there's already a lot of "good news" priced in.

While it is true that the Steinbrenner family is largely avoiding estate taxes, the family also does not get the step-up in basis that previously heirs received at time of death. As you recall, when Congress put the "sunset" provision in the capital gains bill in 2001, they eliminated the step-up in basis at time of death in 2010.

If the Steinbrenners were to sell, they would pay long-term capital gains tax of at least 15% (at the federal level), or about $240 million.

Finally, there is the interesting question of how Steinbrenner's return on his Yankee investment would compare to other investments over the same time period.

For the purposes of this analysis I have ignored taxes simply because it makes the calculations way too complex (e.g. dividend tax rates have changed numerous times over the last 37 years, as have capital gains rates).

So, assuming that Steinbrenner's syndicate took the same $10 million that they invested in the of the Yankees in 1973 and invested in other assets, here's what the total return would have been:

• Even after the "lost decade" of 0% returns for the last 10 years, the S&P 500 have returned a compound return of 10.1% since 1973. This means the $10 million would have been worth approximately $350 million;

• Of course, if George had been smart enough to recognize that the stock market was in a bubble in 1999, and sold all of the stocks and reinvested in bonds, he would have received $383 million in 1999 which would today would be worth $705 million;

• $10 million in Treasury Bills starting in 1973 would have returned 5.5% pa , and be worth $72 million today;

• $10 million in Treasury Bonds starting in 1973 would have returned 7.5% pa, and be worth about $150 million.

So the Yankee investment was a "grand slam" for the Steinbrenners compared to other alternatives.

One more interesting point: I was surprised to see how much the additional 4% in total annual return from the Yankee investment relative to stocks added to the ending amount of money. That is, the difference between 14.7% pa and 10.1% pa may not seem too much, but over the course of 37 years it is huge - in this case, more than $1 billion more.