In today's Marketwatch article, author Bill Bischoff looks at the tax implications of the forced sale of the LA Clippers to Steve Ballmer for $2 billion. While the actions leading up to the event have gotten all of the notoriety, as well as the legal wranglings that are sure to follow once the sale is pushed through. What really intrigues me is whether or not this capital asset sale could have, or should have, been the biggest structured sale of real property in recent history.
As Bischoff points out in excellent detail, the capital gains tax on the sale of the team is going to be almost exactly 33% of the net proceeds due to federal and California state tax rates currently in effect, or a net tax bill of $662 million. Plus, as he goes on to further state, it does not take into account the estate tax when both he and his wife eventually pass away, which takes another 40% on the remainder of the funds.
While obviously no one is feeling sorry for Mr or Mrs Sterling, at least not regarding their financial condition now and in the future, it does raise an intriguing question on the structured sale of real assets and the kind of tax savings he could realize if he had the time to put this in place. For those of you wondering what a structured sale is, just think of a standard installment sale of property, in this case his team, paid out to him over a period of years, with the tax on the gain only being due in the year that he receives the funds. ( Disclaimer, my firm, Wahlstrom & Associates does a great deal of work extensively in this arena.)
For example, what if Sterling made a condition of sale that he was to be paid by installments, to be secured by a structured sale of the proceeds, with payments to stretch out over 15 years, the assumed joint life expectancy of himself and his wife. While Ballmer would own the team and make his immediate investment of $2 billion, the net impact to Sterling would be that he would only be taxed on $135 million of gain each year not the total $2 billion sales price. While the taxes are still calculated at the same rate of 33%, he would be paying out "only" something in the area of $45 million in taxes annually on the sale. A far cry from the $662 million number. Big deal, you say? Sterling still pays the same net amount in taxes, but he just pays it in yearly amounts, plus he doesn't have his net proceeds of $1.3 billion to invest..
However, keep in mind that in a structured sale your total proceeds are invested at what usually amounts to as AA+ bond yields, in this case about 3.5% each year on the TOTAL sale price of $2 billion. What this means is that in addition to the $135 million annual gain distribution which is taxed at capital gains rates, he would also be paid, depending on how it was structured, taxable income of $50 million or so on top of his other distribution as well. Still not a big deal?
Ok, how about if during that 15 year payout, Mr or Mrs. Sterling decided to move to Nevada? Would he still owe a capital gains tax on his income once he was an established resident in his new state? Interesting question, right? Would that mean the 13% California state tax would no longer apply, or would they sue in court to claw back taxes "earned" in California?
Or, let's just assume during that time there is a big political change and that capital gains taxes are cut or reduced on either the state or federal level. In that situation he would only pay taxes in the year in which he received payments. What if the rate went back to 15% Federal and 10% California? The potential savings per year could be $11 million per year and easily total up to over $100 million over time.
My point is that many people, not just the Donald Sterling's of the world, are totally ignoring the potential tax savings and planning power of structured sales of real estate and real assets, such as a basketball team. At what point will tax and investment professionals realize this tool is ready and available, but they just need to put it to work. I will be doing a follow up video interview later this week with noted Tax Law Channel expert Attorney Rob Wood, so watch for that and start to educate yourself on this dynamic planning tool. You may not have $2 billion to structure out, but if you live in a high capital gains state you might want to start looking at this as a viable tool for your planning.
Mark Wahlstrom is the lead commentator for The Settlement Channel and one of the nations leading experts on structured settlements, structured sales and structured legal fees. You can learn more about his firm at Wahlstrom & Associates.