LeBron James Team Selection for Tax Purposes Revisited

I blog because I enjoy talking to people about things that interest me - including how how tax policy drives individual behavior (everyone has to have their passions after all).  The best feedback is to get a dialog from another person who not only reads the blog (thank you very much) but is generous enough with their time to respond to a post with their own analysis.  Such a compliment happened recently on my post "Playing the State Income Tax Game". Gregory A. Viggiano, Senior Director of Taxes, Corporate Finance, at Maersk Inc. in Madison was kind enough to send me some thoughts about points that I overlooked in my "35,000 view" of the issues raised. 

I came across your blog while surfing the net and found it very interesting.

I did have one comment on the post of August 10 on the state income tax considerations LeBron James might have had in choosing the Miami Heat over NBA teams. You mention (or quote another blog) that LeBron's state income tax bill will be "zero, nothing, nada," as a result of this choice.

Perhaps you did not want to confuse your readership, but while LeBron will reap considerable state income tax benefits from living and playing in Miami, he will not entirely escape state income tax since the other states with income taxes in which he plays will tax him. Since half of his games and all or most of his practice time will be in Florida, this means that the majority of LeBron's salary will not be taxed, but a substantial portion will. Of course, he will save a lot more money when endorsements, which can dwarf the salary of a superstar like LeBron, are considered as well.

Moreover, I thought the tax figure for New York was low. You mention that it is only for New York State income tax, but you must be aware that New York City imposes its own hefty income tax that, in combination with the state levy, give the total for New Jersey a run for its money.

Greg, you are correct on all points.  A key point relevant even for non-superstar basketball players is that when you earn money in another state, those earnings are subject to the tax laws of other states.  And if that money is earned in New York City, the income taxes are even higher.

Thank you for the feedback!

Forget the Estate Tax - What about the Medicaid Death Tax

The estate tax, even at a $1 million exemption amount, applies to only 2% of Americans at death.  Medicaid estate recovery can apply to anyone over the age of 55.  Jeffrey A. Marshall, CELA* at Marshall Elder & Estate Planning Blog has a great post today "Medicaid Estate Recovery - A Medicaid Death Tax" asking why there is so much noise and media coverage about the estate tax when Medicaid estate recovery rules essentially act as a death tax on the poorest of seniors.

His central arguments:

  • Medicaid, not Medicare, is the biggest government source of payment for long term care.
  • In a curious exercise of age discrimination, the [estate]  recovery program only applies to people who are over age 55.
  • Because most assets must be spent before a senior becomes eligible for Medicaid, recovery efforts focus on real estate – mainly the home or family farm.
  • In some cases, the fear of losing their home or farm to estate recovery deters seniors from getting the care they may desperately need.

Jeff also gives a great example of how Medicaid estate recovery works.

What really struck me is that I had never really considered before is that estate recovery doesn't apply to everyone - just recipients over 55.  While the state certainly needs to balance the care it offers with payment for that care, why is it only that seniors have to give up their homes to get the care they need?

 Image: jscreationzs / FreeDigitalPhotos.net

Death,Taxes and the NFL - Does Your Business have a Plan for the Final Exit from the Field?

If you or your family owns a business, you've heard from many advisors "You need to have an exit strategy".  Now, this normally refers to cashing out of your business by selling to an employee, bringing on a family member, merging with another company, or selling out of the business. But what if the exit strategy you need to be creating is to plan for when you leave this earth altogether?  As Julie Garber points out today at Julie's Will & Estate Planning Blog, taxes at the death of the owner can kill a business; but with advanced planning, this does not need to be the situation.

Case in point, Julie refers to a story that at least "one NFL franchise is going to be shopped around beginning this month because the owner is working on his estate plan and is looking to sell a 30% interest in the team."  This makes sense.  Sports franchises are worth millions, and sometime billions (Forbes.com lists all NFL franchises by value here - the Cowboys top the ranks at 1.8 Billion, the Giants are 4th at $1.2 billion, and the Eagles are 7th at $1.1 billion - a value that certainly did not show up on the field at their home opener on Sunday). 

Why look to plan now?  Well, with the estate tax scheduled to return next year with a top tax rate of 55%, a failure to plan could result in that NFL franchise needing to be sold to raise money for taxes.  While this is a failure to plan scenario, but that isn't going to mollify the fans who already need to pay $160 a ticket if you are a Cowboys fan to see your team (thus demonstrating the incomprehensibleness of being a Cowboys fan in the first place to those of us in the northeast).

Your business may not be on quite the scale as an NFL franchise (the Jaguars as the least valuable franchise in the NFL still comes in at a healthy $725 million) but a failure to plan an exit strategy that includes an analysis of how estate taxes might effect your business could put your business out of the game for good.

Considering Becoming a Florida Resident? Cut those Ties to New Jersey

Truth - New Jersey is the most expensive state to die in.  Consequence - A great estate planning technique is to not be a New Jersey resident when you die.  

Many people have second homes in Florida and say "well, I'll just become a Florida resident." While this is a great idea, it is not always so simple to carry out.  Guest blogger Steven A. Loeb, Esq. points out below that there are threshold requirements to becoming a Florida resident.  If you don't carefully meet the Florida requirements, and you continue to maintain a presence here in New Jersey (ie: you still have a home here) then you run the risk of New Jersey claiming you are still a resident of the lovely garden state, and thus subject to its tax scheme upon death.  New Jersey has an state estate tax with a $675,000 threshold, Florida has no estate tax - so getting Florida residency right has real bottom dollar consequences.

In today's legal environment, the question of an individual's state of residency can be quite important in determining tax implications, both while the individual is alive and upon their death. Each state where an individual resided and owned property upon his/her date of death will make its own determination regarding the decedent's domicile (i.e. a legal term having a meaning of residing in that state with an intent to remain indefinitely).

Often, an individual wishes to relocate to Florida in order to take advantage of many of the tax favorable statutes in that state. However, many times problems arise when the relocated individual maintains significant contacts with the former state, which creates doubts as to whether residency was changed to Florida.

There are several steps you can take to clarify that you have in fact become a Florida resident in case a tax return is audited by your former state claiming that the state of residency was not changed and there is an attempt to subject the entire estate to tax in the former state.

Steps in Becoming a Florida Resident

1) File a Declaration of Domicile in the Town Clerk's office in the county of residence;
2) Register to vote in Florida and actually take the time to vote in elections;
3) Be physically present in the state of Florida on average for 8 months out of each year (at least 6 months and 1 day);
4) Change your primary care physician and all additional physicians to the state of Florida;
5) Have all prescriptions transferred to a pharmacy in the state of Florida;
6) Register your car in Florida and obtain a Florida driver's license. and notify your insurance carrier that you are now a Florida resident;
7) File Income Tax Returns as a Florida resident;
8) Purchase or rent a house or condominium in Florida and actually move into that location;
9) Transfer primary bank accounts to a Florida bank: and
10) Draft a Last Will and Testament, Power of Attorney. and Living Will/Health Care Directive stating that you are in fact a Florida resident.

These are just some of the necessary action items to consider when relocating to Florida. In order for the taxing authority of your state to not challenge your domicile/residence either during your lifetime and upon your death, it is important to consider the above information when relocating, as well as to get professional advise about your personal circumstances.

Deirdre's note - A great blog about Florida Law issues can be found at South Florida Estate Planning Law authored by my colleague David Shulman.


5 Reasons to Think About Making Gifts in 2010

I came across this great summary of 5 reasons to consider making gifts in 2010 by Marilyn J. Maag through Lexis Nexis Estate Practice & Elder Law Community (I follow them on Twitter).

  1. Changes in tax rates - the gift tax rate is scheduled to go up from 35% to 60% in 2011 unless Congress acts
  2. Low asset values - particularly for real estate and family businesses
  3. Low applicable federal interest rates - make techniques such as Grantor Retained Annuity Trusts (GRAT) more successful
  4. Restrictions on Intra-Family Transfers - may become law next year
  5. Valuation Discounts - may be going away

Image: Francesco Marino / FreeDigitalPhotos.net

Tax Benefits Stay with Life Estate Owner

Will your taxes change if you make a gift of real estate subject to a life estate over a straight gift of real estate? Guest blogger  Stacey Crowell Maiden, Esq., Of Counsel to our Trusts and Estates and Elder Law Practice Group provides an explanation of this common, but non-intuitive planning technique.

In our estate planning and elder law practice, we sometimes incorporate the use of a “Life Estate Deed” to transfer real property.. Under a Life Estate Deed, the “life tenant” retains 100% of the present interest of the property. The future interest (which is defined as the full interest after your death) would be transferred to the “remainder persons.” When retaining a Life Estate in the property, you are not transferring or giving the entire interest in the property away. Instead, the remainder persons are given today the right to own the property after you pass away.

The life tenant is responsible for the payment of real estate taxes on the property. However, the Municipal Tax Office - on receiving a copy of the recorded Life Estate Deed from the County Clerk – will update its records, listing the remainder persons as the owners, which means the tax bills are then sent in the names of the remainder persons. This can be a source of confusion and concern for our clients, particularly as to whether they will lose any tax benefits related to ownership.

Guidance is found in the Internal Revenue Code and Regulations, New Jersey Statutes and the New Jersey Administrative Code to assure our clients that as life tenants, they continue to receive certain tax benefits provided to owners in New Jersey.

For example, life tenants retain the Income Tax Deduction for Real Estate Taxes. As the owner of the property by virtue of the life estate, a life tenant may continue to deduct the real estate taxes he pays on his federal income tax return. (I.R.C. §164(a); Reg. §1.164-1(a).

And, by reserving a Life Estate and paying the real estate taxes, the life tenant is entitled to continue to receive the New Jersey Homestead/New Jersey Saver Rebate (N.J.S.A. 54:4-8.58; 54:4-8.58a; 54:8.59); the Senior Citizen's Deduction (N.J.A.C. 18:14-1.1 and N.J.A.C. 18:14-2.8); and the Veteran's Deduction (N.J.A.C. 18:27-2.10).

Of course, there are other potential taxes (e.g. capital gains taxes) to be concerned with when transferring property pursuant to a Life Estate Deed, but the above tax benefits related to present ownership of the property remain in place for a life tenant who pays the real estate taxes.

Image: Simon Howden / FreeDigitalPhotos.net