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Wealthy avoid taxes by moving
assets to no-tax states including
BY RICHARD RUBIN, JESSE DRUCKER AND ZACHARY R. MIDER
Bloomberg NewsDecember 18, 2013
WASHINGTON -- Wealthy Americans looking to avoid state income taxes are moving billions of dollars in assets to trusts in no-tax states such as Delaware, Nevada and Alaska.
The maneuvers are getting fresh scrutiny from officials in states including New York, which is losing an estimated $150 million a year through such tax avoidance. As fewer Americans pay the estate tax and top earners in New York and California owe more state income taxes, wealth planners say their clients are looking for new ways to escape those levies.
The asset shifts mirror steps corporations such as Google have taken across national borders to lower the taxes they pay. Within the U.S., some individuals who want to sell companies that they built move shares from home states to out- of-state trusts so the gains won't be subject to state income taxes.
"I can't sit with a client who has a substantial portfolio or is contemplating selling his business without putting the strategy on the table," said William Lipkind, a New Jersey lawyer who said he's been involved in 20 to 25 such transactions in the past year.
Lipkind said he's moved as little as $700,000 and as much as $500 million. "You scratch your head and say, 'Why pay if we don't have to?' "
States including Delaware and Nevada have waged a decades- long fight for wealthy Americans' trusts, competing to write laws that make it easier to pass property across generations and protect assets from creditors. Nevada has no state income tax and Delaware's tax doesn't apply to out-of-state beneficiaries.
"The way that states go about taxing trusts is, shall we say, all over the map," said Dick Nenno, managing director and trust counsel at Wilmington Trust, a Delaware-based subsidiary of M&T Bank Corp. "And that creates some real planning opportunities."
Using a Delaware Incomplete Non-Grantor Trust, or DING, wealthy residents of high-tax states take advantage of vague or conflicting definitions in state and federal laws. They can move assets just far enough out of their control so they aren't liable for state income taxes without moving them far enough to trigger a 40 percent gift tax.
Because the trusts are private, there is no comprehensive data on how much money has moved across state borders in recent years or how much revenue the high-tax states are losing. Nevada figures show that trusts there hold $18 billion in assets, up from $8 billion in 2008.
Some high-tax states, such as New York, are seeking ways to stem the flow of money. A state tax commission, led by former Democratic Comptroller Carl McCall and investment banker Peter Solomon, last month recommended laws to limit the use of out-of- state trusts.
The New York Department of Taxation and Finance estimates that the proposed change would generate $150 million a year, or about a 0.4 percent increase in personal income tax collections. Those figures suggest annual income in out-of-state trusts of more than $1 billion and assets much bigger than that.
The use of out-of-state trusts isn't a new strategy, especially for estate planning and asset protection. What's changed in recent years is that wealth planners have become more focused on state income taxes.
"The state income taxes have become a huge issue," said Lisa Featherngill, managing director of planning at Abbot Downing, the wealth-management subsidiary of Wells Fargo & Co.
Congress significantly narrowed the federal estate tax, making the per-person exemption higher, permanent and linked to inflation. Those changes make some more eager to minimize annual state taxes than focus on one-time estate tax savings.
The $5.34 million exemption in place for 2014 means that 1 in 726 people in the U.S. who die will owe federal estate taxes, compared with the 1 in 390 that would have paid taxes if Congress had set the exemption at $3.5 million, according to the nonpartisan Tax Policy Center in Washington.
At the same time, marginal state income tax rates have risen, particularly for top earners. For 2013, California applies a 13.3 percent tax rate on taxable income exceeding $1 million. The top state-and-local combined rate in New York City this year is 12.7 percent for income exceeding $1 million for individuals and $2.1 million for married couples.
Also, the federal government blessed the maneuvers in a ruling requested for a client by Lipkind, an attorney at Lampf, Lipkind, Prupis & Petigrow, P.C. in West Orange, N.J. The private letter ruling, released this year, ended a six-year hiatus on such decisions and ratified the Nevada counterpart of the DING, known as a NING.
"The only purpose of setting up these trusts, near as far as we can tell, is avoiding state tax," said James Wetzler, a former New York state tax commissioner and a member of the state's tax commission who criticizes the IRS. "I'm literally at a loss to understand why they would issue these rulings."
That IRS ruling for a man with four sons, none of whom were named publicly, "resurrected this transaction from the ashes," said Charles "Clary" Redd, a partner at Stinson Morrison Hecker LLP in St. Louis.
Steve Oshins, an attorney at Oshins & Associates LLC in Las Vegas, said he has moved billions of dollars in assets to Nevada, including some through NING trusts.
The DING and NING strategies illustrate how tax lawyers can exploit gaps in state and federal laws.
Trusts created by people before death typically come in two forms, grantor trusts and non-grantor trusts.
The income generated by grantor trusts that isn't distributed to beneficiaries is typically considered taxable income to the person who put the assets into the trust. The initial contribution of assets is, in many cases, considered a gift for estate tax purposes.
For example, records released during the 2012 presidential campaign showed that Mitt Romney used a grantor trust to pass wealth to his children, moving some assets before they rose in value and paying annual income taxes on trust earnings as a way of making an additional tax-free gift.
A non-grantor trust works the other way. The trust pays income taxes on any gains, with the top federal income tax bracket of 39.6 percent starting at $12,150 of income in 2014.
The NING and DING are hybrids, structured so the individual retains enough control to avoid gift tax and cedes enough control to avoid income tax.
"That's like threading a needle being able to get both of those things at once," Redd said.
The gift is considered incomplete, meaning that it hasn't fully passed to heirs and isn't subject to the U.S. gift tax. That's because the person establishing the trust retains some ability to decide who gets how much money.
In the IRS ruling involving Lipkind's client, the man with four sons has the sole power to use the money for the health, education or support of his children.
For income tax purposes, however, the trust is considered a non-grantor trust and pays its own taxes on undistributed income. That's because the person establishing the trust gives up the ability to get money back from it without the agreement of a committee of family members.
The crucial fact is that the income tax liability belongs to the trust, not the individual.
That's where state law comes in.
Nevada has no state income tax and Delaware doesn't tax trusts unless the beneficiaries live in the state. New York's tax law can't touch the trusts if the trustees, tangible property and real estate are out of state and they receive no New York-sourced income.
The DING and NING don't necessarily resolve estate planning challenges, because the money remains in the wealthy person's estate. In the meantime, though, it can save significant state income taxes.
People considering these transactions have to weigh the potential federal tax costs of having the trust receive income instead of sending it to beneficiaries who may pay lower marginal tax rates. There are other limits, including taxes for residents of Connecticut and some other states, the loss of complete control over the assets and restrictions on how soon the assets can be sold after they're transferred to the trust.
A study by two law professors examining data through 2003 found that about $100 billion had moved to states with the most generous laws for passing assets to heirs. States with an income tax on trust earnings didn't see a significant increase in funds after changing other trust laws, the study found.
States such as Delaware, South Dakota, Nevada, and Alaska have become hubs for lawyers specializing in trusts and estates.
"It's lobbying by local bankers and lawyers who are trying to attract business," said Robert Sitkoff, a Harvard Law School professor and co-author of the study. "The initial payoff for the legislators is you've made happy an interest group, with all that entails."
After that, he said, even without taxing the assets, the states have set up a "clean industry" of lawyers and related offices and the indirect revenues they bring, with few if any costs to the states.
Those lawyers and bankers then lure out-of-staters. Nenno sells Delaware's century of trust-friendly law -- and lack of income taxes on non-residents.
A New York City resident with $1 million in capital gains would face a home-state bill topping $100,000, he said.
"If the trust is set up in Delaware, you avoid that $100,000-plus tax altogether," Nenno said. "Perfectly legal."
MLB's 2013 revenue exceeds $8 billion
Nathan Aderhold, SBNation
Posted: Tuesday, December 17, 2013, 5:56 PM
Baseball is swimming in money right now.
Major League Baseball's revenues have reached new record highs in spite of stagnant attendance rates. The league's gross revenues will exceed $8 billion in 2013, largely thanks to the continued growth of television deals, reports Maury Brown of Forbes.
The exact revenue figure is unknown, but it's expected to fall between $8-$8.5 billion. It marks a considerable increase over the roughly $7.5 billion the league pulled in revenues in 2012 and, per Brown, is a staggering 264 percent increase from the inflation-adjusted $2.2 billion the league pulled in 1995.
The 2013 figure marks the first time ever that MLB has exceeded $8 billion in revenue, but it's unlikely to be the last. The league's new national television deals with ESPN, TBS, and Fox go into effect in 2014, which will add nearly $800 million to yearly revenue over the next eight seasons.
While the new TV deals and the serious uptick in revenue has had some effect on the open market this winter--how else does one explain Boone Logan getting a three-year, $16.5 million deal--it will likely take a while before all that extra money is syphoned into player payroll. The current collective bargaining agreement does not expire until after the 2016 season, so significant increases to things like the league minimum or the luxury tax threshold are unlikely to occur before revenues have reached well north of $9 billion.
Read more at http://www.philly.com/philly/sports/sixers/SBNation_20131217_MLB_s_2013_revenue_exceeds__8_billion.html#VBzfe4ysyc8Sjjzy.99
What would Andrew McCutchen get if he were a free agent next year?
As in, Player X used to be a shining star and he signed a big contract, but now he's sorta sketchy and not worth that much now, so what kind of contract would he get now? Those were the players who would be the subjects of the what-would-they-get series. Ryan Braun was an installment. So were Albert Pujols and Josh Hamilton. You get the idea.
This subject is a wee bit different. It's hard to explain him without seeming overly sentimental, fawning, or restraining ordery. He's baseball. Andrew McCutchen is baseball. Like, at the end of the after-school cartoon, when he builds a new ballpark for orphans using twigs and magic breath, right as he's leaving, someone says "Don't you realize who that was? That was Baseball, man. It was him." It would be the Miracle on 34th Streettwist. And I'd watch the movie 78 times.
McCutchen looks like the baseball players I was too young to watch. Carl Yastrzemski was 5'11", 175 pounds. Willie Mays was listed at 5'10", 175. Hank Aaron was 6'0", 180. McCutchen is 5'10", 190. He's vintage without being old. He's a walking reminder that physics works in mysterious, explainable ways, and that baseball players don't have to look like Zangief to be excellent, well-rounded hitters. As a little feller myself, I appreciate that. I'd give him $300 million for that alone.
I don't have $300 million. But teams around baseball do, and they'd love to shovel it McCutchen's way. They would absolutely relish the chance to make him the highest-paid player in baseball. He's 27, and he's the reigning MVP. He would have been a free agent after this year if the Pirates didn't sign him to an extension before the 2012 season, too. As is, here's the contract he signed:
Now, don't weep for McCutchen just yet. He'll come out of this contract the same age as Jacoby Ellsbury is now, so he'll get that nine-figure deal, yet. And if the worst-case scenario happens, if McCutchen plays Grady Sizemore in a critically loathed off-Broadway play, he can still buy an Xbox One and Skittles in bulk. He's probably okay.
Let's take a moment to think about what McCutchen almost was, though. It's rare to see a premium free agent hit the market a few years before he's 30. Everyone gives the original A-Rod deal guff, but there's a reason it was so massive. Rodriguez wasn't much older than Mike Trout, but he was a Mike Trout that anyone could have. For money.
Turns out Rodriguez was totally worth it, before you factor in that he was enjoying better living through chemistry, at least. He got a $200 million contract, and he produced.
Now picture what McCutchen would get. He's 27, gregarious, and one of the most likable people in the sport. Also, a deserving MVP. He's not quite as young as A-Rod was, but he follows the same template. Player is called up young; player is unquestionably awesome; player gets to free agency at a really young age.
The $300 million figure referenced up there is mostly a joke. Mostly. People have opined that Mike Trout is heading in that direction. McCutchen probably wouldn't break that barrier. Except, think of the teams that would be involved.
The Rangers figured out they could take a financial risk on a player like Prince Fielder. Of course they would do the same for an amazing fit like McCutchen. The Yankees might not have held off on their spend-happy ways this offseason, but they might have considered it if McCutchen were available. The Astros might have been in pure screw-it mode, wildly pursing McCutchen to be the foundation of the young talent. Every team would have been going nuts 11 months from now.
/pulls cover off diorama
Colletti: We've already transformed Cyprus into McCutchland®. It's done. Look at the aerial photos. We've displaced millions. Look at that roller coaster from Limassol to Kyrenia. Please sign with us.
The Pirates would have been well set to deal with a situation like this, though. They don't have any goofy long-term deals. Even though they play in a crazy-small market, there's still a chance they could have gone goofy to keep McCutchen. It's easy to pick the Dodgers or Yankees, but I think the Pirates would have made this an issue.
So that's what I'm going with. Pirates. Ten years, $240 million. And it would have made sense. It would have looked like a normal, premium deal for a homegrown deal. He wouldn't have been 50, like Pujols.
As is, the Pirates got the head start they deserve, a reasonably priced difference-maker for the next several years. He would cost a lot more now, you know. Maybe three times as much. He's like this generation's Ricky Nolasco.
This is the way big companies work. They assign Assistants to handle a Players' career until they become stars in the Majors. Not every Player is destined to become a star, but I believe every Player deserves to be treated like one.
I give EVERY Player the benefit of my experience representing Players from the Highest paid Player in the Majors to a Player at the lowest rung on the Minor League ladder.o15
Dan Lozano’s MVP Sports Group Hires Baseball Agent Jeff Randazzo
MVP Sports Group, the baseball agency led by Dan Lozano (and formerly known as Icon Sports Group) has hired Jeff Randazzo to be a baseball agent for the company. Randazzo, who has previously been an agent with TWC Sports Management, advised the #37 overall pick in the 2012 MLB Rule 4 Draft (RHP Pat Light from Monmouth). Randazzo also had his own personal experience with the MLB Draft; he was selected by the Minnesota Twins in the 4th round back in 1999.
Recently, Randazzo took the time to answer some questions I had in relation to his decision to join Dan Lozano at MVP Sports Group.
Darren Heitner: Why did you make the switch from The Warner Company to MVP Sports Group?
Jeff Randazzo: I was presented an opportunity to work with what I felt was the best agent in baseball in Danny. The contracts he has done with Pujols, Votto, etc … and seeing how hard he, Matt Hannaford and the office work for their players and the relationships they share with them made it an easy decision.
Heitner: How long have you known Dan Lozano?
Randazzo: A couple years.
Heitner: What did you particularly like about his practice and the way he is conducting business?
Randazzo: The relationship with players and his passion for the business. How he treats his employees. He is a just a normal person who loves what he does. There is a reason he has the guys he has; he is great at what he does!
Heitner: What will be your new role with the company?
Randazzo: Same as before. I will be handling the east coast – working on the draft, taking care of the players during the minor leagues and one day, when these guys get to arbitration and free agency, being able to work with Danny and rest of the team in securing these guys contracts like Pujols, Rollins, Votto, Swisher, etc.
ESPN.com: Buster Olney
Tuesday, December 17, 2013
Santana, Jimenez may end up staying put
By Buster Olney
The most frequently asked questions at last week’s winter meetings:
1. Do you know where I can get some coffee?
2. Who were the agents who fought in the parking lot?
3. Are any moves going to happen here?
4. Have you heard anything about Masahiro Tanaka and the posting system?
5. Have you heard about any team seriously linked to Ubaldo Jimenez and Ervin Santana?
The answer to No. 5 was easy: No. Because circumstances are buzz-sawing the negotiating leverage from underneath those two veteran pitchers.
A) Santana and Jimenez are anchored to draft-pick compensation, while pitchers like Matt Garza and Tanaka are not. It has been established over the past two winters thatmany teams won’t even consider signing free agents attached to draft picks because they don’t want to lose the draft pick or the draft budget dollars tied to each pick.
B) Some teams are focused on trading for David Price or Jeff Samardzija.
C) Jimenez and Santana are perceived to be expensive options at a time in the winter when a lot of clubs have already made their big offseason expenditures. Santana, for example, initially asked teams for a $100 million deal, and even the wealthiest teams may not have that kind of money lying around.
D) There is uncertainty about Santana and Jimenez because of each pitcher’s history. Jimenez was dominant in the first half of the 2010 season -- Cy Young-caliber dominance -- and since then it’s been a roller-coaster ride:
2010: First half ERA 2.20 | Second half: 3.80
2011: First half: 4.14 | Second half: 5.36
2012: First half: 4.50 | Second half: 6.63
2013: First half: 4.56 | Second half: 1.82
"If you sign him, you’re not sure what you’re buying," said one American League talent evaluator.
In short, he’s seen as a talented pitcher with a history of inconsistency and a delivery that may require a physics degree to fully understand (although Indians pitching coachMickey Callaway did a nice job without the advanced degree).
Santana was nearly nontendered by the Angels in the fall of 2012 before the Royals took a shot at him, and he had a really nice 2013 season, lowering his ERA by almost two full runs.
It’s telling that the Yankees -- who need a starting pitcher and have already sacrificed their top draft picks to sign other free agents -- apparently aren’t interested in either Santana or Jimenez. The Mets, who sacrificed their second-round pick to sign Curtis Granderson, opted for Bartolo Colon on a two-year deal rather than invest in Jimenez or Santana.
As each day in the offseason passes and teams lock in their 2014 budgets and rotations, the options for the two pitchers are shrinking, as they did for Kyle Lohse last winter. The best option for both might be to re-sign with the team they pitched for in 2013.
It’s an easier fit because neither the Royals nor the Indians would have to sacrifice their first-round draft pick to make it work.
Santana loved pitching for the Royals last season, friends say. Once the Royals were told of Santana’s $100 million price tag, K.C. moved on, signing Jason Vargas to a four-year, $32 million deal and Omar Infante to a $30.25 million deal. Sources say the Royals would be open to working something out with Santana, but at this stage, any deal would essentially have to be on their terms -- affordable for them and perhaps structured in such a way to fit their other payroll obligations.
For example, James Shields is set to make $13.5 million in 2014 before becoming a free agent. The Royals might be able to sign Santana to a backloaded deal, in which he signed for a low salary in the first year, before assuming Shields’ spot in the payroll structure in subsequent seasons.
The Indians haven’t filled their need for a starting pitcher this winter, and even after signing closer John Axford, they have some payroll flexibility. But Cleveland probably wouldn’t go for a whopper long-term deal for Jimenez, of three years or more.
Given that the Royals and Indians made plans for 2014 under the assumption that they would not retain Santana and Jimenez, respectively, K.C. and Cleveland likely would want to factor in the cost of the lost extra draft pick into any deal with Santana/Jimenez. By signing Jimenez now, the Indians would be sacrificing the compensation pick they would otherwise receive. (Last winter, Lohse tried to re-engage with the team he was leaving, the Cardinals, and St. Louis’ polite response was No thanks, we prefer the draft pick.
Even if Santana and Jimenez returned to their old teams, they would do so with diminished negotiating leverage. Maybe they haven’t reached that point yet; maybe bidders have quietly emerged.
But it may be that Santana and Jimenez will soon need contractual lifelines.