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Volume 22 No. 23
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NFL votes to allow trust ownership of teams

In a significant change that could ease the way for NFL teams to remain in families, the league last week voted to allow trust ownership of teams, and it dropped the percentage an owner is required to control to as low as 5 percent.

With escalating franchise values making it harder for owners to pass on control to sons and daughters because of mountainous estate tax hits, the league took a step it long spurned, allowing irrevocable family trusts to own control stakes in teams. Under tax law, trusts can shield the heirs of the wealthy from a sizable portion of inheritance taxes that otherwise would be due.

“This is a big breakthrough for wealth transfer planning for NFL franchise owners,” said Richard Greene, a tax attorney and partner with Greene Radovsky Maloney Share & Hennigh. “This opens up for owners of NFL franchises the ability to do the type of planning the very wealthy have done for their businesses for many years.”

The change could help Mark Davis if he were to inherit the Raiders from his mother.
Photo by: GETTY IMAGES
The NFL had resisted the move because technically the assets in a trust are owned by a trustee, someone the league has not approved as an owner. Finance committee chairman and Houston Texans owner Bob McNair, who confirmed the vote, insisted the team owner would retain full control of his or her team.

“The idea of the trust is to allow families control for longer periods of time,” McNair said.

The move carries great benefits for team owners and their families because these types of trusts significantly reduce, and can eliminate, estate and gift taxes when assets are passed between generations. Thirty-one of the 32 teams voted to approve the Irrevocable Family Trust proposal, with the Tennessee Titans abstaining, a source said.

The league also is lowering the percent stake necessary to control a team, said Art Rooney II, the Pittsburgh Steelers owner. When an owner initially buys a team, he or she must control at least 30 percent of the equity. Previously, after a decade, that figure could drop to 10 percent if the family continued to control 30 percent.

Now that control figure is 5 percent, though the family still must own 30 percent, Rooney said. The percent stake drop is not directly tied to the trust move. Either change, whether together or separately, should greatly aid teams getting passed between generations.

                  WHO’S IN CHARGE?

Team ownership rules vary by league. Here’s a look at what leagues require for majority ownership of teams and what that makes possible for limited partner stakes.

                                         NFL
     The league at one time required the controlling owner to have 51 percent of the team. That percentage fell to 30 percent, and in 2004, the number was changed to 20 percent for family-owned teams, with the family needing to cumulatively stay at 30 percent. In the wake of the difficulties of the Pittsburgh Steelers keeping the team in the Rooney family, the control portion percentage in 2009 was dropped to 10 percent. For non-family situations, the control portion remains at 30 percent.

                                         NBA
     The NBA requires the controlling owner to have at least 15 percent of the equity value of the franchise. The league also recently adopted a new rule, limiting the number of individuals who can have an ownership stake in a franchise to 25. Each of the minority stakeholders must own at least 1 percent of the team.

                                         MLB
     Each club must have a designated control executive for league purposes. But there is no minimum equity threshold to attain that role, and there is no restriction on the number of limited partners a club may have. Each ownership structure is subject to MLB committee and full league approval.

                                         NHL
     The NHL has no restriction on the number of limited partners, nor on the minimal stake in ownership for a majority owner. All decisions on ownership structure are subject to league/board approval.

                                        MLS
     MLS requires the controlling owner to hold at least a 35 percent stake in the team. The league currently is evaluating rules concerning the number of limited partners.

                                         — Compiled by SportsBusiness Journal staff

With asset values now soaring past $1 billion, the tax bite is severe, commonly 40 percent of appreciation. Take the Oakland Raiders, owned by the widow of the late Al Davis, who took control of the team in 1972 when the franchise would have been worth just a few million dollars. Davis passed in 2011.

His wife theoretically now could put her control portion into an irrevocable family trust for the benefit of her son, Mark Davis, who runs the team, and greatly reduce the tax bill he would owe when she passes, Greene explained.

When an asset like a team is not in a trust, it is subject to steep estate and gift taxes if it is passed to heirs, said Greene, who has been a tax attorney for 52 years. The trust structure slices if not eliminates the taxes, depending on the precise structure.

“It is a hell of a deal,” Greene said. “It is used by many wealthy people to transfer interests in the business they own to their families.”

There are drawbacks beside the trustee issues. Irrevocable trusts are difficult, if not impossible, to unwind (there are revocable trusts, but those are not allowed by the NFL). That scenario is playing out in New Orleans where Saints owner Tom Benson is trying to take the team stakes of his daughter and granddaughter out of the irrevocable trusts he established for them, and is suing the trustee who so far has blocked the effort. The league allowed that structure, a source said, because the trust does not have Benson’s control position.

Still it underscores what can happen when trusts are established but the owner then has a change of heart.

There is one team that already passed through a trust, the Kansas City Chiefs. That structure was approved by the league despite the rules at the time prohibiting it. The structure eased the transition of the team in 2006 from the late Lamar Hunt to his son Clark Hunt.

Other leagues allow irrevocable family trusts. An MLB spokesman, in response to a query about the league’s policy, emailed that the sport “sometimes” allows it. The NBA declined to comment, though a source close to the NBA said the league allows them. The NHL did not reply for comment.