Davidson has her reasons, but estate tax isn't one of them, rep says
Karen Davidson's decision to possibly sell the Detroit Pistons, among other assets from her late husband's $1 billion estate, has raised the inevitable question of why.
She's said publicly that it's because the team was her husband's interest and not hers, and her preference is that the Pistons are owned by someone enthusiastic about them as he was.
“It's Bill's baby. What can I say?” she told reporters last week.
But there's also the question of estate taxes. Her spokesman, Michael Layne of Farmington Hills PR and marketing agency Marx Layne & Co., said on Friday that she doesn't owe any.
Federal estate tax laws allow for an unlimited marital deduction, which defers the tax until the spouse dies but has other potential pitfalls. There are also other forms of trusts and methods to reduce the tax burden for heirs.
Even with a complex series of trusts designed to shield her and the two adult children named in the estate, there's eventually a tax bill to pay — potentially to the tune of $300 million to $400 million.
A third possibility is that Davidson inherited properties but not cash, so she's selling the team and real estate holdings for liquidity.
For now, it's impossible to know because specifics of the trusts filed in Oakland County Probate Court are not public. Layne declined to comment on questions about the estate.
Bill Davidson, who died at age 86 on March 13, was estimated by Forbes to be worth $2.1 billion. He left the National Basketball Association franchise, Palace Sports & Entertainment and his real moneymaker, Auburn Hills-based Guardian Industries Inc., to his widow and his two adult children through various trusts.
What critics call the “death tax” is 45 percent of the total taxable estate, with certain exemptions. Settling such a large estate can take years, especially if there is a complex series of trusts, as in this case.
The will reportedly was signed a week before Davidson died.
“Estate taxes are generally due nine months after date of death, except when at least 35 percent of the estate is comprised of closely held businesses — presumably, the Pistons and Palace companies would qualify for this,” said Andrew Mayoras, who specializes in estate issues for Troy-based Barron, Rosenberg, Mayoras & Mayoras P.C. and who has some familiarity with the Davidson estate situation. “Then, you can stretch out the payments for up to 14 years, but interest is charged and other conditions apply.”
Karen Davidson confirmed last week that she's exploring selling the team her husband bought for $7 million in 1974. Palace Sports, which manages the Palace of Auburn Hills and other venues, could be sold separately, she said.
Tax laws exempt the first $3.5 million of an estate, but that's a fraction of the Davidson situation.
“It's a little hard to speculate on how much of his fortune will go to taxes, because it depends on how many charitable trusts he has. Certainly, one would imagine it's at least $300 million to $400 million,” said Mayoras, who recently co-authored the book “Trial & Heirs: Famous Fortune Fights!”
Former Pistons minority owner Oscar Feldman, who was Bill Davidson's lifelong friend and attorney, last week told Crain's that his death “brought on myriad problems” that have Karen Davidson, the other minority owners and the estate trustees willing to sell the team.
He didn't elaborate on the specifics other than to say some of them are related to the economy.
Complicating matters — and possibly further fueling a desire to shed assets for cash — is the possibility of the Tampa Bay Lightning hockey franchise returning to the estate because the current owners, who bought the team from Bill Davidson in 2008 for $200 million, are in danger of defaulting on the note — which is held by Palace Sports because the buyers couldn't find other lending.
There are also two legal claims made against the estate, including one by Karen Davidson on behalf of an Israeli company her husband did business with, that further muddle the picture.
The tax situation and legal entanglements over the estate aren't expected to prevent a sale of the Pistons, provided the estate trustees, John Aaron and Eric Garber, concur. It's believed that all parties, in fact, agree a sale is needed.
Even though the process of settling such a large estate is complex and requires Internal Revenue Service valuations on assets, that doesn't mean the franchise can't be sold.
“The value of the estate doesn't have to be completed before the sale of any assets in the estate,” said Julius Giarmarco, executive committee partner at Giarmarco Mullins Horton PC in Troy. “But you wouldn't want (the sale) to be too inconsistent with estate tax return.”
That means owners can't tell the IRS a team is worth one price but sell it for a lot more.
The IRS declined to comment on the Davidson situation or comment generally on the rules for settling large estates.
Karen Davidson is represented by Birmingham-based Williams, Williams, Rattner & Plunkett P.C.
It's unclear what other formal or informal advisers she may be using, but she's been pictured at Pistons games recently with powerful figures such as shopping mall developer Alfred Taubman and U.S. Circuit Judge Damon Keith.
How much cash Davidson could raise through a sale depends on the buyer and the market.
“They do have a glaring need for liquidity,” Mayoras said. “It's an economic issue, as well. The Pistons and Palace are not as valuable as they once were. They have to sell something.”
Several industry sources have valued Palace Sports at about $750 million, and Forbes estimates the Pistons to be the centerpiece, with a value of $480 million.
However, the team has struggled this season, and the recession and subsequent credit crunch make financing such purchases difficult (See accompanying story).
Davidson has made other moves recently that increase her liquidity.
In October, she sold the Detroit Shock women's basketball franchise to an investment group that moved the team to Tulsa, Okla. Terms of that deal were not disclosed. The decision to sell the Shock began under Bill Davidson, who bought the expansion team for $10 million in 1998.
A minor-league baseball team owned by Palace Sports — the North Carolina-based Asheville Tourists, the Class-A Colorado Rockies affiliate— is also for sale.
Karen Davidson told the Wall Street Journal that she put her 10,000-square-foot, eight-bedroom vacation home in Snowmass Village, Colo., on the market for $47 million on Dec. 29.
The home was bought by Bill Davidson for $8.25 million in 1996 from Wall Street trader Boyd Jefferies.
Karen Davidson has the controlling ownership of the Pistons; minority stakes are held by Ethan Davidson, Warren Coville, Bud Gerson, Dorothy Gerson and William Wetsman.
There is precedent for families forced to sell pro sports teams after an owner's death: The Miami Dolphins were sold in 1990 to satisfy the estate tax bill after owner Joe Robbie died.
In 2008, Bill Davidson said his plan was to keep the Pistons in his family.
“If Bill were alive, the team would not be sold. His death brought on myriad problems,” Feldman said. “I loved it as much as Bill did. It's been a big part of both Bill's life and my life.”
[This story first appeared in Crain's Detroit Business, a sister publication of InvestmentNews.]
