How Lamar Hunt set the standard for NFL succession plans – Sportico.com

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This is the fourth installment in a series focusing on legacy and estate planning in the National Football League; in short, how NFL team owners are preparing to pass the team on to the next generation. With an average age of 72, owners face decisions familiar to any family with assets to pass on, compounded by restrictions unique to a league where the average franchise valuation is $4.14 billion.

Lamar Hunt helped make modern football. One of many sons of billionaire oil tycoon HL Hunt, young Hunt lacked his father’s love of the wild hunt despite earning a degree in geology from Southern Methodist University. On the contrary, Lamar loved sports – and nothing more than football. Less than a decade after his stint as a bench warmer for the SMU football team, Hunt had co-founded the Kansas City Chiefs and the American Football League, helped lead the AFL’s merger with the NFL and even coined the term Super Bowl. “You would be hard pressed to find someone who made a greater contribution [to the NFL] than Lamar Hunt,” Dallas Cowboys owner Jerry Jones said after Hunt’s death in 2006.

There’s another gift Hunt has given the NFL: a roadmap for a franchise’s smooth transition from one generation of family owners to the next.

Generational transfer is a big problem in the NFL. No sports league is more focused on long-standing family ownership: nearly a third of league owners or their families acquired their clubs before MLB’s oldest ownership group, the Steinbrenner clan of the Yankees , didn’t buy their team in 1973. Nor is there an ownership group that’s that old: 20 primary owners of the league’s 32 franchises are 70 or older. By comparison, there are 12 septuagenarians in the MLB and NHL, and just 10 in the NBA, according to Sportico The data.

The approach that Hunt pioneered nearly three decades ago? Use sophisticated estate planning tools like trusts to make the transfer as efficient as possible and clearly designate an heir who will lead the team.

The stakes have never been higher: the average NFL team is worth $4.14 billion. A sale at this price could result in a $1.6 billion federal estate tax bill without proper planning. NFL owners are wealthy, but for many, the overwhelming share of their wealth is tied to the team. Skyrocketing franchise values, aging owners and strict NFL ownership rules have made estate planning more important and more difficult than ever. Half of the last twelve ownership changes in the NFL have followed the death of an owner.

At the time, Hunt’s use of trusts was a source of contention with the league, and it took lengthy negotiations for the NFL to approve Hunt’s plan. Now, trusts are common in today’s ownership standards because they are tax efficient and provide a way to rein in unruly heirs if necessary. And such tricks of the trade are widely shared by owners who, despite their wealth, struggle like the rest of us with the American Byzantine code.

“If an owner’s advisors come up with unique planning and ideas, many are happy to share them with other interested teams,” Atlanta Falcons owner Arthur Blank said in a phone interview. “That’s one of the benefits of this brotherhood of 32 owners. When I ran Home Depot, I couldn’t call my friends at Lowe’s and ask them about their financial planning. »

Indeed, even though NFL teams are individual businesses, it’s best to think of them as parts of a whole, according to John A. Davis, professor of management and director of the Family Enterprise Center at the Massachusetts Institute of Technology. “Teams are like divisions within a company, they’re not really like separate companies,” Davis said in a phone call. “They are not independent, they all depend on each other and they have unified global governance that defines how they will work.” With that in mind, the NFL requires owners to have a succession plan in place, checking in periodically.

Despite the league’s interest in the estate plans, few details are disclosed. Even years after Hunt’s death, only certain details of the structure are known to the public. In 1995, Lamar Hunt placed 95% of the Chiefs in a series of grantor trusts, with his four children as beneficiaries, according to former NFL chief financial officer Frank Hawkins. Hunt’s longtime right-hand man, Jack Steadman, was named administrator. The interlocking trusts meant that Steadman had full control and legal title to 95% of the shares, but the beneficial interest in the trusts was the members of the Hunt family. Depending on the structure, if Lamar ceded legal control of the team to trusts in 1995, it’s possible the team’s estate tax base would have been much lower, dating back to its 1995 valuation. and not in 2006. Chiefs declined to comment for this story.

Today, NFL owners prefer a settlor-retained annuity trust (GRAT), according to four attorneys who have experience with NFL estate plans but all asked not to be identified for Avoid exposing private client business. GRATs are very complex trusts in practice, but operate on a simple idea: the transfer of assets into a GRAT freezes the estate tax value up to the date the trust receives an asset. Additionally, the GRAT may pay an annuity to the team owner from its assets, which then reduces the taxable value of the asset in the GRAT.

Additionally, if the value of the asset increases during its time in the GRAT, that growth is tax exempt above a low growth rate assumed by the IRS. And since NFL teams are highly illiquid assets, they likely qualify for a reduced valuation in the eyes of the IRS. How dramatic can the benefits of this be? In 2021, the IRS GRAT rate — the amount of growth the IRS assumed a trust would earn and which is taxed — was 1.2%. During the same period, the values ​​of NFL teams increased by 18%, according to Sportico The data.

The risk? Almost none. The main one: if the creator of the trust dies during the term of the GRAT, just about everything in it, including its appreciation, is subject to estate tax. “GRATs work if you survive them,” said a New York-based attorney familiar with team owner strategies. “They involve a significant amount of tax, but the tax is so greatly reduced that customers like to use them.”

Even in cases where they’ve been lax in crafting estate plans, NFL owners are getting a break. They can take advantage of a clause that allows heirs to extend the payment of inheritance tax over 15 years on a family business that is worth at least 35% of the value of the estate. The first five years require only interest payments to the government followed by no more than 10 annual inheritance tax payments. Team values ​​are expected to continue to soar and, more importantly, cash flow will grow to outpace the estate tax bill, a Boston-based lawyer with a statement said. NFL ownership experience. “An NFL franchise is very valuable. It’s something that people generally want to keep within the family – with the revenue and cash flow from those teams, between television and intellectual property deals alone, there it is no longer a question of hoping to sell the stadium.

In many cases, team owners seek out large life insurance policies as a way to pay at least some of the expected estate taxes, as life insurance proceeds are not subject to taxes. on successions. There is even a rarefied small industry creating syndicates to issue life insurance policies for individual companies worth billions, devising intricate means to generate insurance payouts potentially in excess of a hundred million dollars. “It’s one of those subsets of businesses that you didn’t know existed,” the Boston attorney said.

Sure, NFL owners can afford to hire the best lawyers and accountants. The biggest variable, however, is the heirs themselves. In this regard, Lamar Hunt has also done it right. He telegraphed long before his death that his son Clark would take over, and he let Clark gain experience managing the family’s Major League Soccer properties before moving to the Chiefs.

“It was clear. Clark had the interest and the experience with his work in MLS,” said David Sweet, a sportswriter who wrote Lamar Hunt: the gentle giant who is revolutionizing professional sports. “His father considered him to be very sharp, and obviously there was no animosity that Clark was the one.”

Lamar Hunt in 1984

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Hunt’s will, which is made public by probate court, required only one sentence to pass the heads to his children. The document passed more words detailing how to split the six NBA title rings he received through his co-ownership of the Chicago Bulls (a blind coin toss by the four heirs to get one each, the two rings remaining being displayed in a commercial property owned by Hunt). A focus on equity is often key to effectively transitioning a family business to heirs, noted MIT’s Davis.

Today, Clark Hunt still leads the Chiefs and also chairs the powerful NFL Finance Committee, which is the gateway for potential new owners and league rules and exceptions to ownership requirements. the debt. Hunt is looking to help find solutions to keep legacy owner families in the NFL, the same way the NFL has helped his family, sources say.

“It’s a great long-term business, where you can innovate in marketing and you can innovate in other ways,” Davis of the NFL said. “And families tend to be good at it.”

More from Sportico’s NFL Succession Series:

Broncos’ fumbled transfer exposes the dangers of the NFL’s estate planning

Why Leon Hess’ Jets succession plan remains a model for the NFL

Passing Game: NFL’s flexible bylaws make football a family affair

What does it take to own the NFL?

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