By John M. Goralka
Sacramento, CA
Along with the rest of the country, I am addicted to the Yellowstone TV series and am looking forward to watching tonight’s series finale. While I enjoy the show and its many plot twists and turns, I also watch it from the perspective of an estate planning and tax attorney. Many of the plot twists relate to critical estate planning and business succession issues. The following are just a few. (Warning: Spoilers are possible if you’re not up to date on the series.)
1. None of us has a specific expiration date.
John Dutton, while serving as the governor of Montana, was murdered. When he died, the family had not implemented a plan to minimize or pay the estate tax owed at his death. This left the surviving children with a seemingly insurmountable burden to keep the ranch in the family.
So many of my clients say, “I am not planning to die this year, so we have plenty of time to implement a plan later.” I rarely comment on that attitude, as my job is to provide alternatives and not to “sell” any particular course of action. I have often dealt with the disaster that unfolds with an unexpected death and an incomplete or missing estate plan.
Part of the problem for the Dutton family is that the estate tax is typically due in full in cash nine months from the date of death. While a single six-month extension to file is available, the estate tax must still be paid in full nine months from the date of death.
This nine-month payment requirement may require the sale of assets, such as the Yellowstone Dutton Ranch for the Duttons or your family business at a "fire sale" discounted price. If a buyer knows of this deadline — and the buyer can easily find out — they will be motivated to make a lowball offer. The family will often not receive a fair value after decades or generations of ownership and sacrifice.
In the TV show, the Duttons began by selling livestock and horses. Even with the livestock, they were worried about whether they could get a good price when having to sell so quickly and all at once. This announces to the public at large that this is a fire sale. A more complex sale of land or a business could take much longer than nine months just to identify a qualified buyer, let alone close the sale and collect the sale proceeds.
John Dutton, without seeking professional advice, also put a portion of the ranch under a conservation easement. This could be structured to permit cattle ranching and similar ranch and farm activities to continue. The conservation easement would mean that the land in the easement would have a reduced value based on the limited permissible use of the property. The overall value of the property would not take into consideration the added value if the property were developed for homes or commercial real estate. The lower value would also mean lower estate taxes. But that alone was not sufficient to save the Yellowstone Dutton Ranch.
On a positive note for the Dutton family, I don’t believe that the IRS could force a higher estate tax valuation than the amount actually received in the eminent domain process from the state of Montana. Eminent domain is the process that the government uses to take land from a private citizen. “Just compensation” is required for eminent domain. The IRS would need to recognize that value.
We can take actions to minimize income taxes and estate taxes and to determine when they must be paid, if certain conditions are met. For income tax, the most obvious example is to sell a qualified appreciated asset under an installment sale. The capital gain associated with that sale is paid over the term that payments are actually received.
For estate tax, Internal Revenue Code (IRC) Section 6166 permits the estate tax related to the farm or ranch to be paid over 14 years at a substantially reduced interest rate. Thirty-five percent or more of the adjusted gross estate must be owned by a closely held business. If so, and the other requirements, such as being a United States citizen, are satisfied, then the portion of the estate tax attributable to the family business can be paid over 14 years.
There are so many different alternatives to minimize estate tax that it represents a veritable alphabet soup. Gifting trusts, GRATs (grantor retained annuity trusts), SLATs (spousal lifetime access trusts), CRTs (charitable remainder trusts), CRATs (charitable remainder annuity trusts), LLCs (limited liability companies), TCLATs (testamentary charitable lead annuity trusts), TCRTs (testamentary charitable remainder trusts) and FLPs (family limited partnerships) are just some of the tools that may be used.
John Dutton should have sought professional advice to minimize and provide for the payment of the estate tax. His family would not be faced with the economic reality, and possibly guilt, of losing a multigenerational family business to pay the estate tax. Even if not a farm or ranch, a multigenerational family business is often a way of life and not simply a business.
2. Businesses need to have a succession plan.
There is a scene where John Dutton’s ulcer ruptures, and he’s whisked away by helicopter. In the helicopter, he is worried that he can’t die yet because there is still “too much to do.” At that time, he is estranged from Kayce, his youngest son, who is no longer working or living at the family ranch. His oldest son, Lee, who is working at the ranch as a cowboy, does not at that time have the business acumen or vision to run the megabusiness that is the Yellowstone. Jamie, the Duttons’ adopted son, is working as a lawyer and has some knowledge of the ranch business. However, Jamie does not have a positive relationship with the ranch hands or with family members. Rip, the ranch foreman, may have been in the best position to run the ranch business at that time, but Rip was not yet a family member (he and Beth married in a later season of the show).
John Dutton should have established a succession plan long ago, which could have been revised from time to time. A succession plan is particularly important when you have an active business representing the lion’s share of the total value of your estate. Giving ownership of an active business to heirs who actively work in the business and other heirs who do not actively participate in the business is a recipe for arguments and litigation.
Over time, the inactive heirs often object to the amount of compensation paid to the heirs working in the business and may object to maintaining a strong cash reserve in the business. Similarly, the active participants will object to compensation paid to owners who do not actually work in or contribute to the family business. This potential for disputes can be minimized by providing other assets or insurance death benefits to the inactive heirs.
But memories of being near death can be short. In Yellowstone, despite the very real possibility that John Dutton could have died when his ulcer ruptured, he still did not follow through with the planning needed to protect his family. There was a brief flurry of activity, but he did not seek guidance from a qualified professional, and his family will almost certainly lose the ranch because of the estate tax liability at his death.
3. Family dynamics are important to consider when selecting a successor trustee.
In Yellowstone, brother and sister Jamie and Beth have endured decades of conflict. Jamie, who acts as the ranch/business attorney, went to school on the East Coast and does not have a close relationship with his other siblings, Lee and Kayce. Neither Lee nor Kayce appear to have the sophistication to oversee a trust estate of the size and complexity of the Yellowstone.
In this case, a professional trustee would have been the best approach to oversee the trust because a professional trustee would not have the emotional baggage related to the Dutton siblings’ complicated relationships. However, the professional trustee would typically not be actively involved in the operation of the ranch business.
These are just a few of the estate planning issues raised in the Yellowstone series. While you may not worry about a family member hiring a hitman, the possible eminent domain of your primary assets or the high level of family drama, many of the Dutton family’s estate planning issues are nevertheless applicable to some degree with all families, particularly those with a substantial family business.
Let’s tune in tonight as the search for John’s killer continues, Rip sells livestock in a desperate attempt to save the ranch, and we wait for the solution that prevents the sale of ranch property to pay estate tax.
