Explaining the newly announced Utah Jazz Legacy Trust and it’s taxation implications

On January 23, 2017, Gail Miller and her family announced they had transferred both the Utah Jazz and Vivint Smart Home Arena to a “Legacy Trust”. Per Gail Miller, the move was “part of a big package of estate planning. But it's one part that's all done and it will last forever, as long as we have people who are willing and able to take care of it."

Below is the legacy trust announcement video:

As a Jazz fan who is an accountant with a Masters degree in Taxation, the move intrigued me, and I thought I’d provide some insights from an outsider’s perspective. I’ll walk through the basics and try not to muddy things up too much.

First, what is a trust?

A trust at its core is an agreement.

The agreement has three parties - a grantor/settlor (the person who funds the trust), a trustee (someone who administers the trust pursuant to the trust agreement), and a beneficiary (someone who will be the benefactor of the trust).

A trust can be either revocable (subject to change) or irrevocable (can not be changed).

Second, what is a legacy trust?

A legacy trust, also known as a dynasty trust, is a form of generation skipping trust (GST). This type of trust is normally irrevocable and is intentionally formed to pass assets from the grantor to the grantor’s descendants beyond his/her immediate children (i.e. to grand children, great grandchildren, etc).

The reason for this is that the United States tax code is set-up to assess an estate tax on a transfer of property to each generation. Most of us don’t have to worry about this transfer tax as you can transfer $5.49 million of assets during your lifetime without worrying about the transfer tax. However, wealthy individuals can end up paying 40% tax on a transfer to their children, who in turn have to pay another 40% on a transfer to their children, and so on.

A GST allows an individual to pay the estate tax once on assets placed in the trust, and the beneficiaries are allowed to use the property while the assets are in the trust and enjoy the income of the trust during their lifetime. Meanwhile, transfer taxes don’t have to be paid on future transfers until the trust ceases to exist.

An additional benefit of a GST is that assets are placed beyond of the reach of potential creditors of the beneficiaries, and outside of any marital estate (i.e. the lenders of the grantor’s heirs and the heirs spouses can’t go after the trust assets.)

Finally, what do we know about the Utah Jazz legacy trust?

1. The trust has the potential to last hundreds of years. Dennis Haslam, who worked with the NBA in order to get the deal done, is quoted as having said, “This has the potential to last hundreds of years, maybe longer.”

In common law, there is what is known as a rule against perpetuities; this rule forbids instruments such as trusts “from tying up property for too long a time beyond the lives of people living at the time the instrument was written.”

Some states by statute have eliminated the rule against perpetuities and some have increased the length of time a trust can hold assets. In Utah, the law allows trusts to last 1,000 years. Assuming the Miller legacy trust utilizes Utah’s maximum time frame for trusts, the Jazz could be owned by the trust for 1,000 years.

This may be why Greg Miller said, "It is as close as possible to there being perpetual ownership of a professional sports team," son Greg Miller said.

2. The trust agreement provides for the profits to stay within the trust. Gail has stated the trust will not provide any "material benefit to the family from the Jazz." There have been some that have wondered how this is possible despite the obvious fact that Gail’s heirs are the beneficiary of the trust.

Again, we go to Dennis Haslam, “The profit stays within the trust. The profit that stays within the trust will be used as retained earnings, for expansion, for player salaries, or other operations. There could be a time period where the Jazz aren't profitable, so we'll stockpile cash. This trust will be well-supported financially, and will be able to survive into the future for generations and generations." From this statement, it appears that the trust agreement provides that the earnings of the Jazz are to be reinvested in the team, and since it is a provision of the trust, the trustee has to follow its directions in administering the trust.

3. The trust agreement requires the Millers to be stewards of the team. Gail stated, "It's part of being an organized way to keep the Jazz in Utah with the resources it needs in a trust, to give our family an opportunity, as they grow up, to have stewardship over it and to be the ones to take care of it in the future." This direction would be part of the trust agreement to guide future trustees.

4. The Miller’s will still have a say with what happens to the Jazz. KSL provides the following information:

The Miller family obtained permission from the NBA to transfer ownership to a legacy fund that will be managed by Gail Miller acting as trustee. Following Gail, a six-member board of managers will assume the role of trustee. Those six members will be all be Miller family members, to be chosen in a process outlined in the trust's founding documents.

That board of managers would then vote on those team decisions that would normally go to ownership. For some votes, a majority would be required, for bigger decisions, a supermajority is required.

What’s interesting to me, beyond the family continuing to have a say, is that Gail will be the initial trustee. I have made the assumption that the legacy trust is an irrevocable trust; normally, once you’ve funded an irrevocable trust, you don’t retain a right to direct the assets since such provision could cause the assets to be retained in your estate for transfer tax purposes. Having said that, I’m not aware of the overall estate plan and there may be a reason to keep the assets in Gail’s estate or Gail doesn’t have certain prohibited retained interests as trustee that would cause the trust to be retained in her estate.

Having said all of the above, and from my outside perspective, moving the Utah Jazz to a legacy trust is wonderful. I appreciate the Miller’s innovative thinking and I look forward to having the Jazz in Utah for years and years to come.