United States: Benson Trust Dispute Heads Back To Court

Gal N. Kaufman is Senior Counsel in our Washington, D.C. office.

Only a few months ago, it appeared that the dispute between Tom Benson, the controlling shareholder of the New Orleans Saints football team and New Orleans Pelicans basketball team had with his daughter and trustees of trusts he created was settled, but is now heading back to court.


In 2009 and 2014, Mr. Benson created several irrevocable trusts (the "Trusts") for the benefit of his daughter, Renee ("Renee"), and her 2 children. Mr. Benson transferred approximately 60% of the shares of the Saints and approximately 95% of the shares in the entity that owns the Pelicans to the Trusts, and named two lawyers as trustees of the Trusts. Each of the Trusts permitted Mr. Benson to 'swap' assets from the Trusts and substitute the swapped assets with other assets of equivalent value. Importantly, the shares Mr. Benson transferred to the Trusts were non-voting shares, as Mr. Benson retained voting control of both sports franchises.

The Dispute

Over the last few years, the relationship between Mr. Benson and his 3rd wife, and Renee and her two 2 children, soured. Mr. Benson, apparently as a result of his estranged relationship with Renee, sought to swap the nonvoting shares of the two professional sports teams from the Trusts with assets of equivalent value (i.e., promissory notes). The trustees of the Trusts challenged the transaction. On the one hand, they disputed that Mr. Benson could swap assets from the Trusts. Alternatively, they argued that even if Mr. Benson had the ability to swap assets, the valuation Mr. Benson used in determining the face value of the notes was improper. The trustees believe the value of the nonvoting shares in the two sports teams was greater than the value of the promissory notes Mr. Benson wanted to convey to the Trusts.

In May 2016, a federal judge in New Orleans ruled that Mr. Benson does in fact have the 'swap power,' although the issue of 'equivalent value' was still left to the parties to work out. Benson v. Rosenthal, Civil Action 15-782, U.S. District Court, Eastern District of Louisiana. In June 2016, the parties announced they had settled their dispute. However, in August 2016 the parties announced that they had not yet fully settled the dispute, and a court date is set for December 8, 2016.

The Swap Power

The Trusts that Mr. Benson created, and the 'swap power' provision contained in the Trusts, are common estate planning techniques. Typically, a client with substantial wealth which is likely to increase in value over time, will create one or more irrevocable trusts and will transfer to those trusts (by gift and/or sale) the assets that the client believes will increase in value over time. Many of these trusts (like the ones created by Mr. Benson) will give the client the ability to swap assets of equivalent value. Typically, the swap power provision is included so that the trust is considered a 'grantor trust' for income tax purposes pursuant to Section 675 of the Internal Revenue Code, meaning that the trust itself does not pay income tax and, instead, the creator (or 'grantor') of the trust personally pays the income tax on the income earned by the assets of the trust. See IRC Section 671. This technique allows the trust assets to grow unencumbered by income tax payments, during the lifetime of the trust creator. In addition, the 'swap power' provides flexibility in dealing with future events. For example, if the assets transferred to an irrevocable trust have increased in value after the transfer but the client believes that those assets will no longer increase in value, the client may opt at that time to exercise the swap power, taking back from the irrevocable trust the appreciated assets and replacing them with other assets that the client has (e.g., cash, securities, promissory notes, etc.). One of the major tax benefits of exercising the swap power is that by reacquiring the highly appreciated assets, the client likely will own the appreciated assets at death, thereby allowing those assets to receive a full basis step up at the client's death (see IRC Section 1014), whereas had the appreciated assets remained in trust, those assets would not have received the valuable basis step-up at the client's death (see IRC Section 1015). At the same time, the trust will have achieved its major purpose of shifting appreciated wealth out of the client's estate.

Valuation Issues

Another interesting aspect of this case is the impact of the dispute concerning the "equivalent value" swap. While utilizing a promissory note of the grantor is common, this case will highlight significant valuation aspects. In the first instance, the fair market value of the nonvoting shares will need to be determined. Not only will that require a full valuation of both teams, but it will also require the court to determine the applicable discounts for lack of control and lack of marketability. This discount issue becomes even more important in light of the recent IRS proposed regulations concerning Section 2704 of the Internal Revenue Code, which seeks to drastically reduce if not eliminate such discounts for intra-family families. While those regulations should not impact this case, the outcome of this case might continue the discussion of why such discounts are appropriate as well as the amount of such discounts.

In addition to the valuation of the non-voting shares of the teams, the court will also have to determine the fair market value of the promissory notes. While the IRS establishes appropriate levels of interest to be paid in order to avoid a gift, the trustees could argue that the interest rate on such promissory notes is insufficient as not being commercially reasonable. This issue is similar to the valuation issue that the Tax Court refused to decide in the Estate of Morrisette v. United States, 146 T.C. 11 (April 13, 2016), which we discussed in our blog of June 8, 2016. We will continue to monitor the Benson case and will provide an update as developments occur.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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