Filmmaker George Lucas has been a Hollywood success since 1973, when he spent just $775,000 to produce American Graffiti -- then watched it go on to gross over $200 million.
Lucas has influenced a generation of filmmakers and films, as director
(19 titles), producer (67 titles), writer (81 titles), and even an actor
(he played an uncredited "Alien on TV Monitor" in the first Men in Black). Of course, he'll always be best known as creator of the Star Wars series, which popularized the "space opera" genre for a galaxy of fans.
Last month, Lucas announced that he's selling his production company, Lucasfilms, to The Walt Disney Company for $4.05 billion in cash and stock. And it should hardly come as a surprise ending that he found a way to beat the IRS that's almost as powerful as launching a proton torpedo down the Death Star's exhaust port.
How did he do it? Elaborate special effects? Computer-generated imaging? Nope. He did it just by selling now, in 2012.
have no idea how the evil Empire collected taxes a long time ago, in a
galaxy far, far away. (We suspect that R2D2 kept awesome records in case
he was audited; Darth Vader hid his money on Endor, a forest moon
bearing a striking resemblance to the Cayman Islands; and Chewbacca
never bothered to file at all.) But here in the U.S., gains from the
sale of a business are treated as capital gains and subject to tax up to
15%. Lucas is taking half of his proceeds in Disney stock, so that part
escapes tax for now. (He'll pay if he sells those Disney shares
sometime down the road.) But that still leaves up to $2 billion in fully
taxable cash gains. And that means up to $300 million in tax for Uncle Sam.
At least, that's how it works this
year. On January 1, the Empire strikes back, when those Bush-era rates
expire. Unless Washington gives us a new hope, that capital gains rate
jumps to 20%. President Obama has said he wants to extend the current
rates for income under $200,000 ($250,000 for joint filers), and the
Senate has passed a bill to do just that. But if the 20% Clinton capital
gains rate returns, at least for guys in Lucas's bracket, selling in
2013 could have cost him up to $100 million more in immediate tax. That's at least enough to recondition a Millenium Falcon or two!
1 also marks the start of a new phantom menace, the "Unearned Income
Medicare Contribution," on investment income, including capital gains,
for those earning above that same $200,000 threshold. The new Medicare
tax is "just" 3.8% -- but 3.8% of $2 billion is still a hefty $76
The sale also represents smart estate planning for
Lucas, who is 68. While generations of fans hope to see him shepherd the
final three Star Wars films to the theatre, the sale will spare his heirs the challenge of managing his affairs at his death. Lucas has already announced plans
to donate the bulk of his estate to educational charities, and the
gifts he's already made, including $175 million to his alma mater
University of Southern California, will surely ease the tax bite on that transfer.
Selling a business is one of the toughest productions any entrepreneur directs. Making the most of that opportunity takes bits of Luke Skywalker's drive, Han Solo's skill, and Obi-Wan Kenobi's wisdom. And keeping the most of your proceeds takes the right tax advice. That's why we're here -- to give you a plan to keep the most of your legacy. And remember, we're here for your family, friends, and colleagues, too. May the Force be with you!
Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.
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