Analysis: Simon factions make peace as tax hike looms

Widow Bren Simon and her stepchildren finally managed to set differences aside and settle a dispute over the estate of mall magnate Melvin Simon.

One goal that apparently united the survivors: Limiting Uncle Sam's take of a fortune that has swelled to nearly $3 billion.

The timing and secretive nature of the settlement, which a Hamilton County judge endorsed Dec. 12, suggests the parties are scrambling to facilitate the transfer or sale of assets before 2013 arrives with expected higher tax rates on capital gains and dividends.

Following the settlement, family holding company Melvin Simon & Associates Inc. announced plans to sell 3 million shares in Simon Property Group Inc., a stake valued at more than $460 million based on recent trading. The estate's trustee may be orchestrating similar sales of the estate's privately held investments.

The fortune at stake has swelled in size since the legal battle began in January 2010, four months after Melvin died at 82. The legal fight turned nasty at times, exposing a long-simmering fued between Bren and her stepchildren.

But with a larger pot of money to share among family members and charities to which Melvin had pledged gifts—and the looming tax hike—the parties found sufficient common ground.

“Your enemies can become friends when the IRS is in the middle,” said Joseph A. Clark, managing partner at Anderson-based Financial Enhancement Group and an adjunct professor at Purdue University. "The Simons have been shrewd their entire lives."

Estate taxes are set in stone based on the year of death, Clark noted, but capital gains taxes are assessed based on rates in the year an asset is sold.

The estate process has its tax advantages: Assets can be marked at their fair-market value at the time of death or nine months later, meaning heirs aren't on the hook for capital gains going back years.

However, in the Simon case, the assets have appreciated significantly since Melvin's death. That's a good thing for the beneficiaries: There's more money to go around. But it also means a higher tax bill.

Take for instance the 3 million shares the family said it plans to sell. The estate’s basis in the shares is not public, but if the shares are marked at their value on Melvin’s death, the estate could be sitting on a capital gain of more than $250 million on those shares alone.

There’s no telling exactly where the capital gains tax will wind up, but Clark expects it will rise to about 25 percent from the current 15 percent. That means by selling in 2012 instead of 2013, the Simon estate could save about $25 million in taxes. Even for the Simons, that’s a lot of money.

The Simon estate isn't the only one trying to liquidate assets by New Year's Eve.

Legendary investor Warren Buffett agreed this week to buy back $1.2 billion in Berkshire Hathaway stock from the estate of a shareholder. The move, designed to save the unnamed estate millions in taxes, drew howls of protest from Buffett critics who pointed to his advocacy for higher taxes on wealthy folks.

Clark said he's advising on three estates that hope to liquidate before the tax increase, and has assisted clients on issuing special dividends from their privately held businesses in advance of the deadline. He noted bank deposits have swelled to record levels. Of course, those dollars are pretty much useless as long as bank interest rates remain near zero.

Even if Congress and President Obama manage to avert the so-called fiscal cliff, taxes on capital gains and dividends are almost certain to rise. For those who earn more than $250,000 in combined wages and investment income, that includes a 3.8 percent surcharge on investment income to pay for the Affordable Care Act.