ON MY MIND

Avoid “the Wrigley Risk”: By Lead the Estate Liquidity ichael D. White is Managing M Director of Financial League with Life Insurance Institutions Insurance Association and President of Michael White Associates, Bank Insurance Consultants, Radnor, PA. [email protected]

hen William Wrigley an- In 1977, Philip K. and Helen A. Wrig- cent in an effort to obtain cash to pay off nounced the $20.5 million ley had died within three months of each the estate's “debt” to the federal and state sale of the to other. But it was not until December governments. Still, the debt remained. W the Tribune Company on 1980 that the value of the Wrigley estate The Wrigleys then negotiated the sale of June 16, 1981, most baseball fans were and its tax obligations were settled with the Chicago Cubs. The $20.5 million not surprised. After all, the Cubs had lost the federal government and the states of they acquired from that sale went directly $1.8 million in 1980 and faced a deficit out of their estate and into the coffers of of approximately $3 million in 1981. The the government. In the end, the Wrigley Cubs’ management had recently cut $1.3 Although the time of family was worth $40 million less than million from its payroll by trading some death may not be they were the year Philip and Helen died. high-priced players. anticipated, estate Alice Bright, an attorney with the law Then there was the first baseball settlement costs can firm that administered the Wrigley estate, strike, which could only further cripple be. These liabilities can remarked that Wrigley ownership of the the Cubs financially. Moreover, the be offset by an Cubs had been “a great family tradition, Cubs’ last pennant was in 1945. Their appropriate amount of and it’s rather sad that taxes can break it last place record of 15 wins and 37 de- life insurance. This up.” But, she added, “there was nothing feats at the time of their sale hardly made need presents an the Wrigley family could have done to them pennant contenders for 1981. So, enormous opportunity avoid the estate tax problems and still when the Wrigley family severed its 66- for banks in insurance. retain control of both the Wrigley Com- year old relationship with the Cubs, most pany and the Cubs stock.” fans assumed the “third strike” for the Ms. Bright couldn’t have been more Wrigleys was the result of another bad , California and Wisconsin. The right in her first statement or more wrong season and more financial losses. estate, however, lacked enough cash or in her second. Estate planning and life liquid assets to pay these taxes. The insurance could have saved the Wrigley Big Inning for the IRS Wrigley survivors were forced to find heirs from the devastating financial and Financial losses did cause the Wrig- $40 million to pay the estate tax bill. emotional losses they were forced to face. ley’s to sell the Cubs, but these were not Initially, William Wrigley attempted In the On-Deck Circle operating losses. Death and estate taxes to cover the estate tax bills by selling off were the culprits. They demanded such a blue-chip stocks, like $10.9 million in Ms. Bright’s comments underscore large financial outlay that the Wrigley Texaco and $2.1 million in . But why the Wrigley example is far too typi- family was forced to sell the team to meet this fell far short of the needed $40 mil- cal. Most estate owners never intend to these financial obligations. Estate and lion. The Wrigleys were then forced to lasso their heirs with burdensome debt. inheritance taxes totaled $40 million. discount stock 35 per- They intend, at death, to pass their wealth

1 Bank Insurance Marketing / Fall 1995 ON MY MIND onto their heirs. Since they created their have extended that family tradition to 80 shrinkage of Crocker's estate by over wealth by their own efforts and paid taxes years. 48%. Less than $2.6 million remained for on it while it accumulated, they presume Unbelievably, in 9 out of 10 cases in his heirs. they had a “natural right” to will it intact especially large estates, estate settlement The estate of Albert Wiggin, who re- to whomever they want. costs are not funded by life insurance. tired as chairman of Chase National Unfortunately, in this country, no such Bank, was valued at $20.5 million when right exists. Estate transfer is viewed as a Before an estate can he died. Less than 2.5 percent of the es- privilege, and federal and state govern- be distributed to the tate was cash. Almost $15 million was ments require that fees must be paid for heirs of the deceased, required to pay settlement costs, leaving a them to grant this privilege of transfer. fees must be paid. net estate of $5.6 million—resulting in These fees include the payment of all out- Cash must be found shrinkage of three-fourths of Wiggin’s standing debts, probate costs, attorney's first to pay these wealth. and executor's fees, state inheritance taxes liabilities. Nearly 40 percent of the estate of Fre- and, for larger estates, a substantial fed- As a rule, however, derick Smith, president and founder of eral estate tax whose top marginal bracket cash on hand averages First Security Trust Company in Salt is as high as 50 percent. only about 10 percent of Lake, went to estate settlement costs. A former president of Bank of California, Strengthening the Bullpen total estate assets. W. W. Giddings, Sr., lost 42 percent of Life insurance provides liquid cash his estate, most of it to federal taxes. the moment it is needed—at the death of This need presents an enormous opportu- Heirs of Lloyd Bimson, a president of the estate owner. No other financial vehi- nity for banks in insurance. Arizona Bank (acquired by Security Pa- cle matures at the very moment it is most Bank clients who are owners of cific, later acquired by Bank of America), needed. Although the time of death may closely held corporations or, perhaps, saw more than a fourth of his estate’s not be anticipated, estate settlement costs large farming operations may be at what I value go up in smoke. can be. These liabilities can be offset by call the “Wrigley risk.” Compare the an appropriate amount of life insurance. Life Insurance Pinch-hitting for value of their business enterprises to the Liquidity An analysis of Philip and Helen Wrig- total value of their estates. How much ley’s estate while they lived and an ac- actual liquidity do they have? Is there a Wrigley attorney Alice Bright hoped counting of the estimated estate taxes due shortfall? When death strikes, cash must the Wrigley estate settlement “might help would have shown the financial obliga- be paid. Without proper planning, forced someone else.” It can, and it should. tions to be encountered upon their deaths. liquidation or sale of estate assets to meet Banks have clients who have accumulated The right and the right amount of life these liabilities is a distasteful and usually wealth just like the Wrigleys and, like the insurance to provide the liquid funds nec- financially disastrous necessity. Witness Wrigleys, have done little to conserve essary to pay the estate taxes would have the Wrigley example. their estates in the event of their deaths. saved the Wrigley estate $40 million. But just in case you think the estate Bankers and bank insurance agents need Proper planning might have reduced liquidity problem is limited to nonfinan- to tell their clients the shocking story of the estate liability from $40 million to a cial business owners, consider these the Wrigley estate and explain how com- lower amount. With properly structured wealthy bankers who suffered similar mon-sense estate planning can preserve ownership, life insurance used in conjunc- kinds of estate shrinkage at their deaths. and protect the destruction of a lifetime of tion with testamentary A/B marital trusts, effort and generations of hard work. irrevocable living trusts, or perhaps a cor- Sometimes No Relievers for Furthermore, banks need to show their porate redemption plan could have done Bankers, Either customers how life insurance can pre- the trick. Even life insurance on the sen- Charles Templeton Crocker, founder serve their estates from tax erosion and ior Wrigleys, personally owned by their of the former Crocker National Bank, left forced liquidation. Life insurance for es- children, would have provided the heirs a gross estate at his death of almost $5 tate liquidity gives your clients’ estates with the liquid cash necessary to purchase million. The day before he died, he owed sufficient cash to pay off these liabilities illiquid assets from the estate. less than $50,000. The day after he died, so the assets (and their values) they want Consequently, life insurance would his total estate settlement costs were $2.4 to pass on to heirs can be transferred in- have preserved some broker’s trading ac- million. Cash on hand in the estate ap- tact. Life insurance is generally the best count of more than $13 million. And the proximated $200,000. Assets had to be way to accomplish this goal, because it is Wrigley’s might still own the Cubs and liquidated and sold at a loss, resulting in a purchased at a discount, yet matures at the

2 Bank Insurance Marketing / Fall 1995 ON MY MIND very moment it is needed—when the cli- ent passes on and Uncle Sam steps in. Banks need to develop the resources to utilize the life insurance products that will help them solve problems like estate liquidity for their clients. If your bank doesn't own a life insurance franchise, or, if it is still sitting on the bench watching others, it ought to get in the life insurance game. Don’t let estate taxes knock your clients out of the box and drive their as- sets from your bank to the IRS.

This article first appeared in Bank Insurance Marketing, Autumn 1995, V.4, N.4, pp. 33-34. “Avoid ‘the Wrigley Risk’: Lead the Estate Liquidity League with Life Insurance”— BankInsurance.Com, Internet Edition © 1999 Michael D. White

3 Bank Insurance Marketing / Fall 1995