“You see my husband as a saint, so he must be right in everything he says and does. And then you see him as a devil, and everything he says and does must be wrong. Well, my husband is neither a saint nor a devil. He’s just a human being and he makes mistakes.”
On the day of former Penn State head coach Joe Paterno’s death, a post came out on forbes.com entitled “Monday Morning Quarterback: Joe Paterno’s House Transfer Was a Dumb Tax Move”.
This was the latest in a slew of articles and opinions posted about a July 2011 transaction where Joe Paterno transferred his home to his wife for $1 plus “love and affection”. Since the child abuse scandal broke several months ago, the many opinions on this transaction ranged from head-shaking criticisms to outrage. Some even went so far as to opine that the entire transaction was fraudulent.
So based on the zeal to castigate Paterno’s evil inactivity and within the shield of protecting the interests of abused children, there appears to be a group of people who are almost eager to find fault in everything that Paterno said and did.
As a result, the pendulum is beginning to swing too far away from thorough research and common decency in favor of scooping competitors and eye-popping headlines.
This is because those who have pursued this tack have avoided some key facts at the expense of compassion for the Paterno family, his legal team, and longtime supporters, as well as the Penn State and Central Pennsylvania communities.
Note: In the interest of the family’s privacy, I refuse to provide any links to any personal information here. Additionally, much of the analysis that follows is mere speculation – by design, the contents of the Paterno trusts are not publicly available, nor should they be.
The July 2011 Transactions
The opinions described above about Paterno’s transaction with his wife assume one transaction in July 2011. In fact there were three:
1) From Joe to Susan, his wife, for $1, as stated by multiple sources.
2) From Joe to a Qualified Personal Residence Trust (“QPRT”) and Susan as trustee, for $1.
3) From Susan to the QPRT and Susan as trustee, for $1.
A QPRT is a special (and quite legal) trust allowed by the Internal Revenue Code at Section 2702. To oversimplify, this instrument is used to enable homeowners to give their personal residences to their descendants over time rather than outright all at once. Using this tool can result in very significant tax savings.
- QPRTs also involve a gamble — The homeowner who transfers the residence into a QPRT must survive the term of years the trust is open (which is established at the outset). If he or she doesn’t, the whole transaction is taken apart as if it had never occurred.
If we merely stopped here, it is not a stretch to assume that:
- Joe wanted to remove the house from his estate. This could be to:
- Equalize Joe and Susan’s estates.
- Reduce Joe’s potential estate tax bill.
- Reduce Joe’s potential gift tax bill.
- Have the transactions be subject to capital gains tax (15% maximum tax) rather than gift or estate tax (35% maximum tax).
- The first transaction was inexorably linked to the following two transactions (i.e. it cannot be examined on its own to make any judgments about the strategy).
- The next two transactions were probably arranged to ensure that Susan was the sole owner of the personal residence. Given Joe’s poor health and advanced age, Susan is the more appropriate spouse to “gamble” on living throughout the full term of the QPRT.
But again, let me emphasize that all of this is speculation – I have not seen the QPRTs, and I have not spoken to anyone in the Paterno family or legal team.
But we won’t just stop here. There are even more underreported facts that make these transactions look even less “dumb” for the Paternos.
The November 2010 Transactions
According to Scott Martin of The Trust Advisor, the three July 2011 transactions were merely corrections of earlier paperwork. In fact, the original gifts by the Paternos to the QPRTs were done in November 2010.
This is of even greater significance because:
- The transactions were done even earlier than has been speculated. This punches an even bigger hole in the assumption that they were done to avoid potential creditors from prospective lawsuits.
- There was no estate or gift tax in 2010. Therefore, gifts made at that time would have saved even more taxes than if the transactions were done in 2011.
Pennsylvania Allows “Tenancy By The Entireties” Ownership
Tenancy by the entireties (“TBE”) is a form of ownership between spouses only that is allowed in about half of the U.S. states, including Pennsylvania. It creates a “fiction” that property held as TBE should be treated as if the two spouses are one individual. The property is thereby protected against the creditors of either spouse.
If the Paternos owned their home as tenants by the entirety prior to the November 2010 transactions:
- A transfer of the TBE house into QPRTs would destroy the TBE creditor protection because the two spouses would no longer be the sole owners of the property.
- In other words, the three transactions would have resulted in the removal of one form of creditor protection. Can Paterno be guilty of avoiding potential creditors by weakening the protection over his home?
This discussion is not about excusing Paterno’s behavior, or lack thereof, and certainly goes well beyond estate planning. Instead, it is a call for responsibility and integrity in our writings and analysis:
- Let’s not insult a man’s family and his legal team without knowing all the available facts.
- Let’s not ignore all the good a wrongdoer has done for his community, his state, and his profession.
- Let’s be sensitive to the major impact of Penn State football to Central Pennsylvania which, until recently, proudly embraced the program as reflective of its own values. After over 45 years, it cannot be easy for these thousands to simply flip a switch and haul the man over the coals, so to speak.
- Let’s be decent to others by avoiding flippant articles on the day of the man’s death. Remember that because of the death, you are not punishing the man, you are punishing his family.
- Let’s only report someone’s death once death has occurred.
- Let’s show intellectual honesty by separating fact from speculation.
Folks, let’s also remember that while we all have a right to our opinions, this does not mean that all of our opinions are right.
Thank you for your time.
- Paterno Passes on Home to His Wife for $1 (www.nytimes.com)
- Media Outlets Scrambled to Report False Claim of Paterno’s Death (www.wtae.com)
- QPRTs Can Also Be Used to Avoid Ancillary Probate (www.tennesseeestateplanninglaw.com)