When Bob Magness, the founder of TeleCommuni-cations, Inc. (TCI) died at age 72, he left behind nearly a $1 billion estate, the largest ever in Colorado. One of his pallbearers was fellow television billionaire Ted Turner.
But for all his wealth and connections, Magness didn’t know much about estate planning. That created some painful consequences for his widow, his sons and the company he left behind. Of course, Magness is not the first famous individual to make that mistake. The heirs of Seward Johnson, Henry Ford II, H.L. Hunt and Joe Robbie (to name just a few) also watched their inheritances dwindle, thanks to poor planning, family squabbles and the like.
About the only good that can come out of such highly publicized fights among the heirs of famous people are lessons for the rest of us. There is much to be learned by examining exactly what went wrong with the Magness estate.
The Will
Before Bob Magness died, there were few secrets about his holdings. It was public knowledge that he owned 34 million shares of TCI stock and 9 million shares of Liberty Media, and that the traded market value was nearly $735 million. Soon after his death, the press announced that the estate had problems. Yet it wasn’t until his will and estate became an open public record that real media speculation began.
His mostly “formbook” will was witnessed (and presumably drafted) by noted Houston attorney S. Stacy Eastland. It left $20 million cash and a $35 million qualified terminable interest property (QTIP) trust to Bob’s second wife, Sharon; charitable bequests of $14.9 million (including a $10 million gift to the University of Denver); and the balance of his estate to two sons, Kim and Gary. The document seemed hastily prepared. There were numerous witnessed, hand-written margin comments. The will failed to include a no-contest clause designed to punish an heir who challenges a will. The Denver Business Journal even reported that Bob’s advisors nearly “lifted his hand” to sign a new will while he was comatose.
Lawyers, on behalf of named representatives Donne Fisher and Daniel Ritchie, tried to keep the will’s contents from public scrutiny. Estate attorney William Huff argued that knowledge of the details could cause “significant economic loss” and that the will should remain sealed from public scrutiny; to do otherwise would “let the cat out of the bag.” But lawyers representing The Denver Post and Rocky Mountain News made a successful case for the public’s right to know. On June 11, 1997, the estate gave in and the Bob Magness will became public.
That raised immediate concern about the estate’s staggering 55-percent tax bill. Would a stock sale to raise $500 million cash hurt the value of TCI’s shares? Could the company recover from such a sale? About 95 percent of Bob Magness’ TCI holdings were super-(10 for 1) voting Class B stock. Although TCI chairman and CEO John Malone had a first right of refusal on these securities, it might be a tall order to find that much money. Everyone was in a bind, and the press knew it.
The Stock Swap Sale
About two months before an August 15, 1997 estate tax payment deadline, the Magness estate announced a resolution. With TCI, it exchanged 32 Class B super-(10 for 1) voting shares for 32 million Class A (1 for 1) voting Treasury shares. Then, it sold the Class A shares to Lehman Bros. and Merrill Lynch for $529 million. In exchange for cash interest of about seven percent annually, TCI kept a separate right to reacquire these Class A shares 24 months later.
Everyone seemed happy. The estate still had two million shares of TCI stock and cash for estate taxes. TCI (and Malone) maintained control of Bob Magness’s Class B shares. Lehman and Merrill presumably had increased cash flow from valuable covered call writing potential on TCI’s Class A shares. All was not well, however, with the Magness family and the estate.
Contesting the Will
On June 25, 1997, Sharon Magness formally challenged the Magness will, claiming up to one-half (about $400–$500 million) under Colorado’s elective share statutes. Sons Kim and Gary countered that she might be entitled to even less than her $35 million in bequests, because she had voluntarily waived anything over $5 million in a 1989 prenuptial agreement. Battle lines were drawn for a bitter family feud. (Later, Sharon strengthened her position by claiming her bequests of $35 million had appreciated considerably, because estate assets mushroomed in value after her husband’s death.)
Paying the Estate Tax
On October 13, 1997, the press disclosed a $273 million first payment on the Magness estate taxes, including a $78 million allotment to the State of Colorado. The Denver Business Journal reported that Colorado would likely refund its share to local residents ($30–$40 each) as part of a 1996–1997 fiscal year tax “windfall.” Surely, this revelation shocked those who prefer choice and anonymity in their gifting and philanthropy.
Contesting the Stock Swap Sale
In early September, Magness’s sons came aggressively to the courtroom. They argued that the June 1997 TCI stock swap sale should be rescinded because (1) there were no competitive bids, nor premiums paid for super-voting B shares in the exchange; (2) they neither received notice of actual competing offers, nor did the executors consult with investment bankers about sales strategies; and (3) estate representatives Fisher (a stake in TCI) and Ritchie (chancellor of the University of Denver) had conflicting interests, as well. The Magness sons had instead wanted to borrow against their stock to pay estate taxes.
In short, the executors should step down, and the stock swap sale should be reversed—32 million Class B shares (which had appreciated since July 1997 by about 75 percent) must be returned to the Magness family. “Case closed—end of story.” Of course, the estate representatives disagreed.
The Settlement
On January 5, 1998, all family and estate lawsuits were settled abruptly. Although January press reports are vague, it appears that
TCI returned to the estate one-half (16 million) of the Class B super-voting shares, now worth $450 million
TCI paid the estate $124 million cash for a right to re-acquire these B shares in the future
TCI paid $150 million to John Malone for a similar option on his Class B shares
There was an undisclosed settlement between the estate and Sharon Magness
There was even some agreement about making charitable gifts on behalf of Bob Magness
It isn’t clear from the press whether the Magness estate must now return up to $265 million (one-half of the $529 million in stock value) it received earlier in the Class-B-for-Class-A stock swap. Nor is it obvious why so much cash had to be paid for the mere future option to re-acquire all shares now held by Malone and the Magness estate. Everything points to a “sweet deal” for the Malone and Magness families, at the expense of other TCI shareholders and current subscribers (and several shareholder lawsuits have already begun to reportedly challenge the entire Magness settlement).
Consider this: Malone presently holds 42 million super-voting Class B shares, worth about $1.2 billion. Let’s say TCI kept the cash it paid him, and makes a $150 million business loan at eight-percent interest. If the debtor makes equal payments of principal and interest and liquidates this loan over 20 years, TCI could probably afford 20 annual premiums for $1 billion of life insurance on Malone, age 56. If he consented to being underwritten and this coverage (or some portion of it) were available, you’d think TCI might consider funding a commitment with insurance instead of merely buying an option to pay hard cash later on.
The ‘Lessons’
Although Bob Magness leaves an incredibly successful cable empire behind, he may become best known for his lapses in preserving family wealth. Here are a dozen or so lessons we can draw from his aversion to estate planning:
Pay attention to matters early on. Bob Magness’s reluctance to do creative estate, philanthropic and financial planning for his spouse, children and their offspring, got the Magness family into a real mess. Ted Turner, Sam Walton and Malcolm Forbes set much better examples.
Assure maximum privacy by creating living trusts. Wills are a matter of public record while, generally, trusts are accessible only by those having a “direct economic interest.” For best results, locate the trust where lawsuits aren’t encouraged and judges don’t like family squabbles. An off-shore situs such as Grand Cayman or the Cook Islands would be a good possibility.
Use a living trust to reduce chances of a contest. The longer a trust has been in existence, the more difficult it is for someone to attack its validity. And a contest is probably less likely if the trustee is an independent third party.
Use combinations of charitable remainder and lead trusts and discounting strategies to minimize taxes and benefit others. Establish them now, and make charitable intentions clear.
Get the best legal and financial advice there is. Don’t tolerate incompetency, inferior solutions and those who allow difficult customers to sign third-rate documents.
When money is at stake, don’t name individual executors. Instead, select professional representatives chosen for their neutrality, experience, balance and the financial strength to back decisions. Then, make them trustee while you are alive; one trial run is worth a hundred doses of reality.
Decline the opportunity to serve as an estate representative, unless it involves family. Then, insist on fiduciary liability insurance, if available. It also may make sense to be bonded, if difficult days are ahead.
n Video-tape family discussions—even the signing of the will. A televised commentary may not always be admissible in court, but is powerful evidence of what the deceased intended.
Buy lots of life insurance in trusts to (1) replace assets gifted to charity and (2) pay estate taxes, if any, that are assessed. A life insurance trust for spouse or children is especially helpful if it assures equality and fairness (and if it has a legally effective no-contest clause).
Always be fair and equitable, in disposing of assets. When loved ones sense thoughtfulness and attention to detail, there is less chance of a flare-up.
n Use off-shore trusts before marriage. In Brigid McMenamin’s “’Til Divorce Do Us Part” (Forbes Magazine, October 14, 1996), there is thoughtful commentary about how well foreign trusts can protect assets from a potentially litigious spouse.
In second and third marriages, sign prenuptial agreements. Then, if a will or trust supersedes the marriage contract, specify that a spouse who contests an estate document is left with what is agreed to in the prenuptial agreement.
No-contest provisions (that cause forfeiture of dispositions to someone who challenges a will or trust) are effective in most states. These interroram clauses also are more likely to increase the risk of loss if they forfeit something of real value, such as proceeds from beneficiary designations and other estate documents, as well.
Finally, know that estate planning is an inexact science. We never die “right,” and can only do our best. But it’s extremely important to help matters along for loved ones, and that’s the least we can do in a society where something can happen at a moment’s notice—and usually does. n
Richard W. Duff, J.D., CLU, is a financial advisor in Denver, Colorado, and a principal in First Financial Resources (FFR). He is author of Keep Every Last Dime: How to Avoid 201 Common Estate Planning Traps and Tax Disasters. Duff can be reached at (800) 352-5353.
