Michael Jackson’s executors claim his estate is worth only $7 million.
But the IRS has told them to beat it and take a moonwalk, estimating the estate is worth $1.1 billion and that the “King of Pop” owes more than $700 million in taxes and penalties.
Why the disparity? For one thing, Jackson’s estate owns part of a trust with rights to a catalog of Beatles songs, including Yesterday, Sgt. Pepper’s Lonely Hearts Club Band and Get Back. The estate claims the singer’s interest in the trust had no value. The IRS says it’s worth $469 million.
The battle between Jackson’s estate and the IRS is a lesson for financial advisors who handle high-profile clients with unusual assets. The Beatles’ protest song, Taxman, puts it this way: “Now, my advice for those who die—declare the pennies on your eyes.”
It might be difficult to support the claims of the Jackson estate, says Richard Coppa, managing director of Wealth Health, a Roseland, N.J., private wealth manager.
“There is no Kelly Blue Book for Beatles songs,” he says. “But any asset you hold has to have some value. You can’t say it is worth zero.”
There’s also the fact that, after Jackson died, Cirque du Soleil used his music for performances in Las Vegas, earning his estate $160 million in 2013, according to Forbes magazine. He was the highest paid entertainer that year—dead or alive.
Early Appraisals
When gifting assets to relatives, the key is to have a good appraisal and attach it to the gift tax return, says Michael Massood Jr., a certified public accountant and partner with Massood & Co. CPAs in Totowa, N.J.
“What that does is start the statute of limitations,” he says. “If the government questions the validity of the gift, it has to be done within three years.”
Appraisers evaluate what an asset’s future cash flow could be and what a willing buyer might pay for that income stream, according to Dana Mark, an estate planning attorney for McCarter & English in New York.
“Some clients balk at the price of an appraisal because it’s hefty,” she says. “But that is penny-wise and pound foolish.”
One strategy to remove assets from an estate is for clients to transfer them to a limited liability corporation and gift pieces of the LLC to relatives, she says. “What the LLC does is create a layer of discount,” Mark says. ”If you put $100 into an LLC and give away 10%, it is not worth $10. It is worth about $7 because the piece that you gave away is not easily marketable, so you get a discount for it.”
Appraisers use comparable values to appraise an asset. But it would have been difficult for Jackson’s appraisers to have found comparable values based on the estates of Frank Sinatra or Elvis Presley, for example. For one thing, they might not have access to information on those estates. Both singers also died when the music industry and the economy were considerably different and before a star’s image could be used or affected by social media, says Amy Heller, a partner at McDermott Will & Emery in New York.
“Times have changed so much, and the way an image or intellectual property is used is so different than just a few years ago,” she says. “Because of the rise of social media and technological change, it’s not clear that the value of Michael Jackson’s image could be extrapolated from the value of Elvis’s image or Sinatra’s image, even if we had information about the actual value of [their] images.”
Advisors should have more than one appraisal of major assets performed during the client’s lifetime and disclose them to the IRS, says Steven Tarta, an estate planning attorney in Ridgewood, N.J.
“If the IRS comes back after death and says it doesn’t like the number, you can argue that you gave them the number 10 years ago,” he says. “That puts them on notice, and if they didn’t fight it then, you are in a much stronger position.”
Instead of paying a gift tax each year, celebrities can debit their lifetime exemption of $5.3 million by declaring it on their tax return, Tarta says.
Clients also could set up an intentionally defective grantor trust, also known as a dynasty trust, according to Tarta. The client pays no income tax on assets transferred to the trust, and any income tax deductions may be claimed by the settlor, who establishes the trust. The assets are removed from the client’s taxable estate, resulting in zero estate taxation. Beneficiaries can potentially receive extra wealth through appreciation of the assets.
Tarta says young athletes with high potential earnings should plan far into the future. For example, college football star Johnny Manziel should continue to preserve ownership of the phrase “Johnny Football” even though he wants to distance himself from his college image when he turns pro this year.
“We don’t know what the future holds, so why not preserve ownership of that asset if he needs it down the road,” he says.
Name As An Asset
One main issue for celebrities is the right of publicity, which protects their name, voice, signature and image, and can vary by state, says Jordan Weitberg, an attorney with Bressler, Amery & Ross in Florham Park, N.J.
“I represented a famous entertainer several years ago who wanted to open a restaurant in New York, which never happened,” Weitberg says. “But if the restaurant had taken off, she could have transferred the right of publicity to a trust for her children, and the trust could have licensed her name to the restaurant, which would pay a fee to the trust.”
Arranging a proper wealth transfer is crucial, says Jordan Waxman, managing director and partner at HighTower’s HSW Advisors in New York. That could include establishing trusts for family members to purchase assets from the estate in return for a promissory note. The note can be repaid to the estate and the excess value that accrues from the asset can go estate-tax free to the trust, he says.
Celebrity clients need advisors who can deal with children the celebrity might have had out of wedlock or investment schemes cooked up by relatives, Waxman says.
“A major risk of no prenuptial [agreement] is that the stars get married and have children during peak earnings years—then divorce later,” he says. “However, spousal/child support is calculated at the higher amount. In retirement, a large portion of the star’s cash flow is diverted to pay for spousal and child support.”
Waxman, who represents entertainers and athletes, arranges for a videotape of couples signing prenuptial agreements to prove they didn’t sign under duress.
Entertainers need an independent team of specialists to meet their needs rather than one professional, he says.
“In the entertainment industry, there are plenty of business managers who pay the bills, draft the contracts and do the investments,” Waxman says. “Their fees are very high and the clients are not getting the best advice.”
Backup Beneficiaries
Advisors also should ensure there are multiple beneficiaries for the estate. Otherwise, unintended consequences can result.
Take 1950s icon Marilyn Monroe, for example. The actress died in 1962, leaving 75% of her estate to her acting coach, Lee Strasberg. When he died in 1982, his interest in the estate went to his third wife, Anna Strasberg, who Monroe never met.
Probate took nearly 40 years, resulting in Anna Strasberg gaining full control of the estate. Her interest was sold for $50 million to a group that licensed Monroe’s image on countless products. Monroe also left her personal effects to Lee Strasberg and wanted them distributed to her friends upon his death. Instead, Anna Strasberg auctioned them for more than $13 million.
The lesson from the Monroe will is to have backup beneficiaries, says Massood, the CPA.
“Marilyn should have had a secondary or a backup beneficiary and then a backup to the backup,” he says. “She could leave her images in trust to Lee Strasberg, but if he dies it goes to someone else.”
He points out that estates such as those of Ernest Hemingway and Humphrey Bogart zealously litigate against those who use their names without permission.
Failure to update a will also can be costly, according to estate planning attorney Richard Sugar of Sugar Felsenthal Grais & Hammer in Chicago. Philip Seymour Hoffman, who died in February, last updated his will in 2004 after his first child was born. He then had two more children.
His oldest child could receive a huge trust while the siblings receive little or no inheritance, Sugar says, and his unmarried partner could face a significant tax bill.