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Death and Estate Taxes Don’t Take Holidays, Even for Celebrities

A carefully crafted estate plan may have avoided the multi-million dollar battle over Michael Jackson’s estate currently taking place in the U.S. Tax Court.

By disposing of his assets primarily by Will, his estate has been subjected to a myriad of red tape as well as the scrutiny of the Internal Revenue Service. Maybe, as his attorneys have argued, his estate had no value, justifying a simple Will. However, the IRS clearly feels otherwise. I would argue that much of the hoopla over estate taxes could have been avoided with proper planning.

In California, an estate can wind up in probate for two reasons, to settle a testator’s estate as set forth in a Will, or to determine the appropriate distribution of assets should someone die without a Will. Typically, an executor is appointed by Will or by the court. That person inventories and then values assets, and pays outstanding bills and obligations, such as taxes. Only then can the estate be distributed to heirs.

The valuation of an estate, however, becomes more difficult when a celebrity is involved. Under California’s Celebrities Rights Act, the publicity rights of a celebrity are property and can be bequeathed to designated beneficiaries. Publicity rights may consist of a deceased celebrity’s likeness, photos, voice, or works. After the celebrity’s death, his or her heirs are entitled to the proceeds generated from the use of those rights. Sometimes, a celebrity’s likeness may be used in advertising, while his or her works could be used in anything from a movie or theatre production to a musical performance by other artists.

Copyrights, trademarks, and patents—intellectual property, all have continuing value beyond death. For estate tax purposes, the value of those assets at the time of the owner’s death is critical. It could have a financial impact on the total value of an estate, as well as state and federal tax liability.

The dispute between the executors of Michael Jackson’s estate and the U.S. Internal Revenue Service (IRS) points to the difficulty of valuing a celebrity’s intellectual property rights. The executors claim that at the time of his death, Michael Jackson’s reputation was so damaged that the value of his intellectual property was $2,105. However, the IRS initially set the value at more than $434 million. It has since reduced that value to $161 million, but the tax implications are still pretty extreme.

The IRS is arguing that the impact of his death upon the value of the estate should also be considered. Jackson’s estate has benefited from a use of his image and works since his death. For example, Box Office Mojo reports that the documentary, This Is It, grossed more than $261 million worldwide, while Cirque du Soleil’s Michael Jackson ONE grossed more than $100 million just in 2013. There is no question licensing deals and royalties from the use of his music and his image since his death have been lucrative. However, the real question is whether those post-mortem earnings should be included in his estate for estate tax purposes.

Generally, the valuation of an estate occurs at the time of death. The IRS seems to be claiming that the licensing potential post-death actually existed at the time of Michael Jackson’s death and therefore, must also be included in the value of the estate.

The outcome of this case could have significant implications for the right of publicity for other celebrities. If the IRS is permitted to use post-death earnings as part of the estate valuation process, what will prevent them from pursuing existing high-earning celebrity estates? This could be one of those ‘once in a lifetime cases,’ as some legal experts claim, or it could strike a blow to those celebrity estates that through savvy marketing, found a way to increase the value of a celebrity’s intellectual property after death.

The Michael Jackson case makes it more important than ever for those whose estates may profit from their fame after death to plan ahead and get their ducks in a row. An estate planning attorney can craft a strategy for not only protecting intellectual property rights upon death, but also minimizing estate tax liability.

For example, placing intellectual property rights in a trust can minimize estate taxation, as well as ensure that any profits from those rights benefit intended heirs. The right kind of trust takes property out of the estate, which means it is not subjected to probate and is outside the reach of the IRS. Only the earnings distributed to the heirs are taxed, but as income, which is a better result than subjecting the entire amount to estate taxes.

It is a bit surprising that Jackson’s intellectual property was not placed in a trust for the benefit of his children. By subjecting those rights to probate and estate taxation, the value to his heirs will be substantially reduced.

Perhaps he thought he had more time to address his estate planning concerns and properly provide for his children after death. Unfortunately, as we all know, when death knocks on your door, it doesn’t ask whether you have an effective estate plan in place. Death has its own timetable and the only thing you can do is be prepared.