Thursday, May 29, 2014
While Michael Jackson’s executors claim his estate is worth only $7 million, the IRS disagrees, estimating that his estate is worth $1.1 billion. This disparity may have arisen because Jackson’s estate owns part of a trust, and the estate claims the singer’s interest in the trust had no value. However, the IRS argues it is worth $469 million.
The dispute between Jackson’s estate and the IRS serves as a lesson for financial advisors who handle high-profile clients with unusual assets. Here are three tips to keep in mind:
- Early Appraisals. When gifting assets to relatives, it is important to have a good appraisal and attach it to the gift tax return. “What that does is start the statute of limitations. If the government questions the validity of the gift, it has to be done within three years.” 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, “What the LLC does is create a layer of discount.” Clients can also set up an intentionally defective grantor trust (dynasty trust), so the assets are removed from the client’s taxable estate, resulting in zero taxation.
- Name as an Asset. One issue for celebrities is the right of publicity, which protects their name, voice, signature, and image, and laws can vary by state. Understanding right of publicity laws can help the lawyer advocate for his client. Furthermore, it is crucial to arrange a proper wealth transfer, which 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.
- Backup Beneficiaries. Advisors must ensure there are multiple beneficiaries for the estate. Failure to update a will can prove to be costly. For example, Philip Seymour Hoffman passed in February, and last updated his will in 2004 when his first child was born. He then had two more children, who may receive little or no inheritance.
See Joseph Perone, Celebrity Estate Pitfalls, Private Wealth, May 9, 2014.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.