Will Taxes Destroy the Michael Jackson Estate?

Death and Taxes. Will the headlines next year say that estate taxes have destroyed the finances and estate of Michael Jackson? There is not sufficient information available to the public to know now for certain, but from what we have heard, it appears that the late star’s estate will run into big problems with the Internal Revenue Service.


At the time of Michael Jackson’s death, the amount exempt from federal estate taxes is $3,500,000. To determine the taxes due from his estate, you must add up everything he had control over, had an ownership interest in or was part of his taxable estate under a complex series of rules. Figuring this out may take years.

Calculating Your Taxable Estate. For most people, your taxable estate means your total equity in your real estate, your retirement accounts, your savings and checking accounts, your stock and bond investments, your business interests, your life insurance death benefit, your cars and everything in your home. In counselling with people, I generally find that people are shocked as to how much is subject to estate taxation. Recently, a husband and wife consulted me about planning their estate. They are both practicing CPAs preparing income tax returns for other people. They said they didn’t have an estate tax problem, but when I totaled it up and looked at how they owned their assets, they had a significant estate tax problem.

Jackson’s Assets. According to press reports, the largest asset of Michael Jackson was half of Sony/ATV Music Publishing, a 750,000 song catalogue that includes music by the Beatles, Bob Dylan, Neil Diamond and others. The speculation is that the Jackson share is worth somewhere between $500 million and $1.25 billion. Reports indicate that although Jackson owned this in a protective trust, he had used this catalogue to secure loans and that his creditors could force a fire sale of this asset. Jackson also had interests in his own songs and recordings, which are skyrocketing in value after his death.

Billion Dollar Estate. So, let us assume all of the assets of the Jackson estate are worth $1,000,000,000 (one billion), a figure often mentioned in press reports. He has a lot of debt which does not go away because he died. Reports are that his debt is from $400,000,000 to $500,000,000. Let us assume the middle with $450,000,000 of debt.

Net Estate over ½ Million. This means that his gross taxable estate is about $550,000,000 (one billion minus $450,000,000 of debt). From this you will subtract legal, accounting and other fees of the estate that could range from $5,000,000 to $50,000,000, depending upon the costs and commissions to sell his assets. So, Jackson’s net taxable estate, after subtracting $26.5 million in fees and expenses and his $3.5 million exemption from estate taxes (if still fully available), would be about $520,000,000.

Pay $230,000,000 by March. The federal rate is 45% so the Jackson estate would owe about $230,000,000 in estate taxes to the federal government. When? Nine months after his death, in March of 2010. In cash.

Creditors Sued Him. Jackson had been fighting his creditors in court for the last several years. He successfully fought an attempt to auction many of his personal possessions earlier this year. He had been sued by his former publicist, video director, attorneys and financial advisors. A financial backer bought Jackson’s Neverland Ranch just before the property was to be sold at auction to cover back debts.

World’s Most Powerful Collection Agency. If you do not pay the IRS the estate taxes due in nine months, the IRS can lien and sell your property at a distress sale. You can ask the IRS for more time to pay, but this is often in the discretion of the IRS. Given Jackson’s debt problems before his death and the public exposure of this case, do you think the government will give the Jackson estate a break that they may not give to the average person?

Forced Sale of Assets. If Jackson couldn’t pay his bills during his lifetime, where will his estate get the $230,000,000 by next March? Will the IRS force a sale of his assets at fire sale prices? This has happened in other estates where the family ended up with pennies on the dollar compared to the millions the family thought they would get.

Was there Tax Planning? Jackson could have hired tax planners who could have eliminated most of these federal and any state estate taxes. You may be shocked to know that someone can die worth half a billion and not pay significant estate taxes through clever planning. Alternatively, if you don’t plan, the tax system can wipe out most of the value of your estate. Yes, that is the system we have now and it is going to continue this way for years to come.

The world is mourning the passing of this music legend. His legacy is not just money and will live on regardless of what happens to the finances and taxes of his estate. But, his estate is heading for a show down with the most powerful collection agency in the world.

First LLC Mistake: You Signed the Articles!

Why do you set up a limited liability company (LLC)? Because you want to have at risk only the money and property you choose to put into your LLC; you do not want to risk all of your other assets if there is a failure of the LLC business. You want to limit your liability from business activities.

Example: Susan owns five rental houses, A, B, C, D and E. Susan is sued on house A which she owns in her name. She loses the lawsuit and suffers a judgment against her for $500,000. As a result, all of Susan’s assets are at risk to pay the $500,000. The person who gets the judgment against Susan (judgment creditor) uses the judgment to sell house A through a court sale or foreclosure. The net proceeds of the distress sale of house A are $50,000 and all of this goes to the judgment creditor. She still owes $450,000 to the judgment creditor. The judgment creditor has houses B, C, D and E sold at distress sale prices for total net proceeds of $200,000. Susan still owes $250,000. The judgment creditor then goes and takes the money out of the savings, brokerage accounts, home, stamp collection and other assets of Susan until she has paid the entire $500,000, plus interest, legal fees and costs.

Is the LLC the solution? Susan does not like this. She does not want her savings and other assets put at risk as a result of her investments in rental houses. Susan hears that a limited liability company (LLC) can limit her liability.

LLCs became popular in America in the last 20 years. Basically, an LLC is a legal entity you set up under state law. Once you have the LLC and you keep it in force and if there is a judgment against the LLC, the judgment creditor is only supposed to get the assets in the LLC. The judgment creditor can not come after the assets of the owners of the LLC, unless the owners contributed personally to the reasons for the judgment. Thus, if it works and all of Susan’s houses are titled in the name of Susan’s LLC, then the $500,000 judgment creditor gets all of the five houses owned by her LLC, but can not come after Susan’s savings accounts and other assets.

Personal Judgments: If Susan had an auto accident where she was found at fault and the person she injured obtained a judgment $1,000,000 against her above the insurance limits that Susan had, then Susan is personally responsible to pay the $1,000,000 that her insurance company will not pay. In some states, if Susan’s houses are owned by her LLC, then the $1,000,000 judgment creditor can not use the judgment to sell her houses.

Pre Lawsuit Asset Search. Trial lawyers make their money by suing people and insurance companies who can pay money. The wealthy trial lawyers pick cases very carefully and will often order an asset search before deciding to sue someone. Go to the internet and search for “asset search” and you will find many companies who are ready to find out what you own for a fee. One private investigator says that he can find out what most people own in a couple of hours!

First Mistake: Susan decides to save on legal fees and files the papers for the LLC herself. This means that Susan’s name is in the public record as owning the LLC. When the trial lawyer is deciding whether to sue Susan, the trial lawyer finds through these state and local records that Susan is the owner of her LLC which owns multiple properties, making Susan a desirable target for a lawsuit. Using the internet, this may take fifteen minutes or less. The trial lawyer may be able to force a sale of the houses owned by Susan’s LLC to pay a future judgment. Susan has greatly decreased the asset protection available from the use of an LLC.

Do Not Sign the Articles. Instead, if Susan retained a well informed lawyer to file the Articles of Organization with the state, then in many states, Susan’s name would not be in the public records either for the LLC or as the owner of her houses. The asset investigator may not find out that Susan owns five houses. If an investigator calls the attorney’s office, we treat this as a private matter and subject to the attorney client privilege. We don’t tell the investigator who owns her LLC unless Susan instructs us to tell the investigator. Normally, there is no legal right for a private investigator to force us to say who owns the LLC or LLC property before the filing of a lawsuit.

Top Ten Mistakes. Certainly, when Susan is sued, she will probably have to tell the trial lawyer what she owns, including the LLC, through the litigation process. But, if Susan does not make the First Mistake, she may not be sued in the first place. But, if Susan is sued and she has not made the top ten mistakes in setting up the LLC, there is a good chance of a reduced quick settlement paid entirely by insurance.

This is the First Mistake. We will take about the other Nine Mistakes in future blawgs.

When is a Tax Cut a Tax Increase?

When is a tax cut a tax increase? Or a tax increase a tax cut? In the case of estate taxes, it is both a tax cut and a tax increase.

President Obama is proposing that the federal exemption for estate taxes stay at its current 2009 level of $3.5 million for the next several years. An exemption of $3.5 million means that you have to have over $3.5 million in your taxable estate to pay any federal estate taxes. But, under the Bush tax cuts, there will be no estate taxes in 2010 and if you have an estate over $3.5 million in 2010, you pay no federal estate taxes under current law. Thus, with Obama's continuation of the estate tax in 2010, with an exemption of $3.5 million, there will be a tax increase in 2010 for you if have an estate in 2010 over $3.5 million. So, for you dedicated tax avoiders who will do anything to save taxes, forget going to your reward in 2010.

In this crazy world of taxes, the Bush tax cuts expire starting 2011 and then the federal tax exemption will go back to $1,000,000. Thus, an exemption of $3.5 million will be larger than the $1 million exemption in 2011 and therefore a change to $3.5 in 2011 will be a tax cut. And this is a tax cut for the wealthy between $1 and $3.5 million, or for a couple, for a total of $7 million.

How do we know it is going to be $3.5 million? The Bush tax cuts are still the law. There is no bill ready for the signature of Obama for the $3.5 million. Any bills bouncing around Congress now are unlikely to be the one that puts it at $3.5 million.

But, Obama’s budget figures assume there will be a $3.5 million exemption next year and for several years later. The top lobbyists following this expect the Congress will pass and the President will sign a $3.5 million exemption in the fall. If they do not change the law to the $3.5 million, then with no estate tax in 2010, this will be a tax cut that the Obama budget can not afford, particularly when there are large deficits. If they dropped the exemption to $1 million, this would sweep in large numbers of those who live around the DC beltway and might foment angry mobs of wealthy people in suits, or at least, lots of campaign contributions to their opponent in the next election. A $5 million exemption or higher would let too many of the “rich” not “pay their fair share”. So, $3.5 is not too high and not too low, but just right. Most planners are betting on a $3.5 exemption for the coming years.

Who's In Charge of Your Funeral?

Most people do not put someone in charge of their funeral. Most people don’t sign a document that designates the person who will make funeral arrangements.

You say: Isn’t this covered by my will? No, because it takes weeks to get an appointment to be appointed the executor of your will and no one is going to wait weeks to deal with the body. They don’t put you on ice wanting for a decision. It is not common to cover this in your will.

But, I gave a general power of attorney to my trusted daughter/spouse/son/buddy. No, because powers of attorney expire when you do.

Well, I have this lengthy living trust with all sorts of things in it. No-the living trust deals with property not your physical body.

Remember the week long trial in 2007 on CNN with the Weeping Judge in Florida as to who had the right to bury Anne Nicole Smith?

Today, families are dispersed and according to recent statistics, most Americans do not live with a legally married spouse. Widows, widowers, live ins, divorced, living in nursing homes, never married, sisters, same sex couples, and singles now out numbered the number of people living with spouses. This means most Americans today do not have the automatic comfort of a caring spouse who will make these arrangements.

Fred died and wanted the love of his life, Ellen, his live in of 20 years to execute his funeral instructions that he had told her in detail. But, his estranged son, Edward, insisted that father’s body be cremated even though his dad’s religious beliefs forbade cremation. Dad was a veteran and wanted a Marine Corps honor guard and taps at his funeral, but the son disliked the military and failed to contact the Marine Corps to make such arrangements. Ed had quickly made arrangements with the funeral home as the oldest son and Ellen had no legal power to stop Ed. Ed didn’t even invite Ellen to the funeral because Ed resented Ellen as the cause of the divorce of his Dad and mother.

This is an emotional minefield when it comes to same sex couples where the partner has no legal rights under most state laws.

Contrast this Ted who planned his church service and funeral. He had two children and had an emotional divorce and shared a house with Mary, the later love of his life, whom he never married. One daughter, Judy, was estranged and Ted and Judy had not talked for years. But, Ted scripted the music, readings and remembrances for his church service and funeral and included Judy, his son, Mary, his ex wife and his closest friends as readers and participants in the service. When Ted died, he was a healthy 60 year old ridding his bike to the store and had a sudden and unexpected stroke. At the service, everything went smoothly and the family was brought back together with a warmth that I will never forget. No one expected Ted to die so suddenly, but Ted was a detail person and made sure he covered this detail.

You don’t have to devote yourself to the details that Ted did. You can simply sign a document indicating your wishes and have your lawyer do what is necessary to make it work. In Virginia, we have a very good set of statutes which allow people to designate who will handle their funeral, burial and autopsy. You have the choice to designate a spouse, child, friend, partner or anyone you trust. This trusted person must sign a notarized statement that they accept these duties. Also, you direct your trustee or executor to pay the expenses of the funeral out of your trust or estate.

The laws of the states vary a lot on this subject. Some states have virtually no law and leave it up to the funeral homes to choose the person who will make the arrangements.

Make sure you cover this important point in your estate planning with an attorney who has experience with this. Don’t have your final memory be the debacle at your funeral.