+David Shulman

South Florida Estate Planning Law Blog

Insight & Commentary on Estate Planning, Wills, Trusts, Probate & Taxation

Michael Jackson and the Estate Tax

I have previously written in the blog about the Estate Tax, but I’d like to revisit the subject using the real life example of the Michael Jackson estate.  First, some review of the basics.

The estate tax, which is often, but inaccurately called the “death tax” by people who oppose it, is not an income tax.  It is an excise tax on the value of assets transferred by an individual at the time of their death.  This includes not just money in the bank, but all assets owned by the individual, i.e. cash, stocks, bonds, real estate, Beatles songs, and Elephant Man bones.

A person dying in 2009 has a lifetime exemption, that is the amount of assets they can transfer at death before the estate tax applies, of three million five hundred thousand dollars ($3,500,000).  After that, the rate of tax on that person’s assets is 45%.  Interwoven with the estate tax is the gift tax which is a tax based on inter vivos (which means lifetime) transfers.  However, for the sake of simplicity, I will assume that Michael Jackson did not make any taxable gifts, that is, he did not make any gifts that would affect the estate tax.

Much of the public debate over the estate tax involves the lifetime exemption.  The higher the exemption is, the fewer people there are that would be subject to the estate tax.  A decade ago, the lifetime exemption was only $600,000, so a great many people were subject to the estate tax.  As it is now, very few Americans have estates that are worth $3,500,000 (especially with the stock market and real estate crash).  A married couple that engages in proper estate planning can leave $7,000,000 to their children (or to anyone they want) tax free. 

But for the Michael Jackson’s of the world, the amount of the exemption is irrelevant.  When you have hundreds of millions of dollars in assets, it does not matter whether the lifetime exemption is $1,000,000 or $3,500,000 or even $10,000,000.  What really matters is the rate, that is what percentage of the assets will be subject to the tax.  As I wrote earlier, Michael Jackson’s estate is looking at a possible estate tax liability of 45% on his taxable estate.  And the IRS doesn’t take payments of Red Zippered suits.  Cash only please.

There are a few things that should lessen the amount of the estate tax that he owes however.  First, the tax is only imposed on the net value of his assets.  The estate can deduct from the value of the assets any liabilities that the decedent had at the time of his death.  And according to published reports, Michael Jackson had very significant liabilities.  In fact, his liabilities may be so large that his estate could be worth far less than anyone would expect.  Second, just like there is an income tax charitable deduction, there is also an estate tax charitable deduction.  Any money that Michael Jackson left to charity will be deducted from the value of his taxable estate, and thus reduce the amount of estate tax that he owes.  Third, the estate may deduct the costs involved in administering the estate, which I also suspect will be substantial.

Although news reports say that it will take years and years to sort all of this out, the estate tax is due and payable nine months after death before interest and penalties (which are substantial) start kicking in.  So whoever is in charge of the Form 706 Estate Tax Return has their work cut out for them.

In a future post I will talk about the essential question of valuation, that is how do you determine what an asset is worth.  Cash and stocks and bonds are easy to value and even real estate has comps.  But how do you value the future income stream of the Beatles catalog?  What is the likeness and image of Michael Jackson himself worth?

Tough questions.  Stay tuned.

 

About the Author

David ShulmanDavid is a Fort Lauderdale attorney with a law practice focused on estate planning, probate and trust administration, asset protection, guardianships, and tax. Among other things he is a Mac nerd, BBQ lover, and blogger. Follow him on Google or Twitter.View all posts by David Shulman →

  • Dave

    Nice explanation! I was wondering if this would get any more news considering the numbers being bounced around by the newsmedia concerning the value of the estate.

  • Anonymous

    I would love to have an update on this blog!