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Celebrity-estate planners are anxious to avoid the recent fate of Michael Jackson’s estate—a battle with the IRS over the agency’s $161 million valuation of the King of Pop’s after-death image rights.
Determining the tax value of a celebrity’s postmortem image rights “is a very new topic for estate planners,” said Jeffrey K. Eisen, an estate tax partner at the Los Angeles office of Mitchell Silberberg & Knupp LLP. The Jackson case is “the first real case about the value of a celebrity’s name and likeness,” he said.
The trial, which ended Feb. 24, deals with the debate over Jackson’s postmortem right of publicity—the right of an individual to control the commercial use of his or her name, image and likeness. The pop star’s estate is arguing that his name and likeness at death were worth only $2,105 because his reputation was at an all-time low. Jackson is now one of the highest-paid deceased celebrities, according to Forbes, and the IRS is demanding about $64.5 million on his postmortem likeness—40 percent of the $161 million valuation.
Here are five tips estate tax attorneys say could help celebrity clients.
The best approach for planners is to treat image and likeness the same as any other income-producing illiquid asset and apply existing techniques accordingly, said Eisen, who represents Muhammad Ali’s estate trustee and previously represented the Farrah Fawcett estate.
Robin Williams, for example, chose to make a charitable bequest.
According to the Robin Williams Trust—a deed that was filed as an exhibit in a court battle over the division of his personal property—the actor passed on rights to his name, signature, photograph and likeness to the Windfall Foundation set up in his name.
“You can make the issue go away by going the Robin Williams route of leaving it to a charity and getting the 100 percent charitable deduction against the estate tax,” Eisen said.
Arnold Kassoy, a trustee of the Robin Williams Trust, declined to be interviewed for this story, citing an active estate tax audit on Williams’ estate.
In addition to donating his postmortem rights to charity, Williams placed a 25-year ban on exploitation of his image.
While the ban was likely put in place for personal reasons, not tax reasons—the charitable bequest would have wholly addressed those—other estates could use a time restriction to lower the value of a celebrity’s postmortem image and likeness.
“Certainly, putting some kind of time bar on exploitation of your name and likeness is going to reduce the value,” because as time passes, the celebrity is less recognizable, reducing profitability, said Ron Abrams, of counsel at Brutzkus Gubner Rozansky Seror Weber LLP.
The effectiveness of this strategy depends on who died, Abrams, who advises on intellectual property matters, told Bloomberg BNA.
“Robin Williams did voice-overs, he did so many voices for cartoons, and they probably have him saying almost every common word in the dictionary,” Abrams said. “They could probably put that into a computer and have his voice saying almost anything for future animated movies,” which would have made his postmortem likeness potentially very lucrative, he said.
A celebrity can also suppress the value of his or her postmortem image and likeness by placing that asset into some kind of business entity and gifting it to beneficiaries, said Russell J. Fishkind, a partner in the Personal Wealth, Estates and Trusts Practice at Saul Ewing LLP.
Fishkind, who wrote a book on estate planning for the rich and famous, said his strategy would have helped the Jackson estate.
Jackson’s career hit a low because of accusations of child abuse and odd behavior, and the rights to his image and likeness would have had a reduced value compared with its value at other points of his life, he said.
“What he didn’t do, but he could have done, was have his IP rights valued and assigned into an entity like a family limited partnership,” Fishkind said. Then, his attorneys could have had the partnership interests appraised, taken discounts on the value of those shares as permitted under the Internal Revenue Code, and sold the interests to an intentionally defective grantor trust, he said.
That type of trust freezes those assets for estate tax purposes, but not for income tax purposes. “The celebrity will pay the income taxes, thus suppressing their estate by virtue of paying the income taxes on a trust that’s outside of their estate,” Fishkind said.
It’s true that such a strategy would work, “but that’s going to be really hard to do in practice,” Eisen said. “It would be very hard for advisers or estate planners to go to a really famous celebrity and say, ‘Hey, you were just accused for some terrible crime. Let’s use that to our tax advantage,’” he said. Celebrities may also be unwilling to give up control over their name, image and likeness, which this strategy would require, Eisen said.
Celebrity attorneys must consider the practicality of using traditional planning methods when dealing with their famous clients, Eisen said. “It’s easy for estate planners to say, ‘Look at this brilliant tax idea,’ but you really have to think about how it would get done in the real world.”
To avoid estate tax, stars can also try to be domiciled—declare their permanent residence—in states that don’t recognize an inheritable postmortem right to a celebrity’s likeness, said John Scroggin, a partner with Scroggin & Co. PC in Roswell, Ga.
As of 2016, 23 states—including California, Florida and Nevada—recognize a postmortem right either by statute or common law.
If a celebrity is domiciled in a state without that inheritable right, the estate can argue that it won’t be able to profit from the deceased’s image and shouldn’t be charged the related state or federal estate tax, said Scroggin, who has written articles on the subject.
Marilyn Monroe is an example of why the choice of domicile matters. When she died, Monroe was arguably a resident of California, but her attorneys insisted that she was domiciled in New York to avoid California’s high estate tax rates at the time. It has also been said that her attorneys were trying to bypass inheritance claims of a woman alleging to be the actress and model’s biological daughter.
However, there was an unforeseen drawback. Years later, when California adopted a postmortem right of publicity, Monroe’s estate tried to claim control over her image. The courts denied that claim because her attorneys had always insisted she was domiciled in New York, which doesn’t recognize a celebrity’s postmortem image as an inheritable asset.
The Monroe case illustrates the pros and cons of the domicile strategy. Choosing a domicile that doesn’t recognize the postmortem right “would mean that your heirs may not be able to control what strangers do to your image for profit after you’re dead,” Eisen said. For some celebrities, “giving up control of your image after your death may not be worth that 40 cents on the dollar.”
Having a rock-solid valuation is another way to ensure that a celebrity’s estate doesn’t get overtaxed on image and likeness.
To strengthen the argument for a certain valuation, estates may want to hire multiple appraisers, said Scott Weingust, a valuation analyst and managing director at Stout Risius Ross Inc.
The best way to do this is to hire one person to do the actual valuation and another as a consultant to critique the first appraiser’s work, Weingust said. The consultant would offer suggestions and provide potential arguments against the valuation.
That route can be more constructive than getting two appraisers to do separate valuations of the same estate, Weingust said. “The challenge with multiple valuations is that you may get significantly different answers, so how do you rationalize that to a finder of fact,” he said. “Sometimes that can be a slippery slope where it may not be helpful.”
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