I am always interested in celebrity estate planning blunders as they illustrate common pitfalls that a thorough and complete estate plan can avoid. I have several posters in my office entitled, “Estate Planning Mistakes of the Rich and Famous.” There are so many celebrity “counter-examples” that they keep printing new editions of that poster!
Most of these estate planning mistakes center on the celebrity’s failure to plan properly. However, a recent battle between Michael Jackson’s Estate and the IRS demonstrates that there are just as many potential pitfalls in the settlement of an estate as there are in the planning stages.
Earlier this month, the Los Angeles Times reported that the IRS dramatically disagrees with the valuation of Michael Jackson’s Estate as set forth by the estate’s fiduciaries and advisors. The disagreement over the value of various assets of the estate is so great that it is almost comical.
Below are a few of the examples of the extreme disparities in valuation:
(1) Executors place the value of Jackson’s entire estate at $7 Million. The IRS values it at $1.125 Billion (no, the “B” is not a typo).
(2) Executors place the value of Jackson’s likeness at $2,105. The IRS values it at $434.264 Million.
(3) Executors place the value of the Beatles catalog of songs which Jackson owned at the time of his death at zero. The IRS values it at $469 Million.
(4) Executors place the value of Jackson’s automobiles, which include a Rolls Royce and a Bentley, at $91,600. The IRS values the automobiles at $250,000.
(5) Executors place the value of Jackson’s other tangible personal property at zero. The IRS values the tangible personal property at $47.467 Million.
According to the Los Angeles Times, Jackson’s estate faces $505 Million in taxes and an additional $197 Million in penalties for being grossly inaccurate with the appraisals of the assets.
An executor’s duty is to take inventory of an estate’s assets and appraise them as of the date of death. While this is an extreme example, the battle between Michael Jackson’s estate and the IRS demonstrates the importance of accurately carrying out this duty and the consequences that could arise if third parties such as the IRS or the beneficiaries disagree with the appraisals.
Because of the dramatic disparity in valuation between the Jackson Estate and the IRS, it appears that one of the parties must be unreasonable in its assessment. However, it is not readily apparent which party is the unreasonable one. After all, Jackson’s estate consists of assets that are hard to value due their unique qualities and the lack of comparable assets which leaves room for subjectivity, speculation, and assumptions. For most estates, it is easier to find a value that most parties would consider “reasonable” if proper care is taken in obtaining appraisals.
The lesson of this case is that executors should take care in their responsibilities of valuing a decedent’s estate. When I counsel executors on the duty to take inventory and appraise the assets of a decedent’s estate, sometimes the executors or the beneficiaries question the need for accurate appraisals and look for ways to cut corners believing that they are saving costs. However, taking the time and effort to thoroughly and completely carry out the duties of an executor can avoid disagreement, litigation, much greater future expense, and unnecessary anxiety.
(Source: Jeff Gottlieb, “Michael Jackson Estate Embroiled in Tax Fight with IRS,” Los Angeles Times, February 7, 2014.)
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