As FORBES magazine so aptly put it, Michael Jackson’s Estate has told the IRS to “Beat It” when it comes to payment of estate taxes. In response, the IRS has responded by alleging that the Estate is a “Smooth Criminal.” What is clear is that the estate appears no closer to closing now than it did four years ago after Michael’s death, leaving the beneficiaries (i.e. Prince, Paris and Blanket, the Jackson children) saying “They Don’t Care About Us”. And though the puns are aplenty, this continues to be a sad story of a legend whose greatness as an artist continues to be overshadowed by the oddities of his personal life and growing litigation during his afterlife.
While much of Michael’s estate plan is private, the growing consensus is that the bulk of Michael’s estate existed inside of a Revocable Trust with a pour-over Will functioning to transfer the remainder of his estate to his Revocable Trust upon his death. Often times, I find it a common theme that estate planning is looked at as a “Black or White” concept. An individual completes a Will and/or a Trust and then many times the idea of estate planning is viewed as a completed task. Thinking this way is nothing short of “Dangerous”.
Estate planning is a lifelong, ever-changing process. One common misconception is that Estate planning ends at death. Rather, it evolves into estate administration. Much of the issues highlighted by this case are issues caused by poor estate administration. One of the biggest grey area’s in estate administration is the valuation of estate assets for estate taxes. In this case, it is rumored that the Jackson estate filed a federal estate tax return claiming a value of just $7 million dollars for the estate back in 2009 upon Michael’s date of death. It is also rumored that the IRS has taken the position that the estate was worth between $1 and $1.5 billion. Needless to say, this is a huge discrepancy.
In a recent article, FORBES stated that the Estate alone has earned upwards of $600 million dollars in income since 2009. One could find it very difficult, as the IRS clearly does, to find that an estate worth only $7 million could generate income of more than eighty-five times that amount. The questions are what happened and what should have happened?
If the IRS is correct, there was a clear error in the valuation of the estate which could cost the estate upwards of $750 million in unpaid taxes, interest and penalties. This could have all been avoided with proper post-death valuation and administration. Further, the estate remains open with income being taxed inside the estate rather than with the beneficiaries or another tax-savings planning vehicle. There are many planning techniques that could have been utilized post-death to avoid such issues.
The purpose of this blog is to point out that many critics are blaming the estate plan for the current litigation and issues arising from the estate. This criticism may be misguided. As we often emphasize, the estate plan is a function of the client’s goals. If this estate plan represents Michael’s goals, then there is no criticism to be had. The true issue is in the post-death administration, including the preparation of the federal estate tax return and the valuation of the estate assets. The potential mistakes that have occurred during those processes are the root of the current litigation once again proving that post-death planning/administration are just as important as pre-death estate planning. The failures during estate administration in this case may ultimately prove costly to the King of Pop.
– Adam Abramowitz, Esq.