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What is the Estate Tax? How not to plan your estate: Estate of Michael Jackson

28
Mar

By Jason Stern

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When the king of pop died in 2009, he had already earned more than $1 billion during his lifetime, which adjusted for inflation, would be over $2 billion dollars today.   Since Michael Jackson’s 2009 death his estate has easily earned another $1 billion in royalties.   So when Michael Jackson left his entire empire to his three children, Prince, Paris and Blanket you’d figure they would be set for life right? Wrong. In fact Michael’s three children are scheduled to inherit Jackson’s entire fortune on their thirtieth birthdays in approximately ten years. Unfortunately there may not be anything left to inherit.

 

Any NY estate lawyer will tell you it is not what you earn but what you keep. And this maxim is no truer than in the realm of the  NY probate law. While the king of pop knew how to make money better than any other artist in history, he also knew how to spend money. Michael Jackson’s outrageous spending habits blew through more money than he was able to earn during his lifetime. On the date of Jackson’s death his estate was estimated to be over $400 million in debt. Sadly, Jackson’s estate was only able to begin accumulating wealth after his death as dead people tend not spend as much money as the living.

 

Currently, nearly seven years after Jackson’s death his estate’s estimated value is over $1 billion dollars. Most of this income was derived from royalties accumulating post mortis. Unfortunately for Paris, Prince and Blanket, the Jackson estate is still $400 million dollars in debt, most of which needs to be paid off. Additionally, Michael Jackson died in 2009, a year when the Federal Estate Tax of 40% applied to any and all probatable assets in excess of $1 million. Compound the Federal Estate Tax with capital gains tax liability on any and all income on royalties accruing from the date of the king of pop’s death and we can see how his estate may owe another $800 million in taxes. For all intents and purposes, Michael Jackson’s Estate is an estate planning failure. Not what any self-respecting NY probate lawyer would allow his client to do.  The Jackson Estate is literally hemorrhaging money.

 

As recently as 2009, any NY probate lawyer really had to struggle with the realities of both Federal and NYS estate tax liabilities. Cumulatively, the Federal and NYS estate tax or “death tax” as it is known by NY estate lawyers, could claim 60% of a decedent’s estate depending on its value. At some point the “death tax” became so outrageous the executive branch of government raised the estate exemptions to their current $5,450,000.00 per individual and $10,900,000.00 in exemption for married couples at the federal level. Meaning a single individual can pass the $5.45 million amount to their heirs while a married couple can pass the latter without incurring any Federal Estate Tax liability.

 

While a step in the right direction for NY probate lawyers and their clients it was not until 2014 that the NYS legislature amended the NYS estate tax as well. As of April 1, 2016 an individual can pass $4,187,500 to their heirs without any New York State estate tax liability. While a married couple may pass $8,375,000 as of April 1, 2016 without incurring any estate tax liability at the state level.   For both NY probate lawyers and their NY estate clients, the current levels are a big improvement from the $675,000.00 NYS exemptions in existence only a few years ago.

 

In fact in 2016 it is estimated that only one-tenth (.1) of one (1%) percent of all the probatable estates in the entire country would be subject to the State and Federal Estate Taxes at their current levels. Without the NYS and Federal death taxes to worry about, a NY estate lawyer still has to be vigilant in protecting estate assets from the dreaded capital gains tax.   Much of the eight hundred million ($800,000,000.00) dollar estate taxes owed on the Michael Jackson dynasty is derived from capital gains tax on royalties. The Capital Gains Tax applies to all income and appreciation on estate assets that are put into trust. Capital Gains Tax also applies to income derived from estate assets such as rents and royalties as mentioned above.

 

Historically, experienced NY estate lawyers convinced their higher net wealth clients to place their assets in trust for good reason. Placing NY estate assets in trust removes them from your NY estate and therefore helped to circumvent the onerous estate tax liabilities at both the NYS and Federal levels. With these estate tax exemptions adjusting to nearly $6 million per individual in the coming years the trust is no longer a necessary tool for the NY estate lawyer.

 

However NY estate lawyers are still setting up trusts. The assets in these trusts acquire Capital Gains Tax liability on the appreciation they accrue from the date of the trust’s formation. Thus, while NY probatable assets may not owe any estate tax heirs may be stuck paying hefty Capital Gains tax on the proceeds of their inheritance.

 

While the overhaul of the NY and Federal estate taxes have made life much better for the NY probate lawyer and their clients, many NY estate lawyers are still over lawyering. In NY, under the current tax exemptions, trust formation should be reserved for select clients with special needs such as long term healthcare needs (nursing home), or those who have estate assets with values in excess of the exemption amounts.

 

As for Michael Jackson’s heirs, I’m sure they will be able to negotiate down some of the interest and penalties on their estate tax liabilities. Perhaps the Jackson Estate can even negotiate with some of the estate’s creditors. The good news and bad news for the Jackson Estate is that the underlying assets of the estate are still generating income, lots and lots of income.  For every dollar the Jackson Estate generates it also adds to the estate’s capital gains tax liability along with interest and penalties.

 

Perhaps this is why the Jackson Estate recently sold off the rights to their most prized possession. On March 15, 2016, Michael Jackson’s Estate sold their rights to the Beatles’ sheet music to Sony Records for Seven Hundred and Fifty Million ($750,000,000.00) Dollars. This will accomplish two objectives for the Jackson Estate; It will stop generating income thereby discontinuing the growing capital gains tax liability on royalties earned; And generate enough money to start settling their debts with their creditors and Internal Revenue Service.

 

As a NY estate lawyer, there are many ways to help clients avoid annoying estate and capital gains taxes without all that much preparation. Should you or a loved one wish to speak with a NYC estate lawyer about planning their estate, feel free to speak with an experienced estate lawyer for a free consultation at (718) 261-2444.

 

Our offices have been successfully probating NY estates and drafting wills for New Yorkers in the Counties of New York, Queens, Nassau, Suffolk, Bronx, Richmond, Westchester, Orange, Rockland and Dutchess for years.

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