Many of our readers have asked me about the likely controversy that will ensue following the death of Prince. In fact, two readers feel, since I have been reporting about some of the controversy surrounding the Estate of Michael Jackson, that I must write about Prince’s estate and the expected controversy surrounding it. So, here we go!
Prince Rogers Nelson, known to his fans as “Prince,” passed away on April 21, 2016 in Carver County, Minnesota at his estate, Paisley Park. He was 57 years old. The media reports that he left no spouse or children, but he is survived by a sister and five half siblings. In addition, the initial accounts are that he died without a Last Will and Testament. What is likely to follow is best summed up by the title to Prince’s 1981 hit song “Controversy.”
Controversy involving the pop star’s estate could arise on many fronts. Potential instigators of controversy include the taxing authorities and persons claiming to be legal heirs of Prince.
Probate and Estate Tax Laws in Minnesota
In Minnesota, like most states, if a person dies without a valid Last Will and Testament, his or her probate estate passes by the laws of intestate succession. Under the Minnesota Uniform Probate Code, if a decedent has no surviving spouse and no surviving descendants: (1) the estate passes to his or her parents or the survivor of the parents; (2) if there are no surviving parents, the estate passes to the descendants of the parents (i.e., the decedent’s siblings, half or whole, nieces and nephews etc.); and (3) if there are no surviving descendants of the parents, then a detailed statutory scheme kicks in, which includes paternal and maternal grandparents and their respective descendants. Ultimately, if there are no family survivors, the “no-taker” provision of the statute comes into play – the estate passes to the state.
A probate has been filed in Carver County, Minnesota. I suspect there will be controversy arising about who are the deceased pop singer’s lawful heirs and who is entitled to inherit his suspected massive estate under the Minnesota laws of intestate succession. Perhaps a Last Will and Testament will be presented to the probate court? Time will tell. In any event, it should be interesting.
A Controversy Coming to Pass?
The controversy that is of most interest to me and likely to you is the estate tax controversy that will likely occur. Some background is needed to set the stage.
This year, the federal estate tax exemption is $5.45 million. The federal estate tax rates are graduated, starting at 18% and quickly rising to 40% on taxable estates over $1 million. For a taxable estate over $1 million, the federal estate tax is $345,000, plus 40% of the amount exceeding $1 million. So, for an estate of $505,450,000 (after taking the $5,450,000 exemption), the federal estate tax is $199,945,000 ($499,000,000 X 40% plus $345,000 = $199,945,000).
The Minnesota estate tax exemption in 2016 is $1.6 million. Like the federal estate tax rates, the Minnesota estate tax rates are graduated, starting at 10%, but quickly rising to 16%. For taxable estates over $10,100,000, the estate tax is $1,082,000, plus 16% of the amount exceeding $10,100,000. So, in our example above, the Minnesota estate tax would be $80,082,000 ($505,450,000 - $1,600,000 = $503,850,000 – $10,100,000 x 16% = $79,000,000 + $1,082,000 = $80,082,000).
So, for purposes of illustration, if Prince’s estate was valued at $505,450,000, it could end up being exposed to more than $250 million in state and federal estate taxes. That amount is enough to set the stage for controversy. The issue is likely twofold: (i) what assets are included in the estate; and (ii) what is the value of those assets (on the date of Prince’s death or the alternative valuation date). I suspect the latter will be the most significant issue facing the estate.
The Artist’s Teeming Trove
Prince’s estate likely is comprised of real estate, financial assets (e.g., stocks and bonds), art, collectibles and other personal property. The “other personal property” may be where most of the valuation debate rests. This category of property consists of:
- Song royalties;
- Film rights;
- Intellectual rights to Prince’s likeness; and
- Unreleased song recordings.
Prince reportedly left over one thousand unreleased song recordings in what has been referred to as “the Vault.” What is the value of a musical artist’s unrecorded songs? This is an especially difficult question to answer, given the songs had not debuted prior to the artist’s death. Nobody knows how well the songs will be received by the public.
What is the value of a deceased musical artist’s likeness? It is hard to debate (or at least I think it is hard to debate) that Prince’s likeness is an asset of the deceased artist’s estate. Placing a value on it, however, will likely be the subject of a heated fight among the estate and the government.
Keep in mind, many artists, including Elvis Presley and Michael Jackson, arguably earn more money from their lifetime work after their deaths than they earned during their lifetimes. For example, it was recently reported that Elvis Presley’s heirs earned more than $55 million in 2012 alone from licensing and royalties relating to the late singer’s songs, theatrical works, likeness and sales of personal assets. This is clearly more than “The King” ever earned in any year during his life. So, the valuation of Prince’s future income stream should be a challenging debate. The focus should be the value of assets on the decedent’s death (or the alternate valuation date) rather than some other post-death date.
“Life” After Death
While Prince’s tangible personal property may appear to be less of a challenge from a valuation perspective than the intangible personal property, it certainly will not be left out of any valuation fight. When a star passes away, the value of his or her personal property can skyrocket. For example, just one of Prince’s many guitars sold at auction a few days ago. Indianapolis Colts owner Jim Irsay purchased the late artist’s guitar known as the “Yellow Cloud” for $137,500. It was reported that the auction house originally pegged the guitar’s value at $30,000, but the bidding frenzy concluded with a sales price of almost five times that amount. The guitar was custom made for Prince by Knut-Koupee in 1989. It is described as being in good condition, despite the fact that Prince broke its neck while performing in 1994 (it was professionally repaired). Arguably, the guitar’s value significantly increased on or after the artist’s death (as exemplified by the auction house’s original valuation). This assuredly makes valuation for estate tax purposes challenging as the focus should be on the value of the guitar at the date of death (or the alternate valuation date).
Prince understood and recognized that paying taxes is required. In fact, the following lyrics from his hit song “Paisley Park” support that hypothesis:
“See the man cry as the city
Condemns where he lives
Memories die but taxes
He’ll still have to give”
It will be fascinating to learn what is reported on the state and federal estate tax returns as the value of Prince’s estate. The value will presumably be huge, and the number of assets will likely be many. It should be an interesting battle of the valuation experts.
I would like to invite you to NYU 74th Institute on Federal Taxation taking place in New York, New York on October 25-30, 2015, and in San Francisco, California on November 15-20, 2015.
The NYU Tax Institute is one of our country’s most pre-eminent tax conferences for CPAs and attorneys. I am proud to be a presenter on the closely-held business panel of the program on Oct. 29 and Nov. 19. This is my third time speaking at the Institute. This year, I will present a newly-written white paper on qualified subchapter S subsidiaries.
As in the past years, the Institute will cover a broad spectrum of tax topics, including tax controversy, executive compensation and employee benefits, international taxation, corporate taxation, real estate taxation, partnership taxation, taxation of closely-held businesses, trusts and estate, and ethics. What’s nice about the Institute is that you can pick and choose what sessions you’d like to attend in order to best meet your practice needs.
I hope you can join us this year in either New York or San Francisco. I am confident you will find the topic coverage and the faculty to be fabulous!
Click here to see the complete brochure and registration information: NYU 74th IFT Registration
Larry J. Brant is a Shareholder in Garvey Schubert Barer, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; New York, New York; Washington, D.C.; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- "Tax Law Update for Family Law Practitioners," Oregon State Bar - Family Law Section 2019 Annual ConferenceSunriver, OR, 10.11.19
- "The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles," New York University 78th Institute on Federal TaxationNew York, NY, 10.20.19-10.25.19
- "The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles," Oregon Society of Certified Public Accountants (OSCPA) 2019 Northwest Federal Tax ConferencePortland, OR, 10.28.19
- "The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles," New York University 78th Institute on Federal TaxationSan Francisco, CA, 11.10.19–11.15.19
- "The Oregon Corporate Activity Tax," Oregon Society of Certified Public Accountants (OSCPA) 2020 OSCPA State & Local Tax ConferencePortland, OR, 1.6.20