August 28, 2013

How long does it take to settle the estate of a rich man like Michael Jackson? So far, it’s been four years and counting, and no end in sight. As generally happens, the claims, motions, and other legal matters pour in. Meanwhile, the trusts established for Jackson’s children have not yet been dispersed.

Jackson died in June of 2009, leaving an estate of between $80 million and $200 million. Part of the delay is in the dispute over valuation. Last May, the IRS filed a “notice of deficiency” against the estate, demanding more tax.

Attorneys for the heirs responded by filing a petition in July, contending that the IRS’s demand for more taxes is based on their overvaluation of estate assets, including Jackson’s famous Neverland Ranch, a Bentley automobile, intellectual property, real estate, and trusts. Estate attorneys contend the valuations submitted were “were accurate and based upon qualified appraisals by qualified appraisers who had extensive experience in valuing entertainment industry assets.”

As is typical, there is no meeting of the minds. The IRS wants more. And estate attorney Paul Hoffman (Hoffman Sabban & Watenmaker) summarized it simply. “The IRS is wrong.”

Rich Man, Poor Planner

One estate professional – Rocco Beatrice of Estate Street Partners – who is not involved in the case, told reporters “because of poor estate planning Michael’s family will have to still wait years until his probate, estate taxes, creditors’ claim and other legal battles are finalized.

“When a person dies with even assets of $500,000, everybody wants a piece of the pie. The government wants the taxes, the creditors want their money, the lawyers, appraisers, and accounts involved with the probate want their fees, and lastly, the family gets their share,” said Beatrice. “Every single creditor has an opportunity to make and negotiate a claim, property that has to be sold and/or maintained, and challenges have to be heard.”

A Better Choice

The New York Daily News at one time reported that Jackson’s will included revocable trusts for each of his three minor children – Prince, Paris, and Blanket — and for his mother Katherine who is their guardian. It’s true, the trusts have not been dispersed, but the kids are living well in a mansion and attending a posh private school, a lifestyle which costs about $70,000 a month. Even so, said Beatrice, the lack of financial planning created unnecessary problems.

“I’m glad Mr. Jackson could afford to make a donation to the government, but most people don’t want to throw away 35% to estate taxes (55% in 2013). They want to keep it in their family.”

The Lesson?

According to Mr. Beatrice, a better plan would have been to establish irrevocable trusts, which he described as a “completed gift.” This type of trust puts the trust assets outside of the person’s estate, not subject to estate tax, and not within grasp of future lawsuits. And, money is generally dripped out over time, such as by age milestones for the children. If Jackson had done this, Beatrice speculated, the family could be using their shares of the money now.