The value of image and other intangibles usually overshadows any other valuation issues with celebrity estates. The pending valuation battles of Prince’s fortune will not be easy or without significant legal action.
Another heir is making a claim to the majority of Prince’s estate—Uncle Sam.
Before he died Prince’s fortune was estimated at about $300 million. However, the death of a popular artist can result in future royalties with an increased valuation because death impacts an artist’s body of work. The IRS predicts Prince’s death will blow future royalties off the charts. However, the estate’s attorneys disagree.
An article in The Investment News, "Prince's death sets off estate planning quagmire" reported that some experts say it’s next to impossible to value future royalties and other intangible assets. This will likely fuel an intense legal battle between the government and the estate, because of the more than half of Prince’s estate’s value that could be paid in taxes.
The difficulty of valuing future royalties, image and intangibles is why Michael Jackson’s estate remains locked in a court battle with the IRS. The government valued Jackson’s name and image at more than $434 million. His estate’s estimate was a bit lower: $2,015.
The IRS learned its first lesson about valuing celebrity estates with Elvis Presley’s estate. The IRS didn’t anticipate just how much of the King’s song catalog would increase in popularity after he died in 1977. According to Forbes’ list of the top-earning dead celebrities, Elvis generated $55 million in 2015 alone, second only to Michael Jackson’s $115 million. The IRS now takes future royalties much more seriously.
Like everyone else, Prince’s estate will have 15 months to file a federal estate tax return and is required to pay estimated federal estate tax is at the nine month date. Prince wasn’t married at death, so there’s no chance of a spouse taking advantage of the unlimited marital deduction, which would pass the estate to the spouse tax-free.
The federal government assesses a 40% estate tax on estate values over $5.45 million; however, Prince’s home state, Minnesota, also has a state estate tax, with a top rate of 16%. In total Prince’s estate will be subject to a 56% tax when both are combined.
Whatever the final valuation of Prince’s estate is, 56% will be a big number. Of course the ball is in the IRS’s court because if it considers the tax amount paid by the estate to be undervalued, it will propose a valuation increase, which is open to negotiation. If the parties can’t agree, the court battle will begin.
Reference: Investment News (April 25, 2016) "Prince's death sets off estate planning quagmire"