Prince’s estate now looks poised to pay hundreds of millions of dollars in federal estate tax. Politicians often refer to the estate tax as the death tax. The administration of Prince’s estate offers an excellent opportunity to discuss the estate tax, especially some of the most common misconceptions.
Prince unexpectedly passed away on April 21, 2016 in Minnesota. Though his estate is worth hundreds of millions of dollars, it now appears that Prince had no will and no estate plan. When a person dies without a will, they are said to have died intestate. Every state has intestacy laws. Intestacy laws distribute the estate to family members, usually (and roughly) in the following order: (1) spouse; (2) children; (3) parents; (4) siblings; (5) other relatives. Recently, I authored a guest post for Sparrow Wealth Management here in Las Vegas on Prince’s estate. You can read more about the effect of intestacy on Prince’s estate there.
Prince’s Estate Will Pay Millions in Death Tax.
Prince’s estate continues to make other kinds of news. As it turns out, Prince’s estate will likely pay a substantial estate tax.
Prince earned over $270 million pretax in the 14 years FORBES generated estimates for; current estimates place the value of his estate at between $150 million and $300 million. Estates of this size are usually controlled through a variety of trusts. That the artist–who so meticulously pulled his music from streaming and online platforms–died without a will or any apparent estate planning is highly unexpected.
There has been speculation that ownership would fall to Prince’s heirs, which include a sister and five half siblings. But before that can happen, an estate valuation must occur–and it will be closely watched by the IRS.
Besides his $7 million Paisley Park studio and a $16 million, 187 acre Chanhassen home, Prince’s most valuable assets include his music catalog and personality rights to the commercial use of his name and image.
His catalog, which includes the copyrights to songs on some 50 albums, was reportedly returned to Prince when he resigned to Warner in 2014. Early estimates pegged its worth at $100 million or more–conservative in comparison to Michael Jackson’s $150 million Mijac catalogue.
“The IRS is going to be a partner with the estate for a long time to come to the tune of 40 cents on the dollar,” explains Martin Neumann, a partner at Weinstock Manion with expertise in probate and estate planning. With a maximum federal tax bill of 40% and a maximum state tax of 16%, the taxes temper out to a 50% tax bill. For an estate worth a reported $300 million by current estimates, it could be paying up to $150 million in taxes. “So part of what will be handled is an agreement with the taxing authority with how the estate taxes are paid and over what period of time,” Neumann explains.
The Politics of the Death Tax
The estate tax is often called the death tax. The death tax is extremely controversial. Republicans and Democrats have staked out opposing positions on whether it ought to even exist.
Republican leaders insist it’s patently unfair that people pay taxes as they accumulate wealth through the years, only for their heirs to pay additional taxes on that wealth after they die.
House Majority Whip Steve Scalise (R-La.) said Tuesday that it is “morally wrong” for a family’s toughest decision after a death to be figuring out the next steps for their business. “That’s not supposed to be something people have to deal with when they’re grieving for the loss of a loved one,” he told reporters.
Republicans believe that voters agree with them on that point, even as polls have long suggested that most people believe the wealthiest Americans don’t pay enough in taxes.
For their part, Democrats are just as excited for Thursday’s vote. After all, President Obama won his second term in 2012 after explicitly campaigning for higher taxes on the wealthy.
And Democrats say they’re more than happy to have a debate over a repeal proposal that would add $270 billion to the federal debt over a decade, according to the Congressional Budget Office, while affecting only a small fraction of estates in the U.S.
“I guess when it comes to helping the wealthiest people in the country, it’s never enough,” Sen.Debbie Stabenow (D-Mich.) said Tuesday with a laugh.
Application of the Death Tax is Extremely Uncommon
There are many aspects of the estate tax which are misunderstood. First, application of the estate tax is extremely rare. “Roughly 2 of every 1,000 estates have to pay any estate tax, largely because of its generous exemption levels.” According to Forbes, “for 2016, the estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015. That means an individual can leave $5.45 million to heirs and pay no federal estate or gift tax.” In other words, anyone who dies with an estate worth less than $5.45 million in assets will pay no estate tax. For better or worse, that is nearly everyone. Estates worth more than $5.45 million will pay a 40% tax on everything above $5.45 million. In other words, even the wealthiest estates pay no tax on the first $5.45 million.
The exemption to the federal estate tax has fluctuated over time.
George Steinbrenner Beats the Death Tax
You probably noticed that there was no federal estate tax in 2010. That means anybody who died in 2010 paid $0 in federal estate tax regardless of the value of the estate. Back in 2001, the Bush tax cuts scheduled the estate tax to be phased out and completely eliminated by 2010. However, by 2009, President Obama and Congress passed legislation to bring back the estate tax for 2011. But for one year – 2010 – there was no estate tax.
Billionaire George Steinbrenner, owner of the New York Yankees and boss to George Costanza, died in 2010.
Because Steinbrenner died in a year when there is no federal estate tax, he potentially saved his heirs a 55% estate tax on his assets — or a tax bill of about $600 million. The 55% tax takes effect on January 1, 2011. If Steinbrenner had died in 2009 when the estate tax rate was 45%, his estate tax bill might have been nearer $500 million. Because the wealthy often do elaborate planning, putting assets into trusts taxed separately from the estate or into foundations that are tax-exempt, it is unclear how large his estate will be. Estate taxes may also be postponed on assets left to a spouse in years when there is an estate tax.
Several other billionaires who died in 2010 also escaped paying any estate tax. “The other billionaires to die in 2010 are Janet Morse Cargill of the family that founded Cargill Inc. (net worth: $1.6 billion), Texas pipeline magnate Dan Duncan ($9.8 billion), and California real estate mogul Walter Shorenstein ($1.1 billion). By rough calculation, their deaths in 2010 have cost the government some $6.5 billion.” Even more impressive, billionaire Roger Milliken died December 30, 2010 less than 48 hours before the estate tax became effective again!
Nevada Has No Death Tax or Inheritance Tax
Of course, many states also have their own estate tax. In 2015, 19 states and the District of Columbia had a state estate tax, or death tax. As noted above, Prince’s estate will likely pay millions in estate tax to the State of Minnesota. Fortunately for those of us in the Silver State, Nevada has no estate tax and no inheritance tax. Nevada hasn’t had a death tax since 2005. Nevada’s estate planning and tax laws make us an attractive place to retire. Therefore, don’t expect the state death tax to return to Nevada any time soon. Nevada also has no state inheritance tax.
As contentious as the death tax is politically, in practice it affects almost no one. Almost everyone dies with an estate valued less than the federal estate tax exemption. That said, the political battle over the death tax has been fierce for many decades and will likely continue.