Hey there, Legal Tea Listeners! This is your host, Jenny Rozelle. We’re back to “estate planning of the rich and famous” where we chat about celebrities and their estate planning. And today’s feature needs no introduction … it is on Michael Jackson. If you don’t know Michael Jackon, I don’t think we can be friends… While MJ had people question him, his character, his decisions, etc. (and I’m not taking sides here on what he did, what he did not do…) but I think we can all agree he produced some great music. I mean, when a song by Michael Jackson comes on, it’s impossible not to dance a little – right?!
Unlike many past episodes talking about celebrity estate planning (i.e. Prince, Anna Nicole Smith, Larry King), Michael Jackson actually did some estate planning! Yay! So this time, we don’t have to focus on celebrities and their POOR estate planning – Michael gets a, let’s say, B grade-wise on his estate planning. On the surface, his estate plan looks good – he just missed one vital step through the planning process that hurt him.
Let’s dive in, shall we?
As you may remember, Michael Jackson passed away on June 25, 2009. 2009 feels like yesterday and forever ago – all at the same time. So weird! Michael left behind three children – Prince, Paris, and Blanket. Perhaps it’s because this estate stuff is what I do for a living, but I always tell people that a solid, well-drafted estate plan is a final (and beautiful) gift you can leave to your loved ones. So, I think Michael’s kids should thank their lucky stars because their Dad took good care of them by leaving them with a solid plan.
So, what did he have? Well, his estate plan consisted of a Living Trust – which is a commonly-utilized tool to cleanly keep an estate out of the probate court process. Trusts, too, can (if it’s necessary) contain provisions to gain tax advantages. So, him electing to have MORE than just a Will and have a Trust was a solid move. According to an article on LiveAbout.com, Michael executed his Trust in 1995 – shortly before having his three children. His first child was born in 1997, second in 1998, and third in 2002. In 2002, Michael actually completely restated his Trust – meaning he made some substantial changes to it. (Think of a restatement as an amendment!)
So, let’s get into the nitty gritty details of Michael’s plan – and to give credit where credit is due, the distribution pattern of his plan was provided by the LiveAbout.com article. I do not have my hands on Michael’s Trust to review/provide commentary! Anyway, here we go…
After the super fun administrative expenses like taxes, attorneys fees, medical bills, funeral expenses, etc., 20% of the estate comes off the “top” and is distributed to one or more children’s charities to be selected by a panel –t he panel consists of Michael’s mother, Katherine Jackson …. An attorney by the name of John Branca, who was the long-time attorney for the Jackson family … and John McClain, a music executive. Michael’s Trust said that they can choose charities exist today to support children … or they can establish charities to address this.
When I say that 20% to the children’s charities comes off the “top” … it’s technically something called a specific bequest. So once the expenses are done, 20% of the Trust is calculated and that’s what goes to support the children’s charities. THEN, after the 20% is calculated, the REMAINING balance is split half-and-half…
50% of the remaining balance is distributed in equal shares between Michael’s children (Prince, Paris, and Blanket) and the other 50% goes to Michael’s mother, Katherine.
It seems that Katherine’s share goes to her no-strings-attached … we call that “outright” in my world. She’ll essentially just get a check for her 50%. The kids’ shares, however, will be distributed in, what are called, Separate Share Trusts – meaning that Michael’s Trust creates sub-trusts for the kids in his own estate plan. (I do this ALL the times for clients – so it’s not “just” for famous people. We do it often for beneficiaries that are young a lot … but we also do it for beneficiaries that may be battling addictions, may be on governmental aid, etc. So just know – this stuff is not just for people like Michael Jackson!)
How Michael set up his kids’ Trusts is that the Trustees of the Trusts (who happen to be John Branca, the attorney we talked about earlier – the one on the panel to determine children’s charities … and John McClain, also on the panel and is the music executive) are runnin’ the show for the kids – prior to turning 21, distributions to the children are completely in the discretion of the Johns. Then, when they hit 21, the children will receive the income that is generated off the Trust assets and the Johns, as Trustees, can distribute principal to the child within the Trustees’ discretion. At 30 years old, the child will get 1/3 of the Trust outright (no-strings-attached) … at 35, they’ll get another ½ of the Trust, and then come-40 years old, they’ll get the remaining balance.
A little twist in this – perhaps an oversight or perhaps intentional – is that Katherine, Michael’s Mom, is named as the children’s Guardian, so to get money, Katherine has to ask the Johns (the Trustees of the kids’ Trusts) for money for the kids. I’m not sure if Michael intended to do this – sometimes, I’ve seen clients pick different people as Trustee … versus as Guardian to provide some checks-and-balances on things. (You know, like if there was solid checks-and-balances with Jamie Spears with Britney Spears….I digress…) Though, it’s something often-overlooked too. I have clients that want the same person(s) in charge of the kids … in charge of the money.
Well, everything seemed great on paper – and it was, except Michael made a mistake that SO MANY people do when creating Trusts. What’s that mistake, you ask? When you create a Trust, there is a very important process called funding that happens AFTER the Trust document gets signed. Funding is the process that takes your assets and puts them in the name of the Trust – so if I have a Trust and it’s called the Jenny Rozelle Living Trust – my assets would go from Jenny Rozelle owning them, to Jenny Rozelle Living Trust.
If this process is skipped over, things are still in the human being’s name – so, in my example, I have a Trust, but maybe I didn’t do funding so my assets are still in my name only, Jenny Rozelle – not the Jenny Rozelle Living Trust. If I pass away, the assets not in the name of my Trust will likely go according to my Will, which has to be probated to get those assets from my name to my Trust’s name. If a Will is getting probated, that means it’s a public Court process subject to claims – claims including from the IRS.
That’s what happened here.
According to a blog by McKenzie Law out of Colorado, Michael left some or all, I’m not sure if it was just a portion of his assets or all, in his name alone – meaning to get those assets from his name to the Trust required probate. You know, a lot of “normal” non-famous people create Trusts to avoid probate – so if there’s something you can learn from Michael’s Estate, know that if you do a Trust, make sure the Trust gets funded! It’s like Trust Planning 101 – but for some reason, some clients don’t fund their Trust and some attorneys fail to explain the importance of funding. Or both. (Tooting my own horn here – my office assists clients with the funding process; that way, we know Ts are crossed and Is are dotted!)
Anyway, because Michael’s Trust was either unfunded or underfunded, that meant there was more work for the attorneys to do (meaning more legal fees), more work for the Executors and Trustees (meaning more fees for them), probate court filing costs, etc. Really, had Michael’s Trust been fully funded, the Estate would have saved money. Probably a healthy chunk of money too! Beyond that, there’s even an argument that had Michael’s Estate not gone through probate, it wouldn’t have opened Pandora’s box with the IRS, either.
After Michael passed away, probate got opened up, etc. the IRS began to question things – specifically how the Estate’s representatives, the Johns, were valuing Michael’s assets. Just like we talked about in the prior Legal Tea episode where we talked about Prince’s estate planning, the IRS questioned how Prince’s Estate representatives were valuing things too. Of course, the Estate of Michael Jackson (and Prince too) wanted the value to be “on paper” lower than what the IRS valued things – because the bigger the Estate, the bigger the payday for Uncle Sam!
To keep a long story fairly short, Michael’s Estate representatives and the IRS went back-and-forth because after all, some assets are truly hard to value – according to a Wealth Management article, which has the best headline EVER … “Michael Jackson’s Estate Moonwalks Past the IRS in Tax Court Battle.” … So, like what dollar figure do we assign to Michael’s “image and likeness” … what do we assign value-wise something called New Horizon Trust II, which held Michael’s 50% ownership in Sony/ATV … which by the way, owned a copyrights relating to at least 175 songs of The Beatles … or New Horizon III which held Michael’s ownership in Mijac Music (that was a catalog of copyrights on songs that Michael wrote or co-wrote….
Keep in mind, these things are not even the assets like cash, real estate, investments, etc. etc. What the Tax Court was specifically valuing was this intellectual property stuff, though, so the “image and likeness” value, the value of Michael’s ownership in both Trusts … so they weren’t kicking up a fuss about Michael’s cash value, real estate value, investment value. It was just more that “intangible” stuff.
Initially, the IRS argued that Michael’s Estate had underpaid estate tax to the tune of $500M and because of the underpayment, the IRS was going to assess around $200M in penalties. Ultimately, the outcome was a WIN for the Estate – The Tax Court, after the Estate and IRS went head-to-head, stated that the value of the intellectual property was around $5.3M when the IRS was attempting to claim that was all worth $482M. So yeah, Michael’s Estate won big-time.
The purpose in bringing all this up, though, is that there’s much talk that had Michael actually funded his Trust – so put all his assets including the intellectual property assets in his Trust – his Estate would have not gone through probate. Had it not gone through probate, which is a public process through the Courts, the IRS may not have gotten involved and caused this delay and expense to the Estate.
So what to take away from ol’ MJ? Well he did a pretty good estate plan – he puts his wishes on paper, he seemed to keep it updated (hence why he was amending/restating his Trust), but where he tripped and fell was the funding aspect of the Trust. To be frank, it’s among my biggest pet peeves in my industry – I work with a lot of individuals and families that bring in their estate plan for me to review, which is done by another attorney. If they have a Trust, I always ask “what” is in the Trust – I’ll ask about their house, their investments, their life insurance, etc. The amount of times I hear them say, “I don’t think anything is in the name of the Trust…”
Hear it here, here it from me – Funding the Trust is nearly as important as signing the Trust on the dotted line. Fact!
Next week’s topic is a cautionary tale – a real-life case I’ve personally worked on. It’s about a lovely little lady (who when I first met her made a lawyer joke!), her husband, and the many lessons you can take away from their situation. So stay tuned for that! Until then, Legal Tea Listeners…take care and be well!
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