Valuation Theory & Your Life: Why What Happened to The King of Pop’s Estate Should Matter to You

Entertainment and Music | Joseph Rust | May 29, 2019

In the last few years, some of entertainment’s most iconic performers have left us. Both Prince and David Bowie passed in 2016, and just this year we lost Aretha Franklin. It seems a lot more recent, but it has been almost ten years since Michael Jackson passed away at age 50. But nearly a decade later, the controversy surrounding his estate and the valuation of his post-mortem earning power continues.

What we will do in this space is tell a cautionary tale about the estate of “The King of Pop” including:

  • Why the fact that he lived and died in California affected the future use and valuation of his image and likeness;
  • How the IRS viewed his post-mortem earning power; and
  • Why not just mega-stars but any high net worth family needs a carefully-crafted estate plan.

Without question, Michael Jackson’s legacy comprised a complex mosaic of revenue-generating elements that we will examine more closely in a moment. Jackson did, in fact, have a well-designed estate plan that included key estate-planning documents.  And while you may not be a pop star, like Michael Jackson, the sources of your wealth that you leave behind will continue to generate income/revenue after you pass.

Well-thought-out estate planning documents effectively transfer property, which can include a will and trusts, and that in turn reduces pay-motivated disputes among heirs and/or beneficiaries.

Good planning, however, does not always avoid post-mortem scrutiny by the IRS.  Additionally, the IRS has the benefit of hindsight.  This is particularly true of celebrity estates where much information as to post-mortem earnings, even if not always accurate, is public.  The IRS pursued estate tax on what it believes is the fair market value of Michael Jackson’s name and likeness or “the right of publicity” as of his date of death.

Simply put, “the right of publicity” is the “right” of a person to exploit the use of his or her name and/or image to make money. However, the rights, or lack thereof, differ from state to state. Some states, like California where Jackson was a resident when he died, protect the right of people like Jackson to dictate the use of their name or likeness image.

In other states, like Minnesota, where Prince lived and died, there is no “right of publicity.” That said, an individual can put restrictions on his/her right of publicity. Robin Williams left clear instructions that not only could no one market his name until 25 years after his death, all proceeds from that marketing must go to charity.

As to Jackson’s “right of publicity,” the fact that his estate can control the exploitation of his name/image greatly affects the valuation of current and potential earnings from his name and image. But names and images are vulnerable as was proven by Jackson himself. By the time of his passing in 2009 he had had some serious setbacks.

It had been eight years since he had recorded a hit song. He had to fend off accusations of child sexual abuse in 1993 and again in 2005. And there was always the possibility of further litigation. After the first child molestation allegations in 1993, Jackson never toured the U.S. again. Not to mention, he never got another endorsement deal in his lifetime.

Just prior to Jackson’s death there seemed to be one bright spot in his career. He was working on a comeback tour called “This Is It” with 50 London concerts sold out. But even before it started the tour was having its troubles with rehearsals impacted by alleged drug use and physical ailments. And when Jackson passed away suddenly, he had about a half billion dollars in debt since he routinely borrowed against his assets to finance his lifestyle.

In sum, not a particularly positive scenario if one were trying to predict and/or put a value on the post-mortem earning potential of the Michael Jackson name and likeness. The important point here is that while Jackson was alive and after his passing, the estate had key decisions to make every step of the way. And, yes, the same will happen with your estate, particularly if it wishes to monetize the value of your name and likeness. Which brings us back to the Jackson story and what happened after 2009 to get the IRS representative’s attention.

What happened is this: Post-mortem, the Jackson estate started earning money. A documentary using footage of rehearsals for the “This Is It” comeback tour earned $260 million during a theatrical run. There was a Cirque de Soleil spectacular, “Michael Jackson: The Immortal World Tour,” and a Las Vegas show called “One.” Also, the Jackson album “Xscape” debuted at No. 2 on the Billboard chart…a full five years after Jackson’s death.

There was also a ten-year, ten-project deal with Sony to produce and sell unreleased materials and anniversary editions of albums, a deal that was reported to be worth $250 million. And speaking of Sony, in March of 2016, Jackson’s estate sold his half of Sony/ATV Music Publishing for $750 million. And while the sale to Sony/ATV might have been to cover past debt, it is no surprise that the earning power of the deceased Michael Jackson caught the attention of the IRS.

It is also no surprise that the Jackson estate and the IRS might have differing views of Jackson’s after-life earning potential going forward. It does not take any guesswork to figure out who would value it higher and who would value it lower. And the proof is illustrated in the chart accompanying this article. Looking at the very first line, “Jackson’s Image and Likeness,” the Jackson estate values it at $2,105, while the IRS gives it a valuation of $435,264,000.

From the IRS perspective, with interest and penalties, the Jackson case could be worth $1 billion. So, the IRS did move forward with the case which was heard at trial at the Los Angeles tax tribunal in 2017. Turns out an IRS expert witness allegedly lied under oath. But it is difficult to know what the ultimate determination was.

So, what is the lesson of this part of the Michael Jackson saga?

Few celebrities reach a level of stardom equivalent to Michael Jackson. Still, if in your business your name and likeness have post-mortem value, the Jackson case demonstrates just how important it is that your carefully thought-out estate plan account for and protect your “right of publicity.” Perhaps just as important, whatever a person’s public face or level of wealth, well-crafted estate planning documents, which can include a will and trusts, help to efficiently transfer property, and as mentioned, will hopefully reduce pay-motivated disputes among heirs and beneficiaries.

2019-10-31T10:33:59-05:00