Archive for June, 2016|Monthly archive page

Prince’s Million Dollar a Mile Mistake

Originally published in the Cedar Street Times

June 10, 2016

Unless you have been living under a rock, you have certainly heard by now that musician, Prince Rogers Nelson, passed away on April 21, 2016.  Unfortunately, he did no advance estate planning which means it is going to be an expensive, public, and litigious affair that will probably last for years.

I have seen estimates of his net worth in the media ranging from $250-$800 million.  Obviously, there is all the easy stuff to value – cash, stocks, bonds, real estate, and personal property.  But putting a value on things like his future royalties on music sales, video sales, his brand image, licensing of his lyrics or music to other artists to cover his songs, etc. is quite a task.

And what about the purported 2,000 or so unreleased songs he is said to have.  How many hits are in there?  Do you think an appraiser is going to sit in a room and listen to songs or read sheet music and put a value on each of them?  And once they come up with a dollar figure, then they have to discount it to the present value, so they would really need to consult their crystal ball for future interest rates, etc.

At one point in my career I worked with the family of a famous deceased musician, and I can tell you first hand that a lot of future value will be determined by how well his heirs maintain or expand the “Prince business machine” that will continue to promote his music and keep it alive, and keep people buying it.  And if the estate gets split up between multiple heirs that do not know each other, there will certainly be a decrease in value.  The last I checked, there was a sister, three half-siblings, and two people claiming to be his son, one of which is in prison, all vying for a piece of Prince’s estate.  So you might have to work with all of these people to buy the rights you need!

Prince certainly is not the first musician to have his estate valued, and there are accepted norms of how appraisers come to values, but I can tell you this much, whatever number they come to will not even be close to correct!  And there will certainly be a lot of negotiating between IRS appraisers and appraisers hired by Bremer Trust, the wealth management firm appointed to handle his estate.

And by the way, all of this is supposed to be done and estate taxes calculated and paid within nine months…in a perfect world.  The Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return, which will list every single asset in his estate, (right down to the change in his pockets) with descriptions, values, and support for valuations is due January 21, 2017.  It is the mother of all tax returns.

The administrator of the estate can file a six month extension for the return, and the IRS can grant an additional year to pay the tax, but interest will start accruing on any unpaid tax after January 21st.  In situations with reasonable cause, the IRS can grant additional one year extensions for up to four and sometimes up to 10 years to pay the tax.  Although, they could also be assessed additional penalties.  The estate could also do an installment agreement for up to 14 years to pay the tax over time.

The extensions of time to pay, although not granted easily, are  designed to protect the interests of the heirs and the IRS.  With a massive estate and so many unknown quantities and litigation, you would have to have a fire sale to generate enough cash to pay the estate tax within nine months.

So how much estate tax will be paid?

The federal return will provide for a $5.45 million exemption for people dying in 2016.  That assumes that he made no lifetime gifts over the annual exclusion amount (currently $14,000 per person per year, and less in prior years).  It would be silly to assume someone of his wealth made no large gifts to individuals during his lifetime.  From what I have read about Prince, he probably made quite a few.  Any gifts he made in excess of the annual exclusion amounts would reduce his $5.45 million exemption.  For simplicity, though, let’s assume he made none.  So the first $5.45 million is tax free.  The rate of tax then slides from 18 percent on value in excess of $5.45 million to the top rate of 40 percent on everything over $6.45 million.  So for the first $6.45 million of his estate, a tax of $345,800 will be paid, and then 40 percent on everything over that.

Let’s assume his estate ends up being valued at $550 million and there ends up being $50 million in litigation and estate expenses leaving $500 million potentially taxable.  His federal estate tax would be $197,765,800.

Ahh, but Prince lived in Minnesota!  He was unfortunate enough to make his home in one of the 19 states (plus Washington DC) that have their own estate and/or inheritance tax.

Due to his residency the estate will also need to file a Form M706, the Minnesota equivalent of the federal Form 706. Minnesota will have a $1.6 million exemption.  The rate of tax then slides from ten percent on value in excess of $1.6 million to the top rate of 16 percent on everything over $10,300,000.  So for the first $10,300,000 of his estate a tax of $1,080,000 will be paid, and $1,600,000 for each additional $10,000,000.  So his Minnesota estate tax will be $79,432,000.

The Minnesota estate tax paid will fortunately be an additional deduction on the federal return.  So 40 percent of $79,432,000 will reduce the federal estate tax bill by $31,772,800, resulting in a $165,993,000 balance.

That will bring his total estate tax bill to $245,425,000, or roughly 49 percent, leaving his heirs with $254,575,000 to split up.

Besides all of the typical and sometimes fancy estate planning that could have been done to avoid costly litigation, and perhaps save tax through things like irrevocable life insurance trusts and other tricks up an estate planners sleeve,  I wonder if he ever simply considered setting up shop 45 miles away across the St. Croix river in Wisconsin?  It might have saved his estate $47 million – that is over $1 million per mile!

Although most people do not have $245 million estate tax bills for their heirs to worry about (or any estate tax at all), planning in advance and understanding the rules surrounding your tax and financial life is always important.  Sometimes even little things, learned early, can make a big difference.  And building a relationship with someone that can keep you on the right track is certainly of value.

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

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Why I am a Tax Accountant?

Originally published in the Cedar Street Times
May 27, 2015

Sometimes people ask me why I am a tax accountant.  This question seems to have different colors to it when asked. Sometimes it is an interest in me – what things I find enjoyable about the profession or how my particular career path led me to where I am.   Sometimes it is an interest in themselves as they are “trying on” my work clothes to see if this field may be of interest to them in some capacity.  And other times it is an interest in the general human condition probing for answers to: “How in the world could anyone in their right mind, voluntarily do what you do?”

Well, I certainly hope I am in my right mind.  Contrary to the stereotypical image of a reclusive, socially awkward bean counter that maybe wears a pocket protector, I actually find most of us do not carry that stigma! Okay, I admit I wear bowties, but these days in a scene where formal business attire inevitably includes a necktie,  I submit to you that a bowtie is more the shtick of a rebel than a conformist.
Let’s see, what else can I tell you to debunk the nerdy, ill-equipped-for-life-but-good-with-numbers typecast. Well, I recently flew across the country to play in a soccer a tournament with a bunch of teammates that I played with in college.  I pretty much built a house with my own two hands (actually four when you count my wife’s) – everything from bending rebar in the foundation to nailing the shingles on the roof.  Oh, and I ride a motorcycle (albeit cautiously).  So you can add sports, construction, and motorcycling to your list of accountant hobbies.
So what part of me is driven to debits, credits and taxes?  Well, there are various skills in my life that I have seen as a recurring pattern ever since I was a child that are applicable.  I have always enjoyed: 1) organizing and classifying information, (like counting coins and bills which was a favorite activity when I first learned to count, or endlessly sorting, organizing and valuing baseball cards in elementary school), 2) solving problems (like figuring out how to turn on all the pull string lightbulbs in our basement in middle school all at once), 3) creating things (like a Christmas light display in high school that soared 35 feet above our rooftop, or writing software code – one of my first jobs out of school).
I was also entrepreneurial growing up.  I can remember when I was in third grade, I located some really neat and colorful mechanical pencils.  I found that I could buy a ten pack for $1 and resell them for 25 cents each making a $1.50 profit on each pack.  I can remember the teacher having to tell everyone to sit down one day because I had a swarm of kids around me buying pencils. I had a few other small retail ventures like that in elementary school and I had a yard and odd job business in middle and high school as well.
Throughout it all, I enjoyed people, and I liked helping people.  That is what really landed me on the tax side of CPA life.  I did financial statement audits about half-time for the first six years or so of my accounting career.  I felt it really used my full skillset as an accountant, which I enjoyed, but I felt more like a necessary evil than someone who was being voluntarily employed to help.  Not many people hire auditors because they want to!  And who likes someone who is basically looking over his shoulder to report any mistakes he is making!
I have enjoyed tax preparation because there is a high degree of interaction with individuals, and I truly feel that I am able to help people, and they are generally very grateful for the help.  Since most everything in our lives (good or bad) has some kind of tax impact at some point, conversations with clients become very personal at times, and there are deep bonds that can form.  I find it is a very honorable and rewarding feeling to be entrusted with an understanding of someone’s personal and financial matters, and to try to help them either save tax or be a general financial (or personal) sounding board.
Plus, while doing this, I get to use the various skills I have enjoyed in my life.  Tax accounting certainly employs organizing and classifying information.  Preparing a tax return or tax plan for an individual, trust, estate or business is almost always a problem solving and creative activity as you try to piece together a mountain of facts and rules to come up with the best scenario you can.
Having my own firm also fulfills my entrepreneurial craving and gives me flexibility of time and the opportunity to do a variety of things, which I also enjoy.  So why am I a tax accountant?  Because I love it!

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

Do You Know What a Mortgage Really Is?

Originally published in the Cedar Street Times
May 6, 2015
You commonly hear people say things like, “I have to pay my mortgage,” or “When is my mortgage due?”  Technically, this is incorrect.  If you were back in grammar school, your teacher would explain that you are using an incorrect part of speech. A mortgage is not a noun; it is a verb.
Mortgage means “to pledge.”  It is the action you take when you pledge the house as collateral when you give the bank a note with the promise to pay them back.  So the bank says, “Hey, if you want to buy this house (or borrow money against a house you already own), we will give you the money if you mortgage the house by giving us legal title to the house until we are paid back, and giving us a note that promises repayment.  If you default on the loan we can sell the house to settle the debt.”  The customer is the mortgagor.  The mortgagee would be the lender.
After the note is paid in full, then the mortgagor reconveys legal title to the property to the mortgagee.   Even though the lender has legal title until paid in full, the mortgagor still retains equitable title.  Equitable title is basically the right to use and enjoy the property.
In about  20 states (including California) we technically do not use mortgages, but instead use deeds of trusts.  This works in a similar fashion except that instead of the mortgagee holding legal title until the debt is paid, a third party (such as an escrow company) holds the legal title until the debt is paid in full.  A deed of trust is an advantage to the lender, as the lender does not have to sue in public court in case of default.  Instead they can do a nonjudicial foreclosure much faster.
So, in reference to the beginning of our article, to be technically correct, you would have to say “I’ve got to pay the note for the house I mortgaged,” or in California, ” I’ve got to pay the note for the house on which there is a deed of trust.”

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.