Archive for the ‘appraisal’ Tag

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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Sale of a Residence After Death – Part II

Originally published in the Cedar Street Times

April 5, 2013

Two weeks ago we discussed the sale of a personal residence after someone passes away when held as joint tenants or community property.  We also discussed the concept of a cost basis step up (or down) to the current fair market value at death as it relates to joint tenancy, community property, and tenancy in common.  If you missed this article you can find it on my website at www.tlongcpa.com/blog.  This week we are going to discuss what happens when a sole owner or tenant in common passes away and the house or fractional interest in a house goes to their trust or estate.

Often children are tasked with figuring out what to do with mom or dad’s house after the second spouse passes.  Names like executor, executrix, and trustee get thrown around and sometimes you get to know your accountant and attorney better than if you had gone on a fishing trip together!  After death, the house typically become part of the estate if there was no trust in place, and if there was, then it becomes part of an irrevocable trust that has the task of winding up affairs and distributing the assets to the beneficiaries (or trusts for the beneficiaries).

If the surviving spouse held the house as a sole owner or in his or her revocable trust before death, the house receives a full step-up (or down) in basis to the current fair market value at death.  If the house is distributed outright to a beneficiary (or beneficiaries) and then the beneficiary immediately sells the home, you often will have a loss due to the real estate commissions and other sales expenses (or perhaps even a market decline between date of death and the sale as we saw so often over the past five years).  This loss, however, will generally be a nondeductible personal loss unless you first convert it to a rental property, and then sell it later.

If, however, it is decided the house needs to be sold while it is still in the estate or trust in order to pay debts or to distribute the proceeds to various beneficiaries, you may have a case to take a deductible loss on the sale of the property (which would offset other taxable income in the estate or trust, or perhaps flow through to the beneficiaries reducing their personal taxes).  Fair warning, the IRS and the courts disagree on this issue!

The IRS has taken the position that even a trust or estate cannot take a loss unless it is a rental property or converted to a rental property and then sold.  However, this conflicts with some of the instructions they provide regarding capital assets held by trusts and estates. The courts, on the other hand, have held that a trust or estate does not hold personal assets, and thus is allowed to take a loss on the sale of what used to be the decedent’s personal residence as long as no beneficiaries live in the property in the interim.  There are other issues to consider here, but in the right circumstances, strategic planning could create some large tax savings.

If a tenant in common passes away, his or her ownership percentage receives a step in basis to the current fair market value and the interest flows through to the estate or trust.  Similar results would occur as those just discussed for sole owners.  It is less common to find someone holding a personal residence as a tenant in common, especially with unrelated people.  It also comes with other, more complicated issues, since fractionalizing ownership in a house diminishes the value – basically, who wants to buy a house with other people you don’t know?  In all cases after someone passes away, date-of-death appraisals are requisite, and you may need specialized appraisers for fractional interest properties.

This really just scratches the surface of the issues you can encounter, and it is always best to find a CPA and attorney team that is equipped to handle these issues appropriately.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Sale of a Residence After Death – Part I

Originally published in the Cedar Street Times

March 22, 2013

When a living individual sells a personal residence that results in a gain, many people are familiar with the rules which may allow an exclusion of the taxable gain of up to $250,000 ($500,000 if married filing joint) if the taxpayer lived in the property two out of the last five years as his or her primary residence.  In the depressed real estate markets over the past few years, many people have also learned (sometimes to much dismay) that a loss on a personal residence is not deductible.

But what happens when a house is sold after someone passes away?

The first thing we need to do is determine the cost basis.   At the date of death, the cost basis of the property changes to whatever the current fair market value (FMV) is (an appraisal is required – not a market analysis by a real estate agent).  If the house is held in joint tenancy or tenancy in common, only the decedent’s share of the home gets a step up (or down) in basis to the current FMV, and the basis for the survivor’s original share does not change.

If, however, it is held as community property, the entire interest in the house gets a step in basis to the current FMV.  If the property is held “with rights of survivorship” then the house passes immediately to the survivor which in turn inherits the new stepped up (or down) basis of the decedent to add to his or her own basis-in the case of joint tenancy or tenancy in common, or he or she takes the new FMV as the new basis if it was community property.

When the property is sold, the survivor reports the sales price less the new basis and selling expenses.  If it was sold soon after death, the survivor often realizes a loss due to sales expenses if they got a full step-up in basis (albeit nondeductible if maintained as a personal residence).  If the survivor realizes a gain, then, the survivor is eligible for the $250,000 exclusion assuming he or she meets all the normal rules.  If it was a spouse that passed away, then the widow or widower would have two years from the date of death to sell the house and still be eligible for the $500,000 exclusion.

In two weeks we will discuss the more interesting scenarios that play out when the property is not held “with rights of survivorship” and the property goes to the individual’s estate or trust, such as is often the case at the death of a single individual or the death of the second spouse.

Remember, it is always best to seek competent advice as everybody’s tax situation is unique and there are more rules that could affect you than just those mentioned in this article.

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

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Donating Your Bald Eagles and Blue Jeans

Originally published in the Pacific Grove Hometown Bulletin

August 1, 2012

If you missed the July 22 issue of the New York Times, you missed a great article about estate tax the IRS is trying to levy on a piece of art that includes a genuine stuffed bald eagle.  The IRS has valued the piece of art at $65 million and wants the heirs of New York art dealer Ileana Sonnabend to pay approximately $29.2 in estate tax.

The rub, however, is that it is illegal to sell the piece of art due to the 1940 Bald and Golden Eagle Protection Act.  The heirs and their appraiser are of course contending the value is $0 since they cannot legally sell it – how can it have value?  The IRS Art Advisory Panel reportedly called it a “stunning work of art” and is contending that it could be sold illegally on the black market and therefore has value.  It sounds to me like our government wants to have it both ways – you cannot sell it but, we are still going to tax you as if you could.  I think our tax policy should promote legal activities!

The end of the article mentions a possible charitable donation instead.  I suppose this could be an option for the heirs.  Unfortunately, the estate tax would not be eliminated, since the heirs would be the donors and not the decedent.  They would also have to be able to absorb a $65 million donation in a six year period against their income.  IRS law allows you to make a charitable contribution up to 50% of your income each year which can be carried over for up to five more years.  After that, you lose the rest permanently.  One strategy for large noncash gifts is to give a partial interest in the item each year and loan the rest to the charitable organization.  This way, you do not lose any of the valuable deductions.

It is important to remember that current IRS law requires an appraisal for donations over $5,000.  This would also include multiple gifts during the year of similar items that add up to over $5,000.  So if you are taking lots of trips with household items and blue jeans, just make sure it does not go over $5,000 during the year.  It is hard to get an appraisal on a pair of jeans you donated eight months ago.  Oh, and be sure to get your charitable gift receipt!

Regarding the bald eagle art – I sure am glad Mrs. Sonnabend did not leave it in her will to me –   sounds more like a white elephant from my perspective!

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

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.