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Planning, valuation could have saved Franklin’s heirs $20mil

ArethaAretha Franklin, the “Queen of Soul,” passed away last month in her birthplace of Detroit after six decades reigning the music industry. The first woman inducted into the Rock and Roll Hall of Fame, Ms. Franklin leaves behind legendary hits and performances and a legacy many entertainers only dream of achieving. What she didn’t leave behind, however, is a will.

Without a will in place, it’s now up to the state of Michigan to determine how her reported, yet unconfirmed, $80 million net worth is divided among her four children. And that amount could rise as her estate is valued. In hindsight, with some tax and financial planning, and a quality valuation—even just a few months ago—Ms. Franklin’s beneficiaries could have saved more than $27M in estate taxes.

Tax and financial planning:

First of all, avoiding this type of situation is exactly why CPAs should mention the importance of an estate plan if they sense a client’s resistance to writing a will. When faced with an estate challenge, the family of the individual (or, in this particular case, the entertainer’s agent) should become involved to protect the client’s interest. One of the first steps to take is the review of titles to property, employing any state laws that allow the passing of real property through transfer-on-death elections on deeds. This is one of the simplest, yet most effective, means of transferring real property to heirs without the need for probate.

Also, it is imperative to account for the net worth of the client annually. By maintaining accurate records that reflect cost basis, it is far easier to initiate a valuation after the owner is deceased. That’s where the need for experienced professionals in valuation, a growing advisory service, comes into play.

Valuation

Assigning an estimated value to intangibles like publicity, brand, image rights and music royalties can be very complicated. More and more, firms of all sizes rely on valuation experts like Accredited in Business Valuation (ABV) credential holders to play a key role in determining the value of these assets, but it’s important they do so in a justifiable manner that will prevent the IRS from challenging its value.

Intangible assets are typically the most significant assets owned by an entertainer’s estate. From a financial planner’s perspective, the values of such assets are necessary to assist in creating cash flow that may be required to liquidate estate taxes. This cash flow could also help continue the function of the artist’s business ventures as well as the payment of any business debts triggered for repayment upon the death of the entertainer.

At the time of death, the estates of celebrities like Ms. Franklin go through a complex valuation process. Today, continuous payments to an artist from digital streaming royalties can be more valuable than any physical asset. And what if a musician leaves behind a secret vault of unreleased or unpublished recordings, like the legendary artist Prince did after his untimely death in 2016? How is the ownership of these tracks determined? In Ms. Franklin’s case, these considerations will be evaluated and can inflate the value of her estate.

Another trick to valuing a celebrity estate is public interest, which typically skyrockets after death. That could mean an uptick in fans streaming Ms. Franklin’s music, publicity and, ultimately, a higher visibility for her brand. In addition, the state of Michigan has a postmortem right of publicity, meaning heirs can legally protect Ms. Franklin's image from unauthorized use.

Saving Loved Ones More Than Grief

You don’t have to be a celebrity with an $80 million estate to understand the importance of estate planning. In fact, many Americans do not have a will in place and could, unintentionally, cost their loved ones more than heartache and delayed distribution of assets. The lessons learned by failing to properly plan an estate are multiplied for an estate the size of Ms. Franklin’s. To mitigate this dysfunction for any estate, we recommend the planning process start during a client’s career, and appropriate individuals be appointed in case of his or her incapability or incapacity. In many states, a revocable trust, pour-over will, physician’s directive and durable power of attorney would be adequate to accomplish most transactions of an estate. You can accomplish a tremendous amount of pre-mortem planning for a lot less than $27M!

More than ever before, the need for both trusted advisers and valuation professionals is clear. These experts can help plan ahead and make sure clients’ wishes are carried out. The AICPA can help, if you’re looking for information on expanding your practice into the planning or valuation arena.

Jimmy J. Williams, CPA/PFS. Jimmy is the CEO/President of Compass Capital Management, LLC, a registered investment adviser and wealth management firm with offices in Tulsa and McAlester, Oklahoma.

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