You know how sometimes the storm just has to get worse before it gets better?

That’s where we are in Part V of the Aretha Franklin saga.  Under the topic of, “It’s not what you gross – it’s what you net,” here’s the latest;

The Problem

Let’s add Income Tax to the mix…

According to an article in the New York Times last month, Ms. Franklin apparently owed several million dollars in unpaid income tax over the last seven years of her life. The IRS has valued that debt at $7.8 Million.

That will be added to whatever the Estate Tax bill turns out to be. (The highest estimate we’ve seen published puts the estate at $80 Million.)

But wait – there’s a potential agreement with the IRS awaiting Court approval!

The Solution

I choose to designate this the “After” plan. It looks like this:

40% of ongoing revenue from the estate is to be set aside to pay the ongoing tax bill for both the estate and the heirs.

The next 15% will pay the first $1 Million dollars of ongoing administration costs. (That’s primarily the legal and accounting fees, I suspect.)

55% is leftover. Apparently, that is to be split equally among her four sons. There’s also a $50,000 incentive payment for each of them once the stipulation has been approved.

The two big disadvantages of this “After” plan are the publicity and the math. Let’s just speculate on the math, ok?

      • Estate Tax on $80M? Should exceed $25M. The estate will be paying this plus the interest it accrues until it’s been fully paid.
      • Administration fees? We’ve not seen published numbers yet.  For now, let’s just speculate they’re only $15M. (We’ll be able to update that at some point in the future.)

These numbers quickly reduce the estate’s value by 50%. Before adding the interest that will be due, we’re already down to $40M. Ms. Franklin didn’t really have an $80M estate after all…

Now let’s Monday Morning Quarterback how much more favorable things might have been with a “Before” plan;

The two big advantages of this “Before” plan would be the privacy and the math.

      • Privacy. There would have been no public knowledge of all this.
      • Math, Part 1: The IRS wouldn’t be able to value the estate at retail. Good estate planning would have been able to shelter and discount the assets. The taxable estate could have been substantially less. I like to think of that as valuing the estate at wholesale.
      • Math, Part 2: Leverage. The estate will be paying both the principal and interest from its own assets. Good insurance planning would have allowed the estate to pay that interest in advance. The principal would then have been paid with the insurance company’s money, not the estate’s.
      • Math, Part 3: The total administration fees would seem like petty cash compared to what’s already been incurred.

The Outcome

The outcome is still to be seen. Next is a court date in August to litigate the validity of multiple wills which surfaced about nine months after Aretha Franklin’s passing.

Whatever it turns out to be, the results will have taken much more time, with a much more costly outcome, than could have otherwise been accomplished.

Our clients need the better outcomes we can provide. Ms. Franklin’s reality isn’t theirs – nor does it have to be.

(Our previous coverage is here; Part I, Part II, Part III, Part IV)

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