Wednesday, September 24, 2014

Estate Planning Tips from the Loss of a Hollywood Icon

A very notable woman in the entertainment industry (other than Joan Rivers) passed away recently—Lauren Bacall. Lauren, born Betty Joan Perske, left a true legacy in the entertainment world, as well as a couple of good reminders for those of us crafting our own estate plans. 

Lauren Bacall was the famous co-star and eventual wife of Humphrey Bogart, and she died this August at age 89. Lauren left an approximate estate of $26.6 million.  Of the $26.6 million, about $10 million represents the value of her apartment on the Upper West Side of New York City.  There is about $1 million of personal property and only $100,000 of cash. Lauren also possessed a general power of appointment over the trust that Humphrey Bogart left for her.

Lauren presumably died a New York resident, so there will be both federal and New York state estate taxes due on her estate value and the value of the trust. With only $100,000 of cash, her estate has a serious liquidity problem.

Her will directs that the real estate be sold, but depending on the market and other factors, that might not be practical. Her estate has nine months from the date of her death to pay any estate taxes.  The chances that there will be a closing on a $10 million property within nine months are pretty remote, and it will likely cost more than $100,000 to maintain a property of that size until it is sold.

What about the other assets? Lauren asked in her will  that her personal effects, letters, and memorabilia not be sold. This may be some very valuable property that (assuming the family is willing to part with some of it) the estate could use to pay taxes.

Anything else? Well, Lauren gave the rights to her “likeness” and other intellectual property to her children. If this property is valued anything like the similar property owned by the estates of Marilyn MonroeMichael Jackson, or Elvis, its value is fairly significant.  And the IRS can argue they are owed taxes based on that significant value, even though the family hasn’t yet begun to profit from any of it. Even if valuation isn’t a problem, issues relating to whether and how the estate markets her likeness or how the estate divides royalties and other proceeds can leave families in litigation for years.

These two major issues—illiquidity and problems arising out of the management of valuable intellectual property—can be headed off by a carefully crafted estate plan.

Usually life insurance is the simplest way to assure there is a bucket of liquid assets available to pay taxes and other expenses, and it is also possible to borrow against illiquid assets (such as Lauren’s apartment) to pay expenses. These are relatively simple solutions that usually do not otherwise disrupt the plan.

As for the management of future profits from her likeness, a family entity or trust might be created to hold and manage the assets in order to avoid conflict and govern decisions regarding the use of the assets going forward. A family can agree to put this in place after the fact, but many individuals in similar circumstances choose to establish the entity, select the ownership interests and associated rights (think voting and non-voting shares, for example), and perhaps even a board of directors outside the family to make decisions.

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