Today I am going to use the Michael Jackson case (yet again) as an example to discuss the important issue of timing when determining the value of assets included in a Decedent’s estate for estate tax purposes. As I’ve written before, the estate tax generally is imposed upon the value of a decedent’s estate at the time of his death. Technically, according to Section 2001 of the Internal Revenue Code (the Code), “a tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United Sates.” The “taxable estate” is the “gross estate” with certain deductions and adjustments. The key is determining the “value” of the gross estate.
(Note to estate planning and tax professionals, I will be ignoring the alternate valuation date for now)
Under section 2031 of the Code, “the value of the gross estate of the decedent shall be determined by including to the extent provided for in this part, the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.” But what does “at the time of his death” mean? Section 2033 of the Code provides that the “value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.” Furthermore, the regulations provide, “the value of every item of property includible in a decedent’s gross estate. . .is the fair market value at the time of the decedent’s death. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”
Does it mean at the instant of death?
For most people and for most property, the question is moot. The value of cash, stocks, bonds, real estate, is not going to change from the second before death to the second after death. But for Michael Jackson, it will make a big difference. The value of his image and his name, and his right of publicity are obviously worth a lot more after he died than beforehand. (For more on this see the TaxProf, Michael Jackson’s Looming Estate Tax Disaster, quoting Professor Caron’s previous article on Estate Planning Implications of the Right of Publicity.
So is valuation on this property done the second before death or the second after (or at) death?
It seems logical that the value should be the second before death, because that what it would be worth if Michael Jackson sold the rights if he were alive. The mere lapse of time, or the event of his death itself, shouldn’t cause an increase in the estate tax. It wouldn’t be “fair.” Note however, that there is some property in which, at least in part, uses a post death valuation.
For example, stocks that are traded on an exchange are valued at the mean of the highest and lowest quoted selling prices on the date of death. In a volatile market, this could provide a substantially different value of the stock from the instant of death, especially if the decedent has a large interest in it. If Bill Gates were to die, each 1/8 of a dollar in Microsoft’s value could result in millions of dollars of difference in the gross estate.
But the property being discussed here is not stocks or bonds. It’s publicity rights, and the interest in the music. As such, I believe that the correct value should be the instant before death, and not at the much higher value afterwards.