A Princely Sum

A Princely Sum

Taxes, lawsuits and a guessing game over his ultimate worth are just part of the drama to come as experts unravel Prince’s financial legacy.

It is still hard to believe. Prince Rogers Nelson dead, at 57, without leaving so much as a Post-it note to indicate who he wanted to inherit his vast fortune, or how his music and legacy should be managed. Indeed, of all the strange and idiosyncratic decisions Prince made in his career, dying without a will may turn out to be the most mystifying.

The ironies are impossible to ignore. Here was a man who employed teams of lawyers to investigate and battle anyone involved in the most innocent of copyright infringements—a man who once forced a mother to remove the YouTube video she had posted of her toddler dancing to his song “Let’s Go Crazy”; a man who once filed suit against nine websites and two Prince fanzines for referring to him in print by the glyph that was his legal name at the time; a man whose zealous pursuit of copyright violators prompted the Electronic Frontier Foundation to create a hall-of-shame award especially for him: The Raspberry Beret Lifetime Aggrievement Award, in honor of the Purple One’s obsessive use of the Digital Millennium Copyright Act to prevent anyone, anywhere, from using his music or image in any way that he did not personally bless. With lawyers on speed-dial and litigation on his daily to-do list, how is it possible that Prince died intestate? No one knows. “I find it inconceivable that Prince’s lawyers never suggested that he draw up a will,” says Sharon Sandeen, a professor of law at Mitchell Hamline School of Law in St. Paul. “They had to have had that conversation. I can’t think of any scenario where they wouldn’t.”

And yet.

As the world now knows, having died without a will, Prince effectively handed over control of his legacy to the vagaries of the Minnesota legal system. Absent any other estate-planning documents, such as a trust, the heirs to Prince’s estate are now locked into a long, arduous legal process over which they have little control. At stake is an estate valued at anywhere from $100 million to somewhere north of $300 million, as well as the rights over who will manage Prince’s artistic legacy going forward, what value the state will place on Prince’s income potential in the future, and how much control his estate will have over the management of Prince’s brand in perpetuity.

Prince Rules Billboard Chart

Prince set an all-time record for the Billboard 200 chart in mid-May.

He had 19 albums on the chart for the week of May 14. The Beatles, with 13 albums, had the old record for the most number of albums on the chart in a single week.

Prince broke the record weeks after his death on April 21. “The Very Best of Prince” was No. 2 and “Purple Rain” reached No. 3.

What kind of tax bill is facing Prince’s estate?

While the value of Prince’s estate is unknown, the approach to calculating the estate taxes is much clearer.

Twin Cities Business contacted accounting firm Baker Tilly to gain a deeper understanding of what’s involved in determining and paying the estate taxes.

At the time of his death, Baker Tilly did not have Prince or his related entities as a client.

Mark Bakko, tax partner and leader of Baker Tilly’s Minneapolis tax practice, explains how to reach an estate tax total if Prince’s estate is valued at $300 million. That is one of the estimates that has been used in media reports.

When computing estate taxes there are several items that are deducted from the value of the estate, Bakko says. “One item is the state estate tax which is treated as a deduction from the total value of the estate,” he says. “On a $300 million estate, the Minnesota estate taxes would be $47,464,000.” Therefore, this amount would be deducted from the $300 million gross value of the estate.

Each person is allowed a federal exclusion of $5.54 million. “So the first $5.54 million is not taxed for federal,” Bakko says. “This amount would be reduced by any previous gifts that have been made. Therefore it is possible that none of the $5.54 million is still available.”

For Minnesota estate tax purposes, the amount of exclusion is $1.6 million instead of the $5.54 million.

“This means that the federal estate tax would be $98,789,400, if the full federal exclusion has not been used,” Bakko says. “The tax would be $100,960,200, if the exclusion has been previously used.”

The total federal and Minnesota estate tax owed would be $146,262,400. The tax is normally due nine months after death.

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If the value of the estate is from a separate legal operating entity (like a partnership, S corporation, limited liability company) then the estate tax is due over a much longer time. The rules for paying the tax are:

  • interest only for the first four years
  • the remaining balance is paid over 10 years, plus interest each year.

“We do not know if Prince had any separate legal entities,” Bakko says. “So it is unknown if this second payment option is even available.”

How it will all play out is anyone’s guess. Only two things are certain: There will be taxes, and there will be lawsuits. An estate executor has yet to be named, but Bremer Trust has been granted temporary stewardship over Prince’s financials. And Bremer staff and advisers will be busy.

The first big hurdle for the Prince camp will be determining who the rightful heirs to Prince’s fortune really are. In court documents, Prince’s sister, Tyka, has listed herself and five half-siblings as the heirs. But since that filing, two women claiming to be Prince’s niece and grand-niece have come forward, as have people claiming that Prince was their father.

One of the paternity claims comes from a rapper named Carlin Q. Williams, who is currently serving time in a Colorado federal prison on weapons charges. Williams’ mother, Marsha Henson, claims she met Prince in Kansas City in 1976, had sex with him in July, and bore her son the following April. A timeline puts Prince in KC at about that time, adding an element of credibility to the claim.

If Williams can pass a DNA test establishing a genetic link (an admittedly big “if”), Minnesota law would declare Williams as Prince’s sole heir (assuming no other love children materialize), leaving Tyka and her half-siblings with nothing.

Once and future money

The next big obstacle will be the dreaded estate tax. If Prince had been married or left his fortune to charity, the tax wouldn’t apply. But he wasn’t and didn’t, so the estate will be subject to the highest possible rates: 40 percent federal, 16 percent state (though the state tax is deductible against the federal).

The Prince estate has nine months, plus an optional six-month extension, to file its claim estimating the value of Prince’s assets—cash, property, investments, royalties and estimated future earnings. The IRS’ auditors then have three years to file their own estimate. If the two don’t agree, there could be trouble.

The most problematic number likely will be the estimated value of Prince’s future earnings at the time of his death—a number that would include royalties from his catalog of work, the value of hundreds or thousands of unreleased songs that Prince recorded and stored in a vault at Paisley Park, and the estimated dollar value of Prince’s brand in the future.

Unfortunately, that last part—estimating Prince’s future value—is as tricky as it is important. One of the peculiarities of the estate tax is a requirement to estimate how much revenue the claimant’s estate is likely to generate after his or her death, and pay taxes on it immediately, before the money has been earned. The amount is theoretical, but the cash needed to pay it is not.

According to Andy Mayoras, an estate attorney and co-author of Trial & Heirs, a book about celebrity estate-planning debacles, the Prince case is unique because he owned most of the copyrights to his work—and there are other major factors to consider. There’s a huge question mark hanging over the value of possibly hundreds or thousands of unreleased recordings locked away in Prince’s storied vault, and because he died relatively young, there’s a loss of decades of creative potential.

“There is some guesswork involved in determining how much money the estate can profit from his future royalty streams, the unreleased music, and Prince’s name and likeness,” says Mayoras, a principal partner with a Michigan-based law firm. “The IRS is going to take a snapshot of his value on the date of his death. Nobody knows what’s in the vault or what it’s worth, but someone has to come up with a number.”

That number is everything.

A possible precedent

Michael Jackson’s estate offers a cautionary tale: In 2010, the year after Jackson died, Jackson’s estate estimated the value of the Gloved One’s name and likeness going forward at a paltry $2,105, arguing that his estate was bankrupt at the time of his death, and his image had been forever tarnished by allegations of child molestation. The IRS disagreed and came up with a slightly different number: $434.26 million. A Washington, D.C., court is scheduled to hear the case in February.

The outcome of the Michael Jackson case is important to the Prince estate because it could establish an expensive precedent. If the IRS wins, or even if some multimillion-dollar middle ground is reached—$200 million, say—it could provide a rationale for auditors evaluating Prince’s estate to reach for a higher number.

As it happens, Michael Jackson’s estate also has gone ahead and disproven the validity of its own low-ball estimate by earning more than $1 billion since Jackson’s death. That number also could play a role, because it demonstrates that beloved pop artists in this day and age can bank quite a bundle after they die. In Jackson’s case, the film This Is It, the Cirque du Soleil show Michael Jackson ONE, album sales, new music and a $750 million catalog deal with Sony have pushed MJ’s post-mortem payday well past that billion-dollar mark. One can only hope that Prince’s estate doesn’t go the Cirque route to riches, but turning Paisley Park into a museum or shrine à la Elvis Presley’s Graceland is certainly an option, as is a film and some sort of fan-friendly concert experience. Prince also was reportedly working with journalist Dan Piepenbring of the Paris Review on an unpublished memoir tentatively titled The Beautiful Ones.

The bottom line is that no one knows precisely how much Prince’s estate is really worth, now or in the future. According to Forbes, a conservative estimate of the value of Prince’s future royalties on music he’s already released (39 studio albums, four live albums, six compilations, 17 video albums, 136 music videos, 13 EPs, one remix album) is between $300 million and $500 million. Unlike most other artists, Prince owned the copyright to most of his music, so the revenue stream from that quarter is full and flowing. Demand is also high. In the two weeks following his death, several of Prince’s albums were on the Billboard 200, including the top two spots (Beyoncé eventually nudged him off). Prince also prohibited streaming services such as Pandora and Spotify from playing his music (Jay-Z’s Tidal is the only streaming service Prince approved of), so fans must still pay for the privilege of hearing most of Prince’s music.

Prince achieved superstar status as a musician, singer and creative artist. Despite his aggressive moves to seize control of his musical rights, the handling of his estate and business affairs is now up in the air because he failed to leave a will and estate plan. Bridges and buildings in the Twin Cities area were bathed in purple to honor the life of Prince. But the purple tributes extended around the world, including purple lighting on the Empire State Building in New York City and the Eiffel Tower in Paris.

What’s in the vault?

But it’s the material the public hasn’t heard that’s the biggest mystery. Most media outlets echo reports that the vault contains more than 2,000 songs. Prince’s former recording engineer, Susan Rogers, has said there were already more than 2,000 songs in the vault when she left in 1989, according to the New York Daily News. Alan Leeds, Prince’s former tour manager, says Prince also recorded every concert he ever played. So in addition to the recorded songs, there are hundreds, if not thousands, of live concert performances that could be curated and sold.

All of that potential income sounds great, and it is, except when it comes to that one-time estate tax hit. If the state’s auditors decide that Prince’s total estate at the time of his death is worth say, $300 million—not an outlandish sum by any means—the estate could be on the hook for about $150 million in taxes right out of the gate.

“A number like that would probably force the estate to sell off assets to pay the taxes,” says attorney Mayoras. “The value of the vault is illiquid, but they have to make it liquid.”

But what to liquidate? According to Carver County property records, Prince owns 16 properties in Minnesota—including four in Chanhassen, two in Minneapolis, and one in Excelsior—which are worth just over $31 million. The most valuable of these properties is a 156-acre parcel of land on the shores of Lake Lucy and Lake Ann in Chanhassen, valued at $13.68 million. Paisley Park, the 9-acre recording/living/party complex where Prince died, is valued at $7 million. The rest are various properties valued at $95,000 on up. Recording equipment, musical instruments, personal belongings, a few cars and some art constitute the bulk of his other physical assets. It’s unclear what he had stashed away in cash and investments.

“Determining the value of those intangible assets is most of the battle,” says Matt McClenahan, an estate-planning attorney with the Minneapolis-based JUX law firm. “The number could be very high. But both sides have to play by the same rule book in the valuation process. If Prince’s team and the IRS come up with different numbers, there will be an opportunity for negotiation, and an opportunity for the tax court to render an agreement.”

If no agreement can be reached about the amount of tax owed or terms of payment, there could be a lawsuit similar to the Michael Jackson case.

Rights to the famous image

Concerns about these issues spawned a flurry of activity in the last two weeks of the state legislative session in May. As it happens, Minnesota does not have a specific law prohibiting other people from profiting from the image or likeness of a celebrity—on a T-shirt or bobblehead, say—after they’re dead. The ability to control the use of a celebrity’s image and likeness is called “right of publicity,” a right that a celebrity-rich state such as California has codified into law. Minnesota has a common-law statute established by a case involving Jesse Ventura, but that case only established right of publicity in Minnesota while someone is still alive.

Without a right-of-publicity statute, Prince’s heirs could lose a bundle to entrepreneurial merchandisers of Prince-inspired memorabilia. To prevent this from happening, Bremer Trust asked the Minneapolis law firm Stinson Leonard Street to draft a right-of-publicity bill based on California’s statute. Rep. Joe Hoppe, R-Chaska, whose district includes Paisley Park, and Sen. Bobby Joe Champion, DFL-Minneapolis, were hastily recruited to sponsor the bill.

The legislation did not conceal its intent; it was called the Personal Rights in Names Can Endure (PRINCE) Act. Its purpose was to protect Prince’s legacy from “unauthorized commercial use,” but representatives of several sports celebrities also backed the effort.

Joel Leviton, a Stinson attorney representing Bremer Trust, explained the law’s rationale to a judiciary panel this way: “For better or worse, Prince is the first Minnesota celebrity to reside here, to pass away here, and likely go through probate with a right of publicity that has value.”

But right-of-publicity laws also give celebrities broad latitude to sue whomever they think is violating that right, for whatever reason. In many cases, those trapped in its web are people who unwittingly crossed the line—promoting a dance party, theater performance or tribute act, for instance—and don’t have the resources to defend themselves.

Many First Amendment advocates and representatives from local arts institutions, including the Guthrie, were quick to criticize the bill’s potentially “chilling effect” on creativity and self-expression. They also questioned the wisdom of passing legislation with such broad ramifications so quickly, noting that most of the scenarios concerning Prince’s merchandising potential are already covered by current copyright, trademark and patent law. The use of Prince’s music catalog, for instance, is already protected by copyright. Bremer Trust argued that the bill needed to be passed quickly to clarify issues with Prince’s 2016 taxes, but the anti-PRINCE faction made enough of a fuss that the bill was ultimately tabled. It hasn’t gone away, though. A working committee has been formed to refine the bill’s language and reintroduce it following the 2016 election.

Blake Iverson, an intellectual property attorney with the Friedman Iverson law firm, was among those who objected to the bill in the form it was drafted, partly because it put the onus of attorney’s fees on the plaintiff. “No other intellectual-property tort incentivizes attorneys to be aggressive, but this one does. If a nightclub decided to do a Prince tribute night, they could demand all the money from the event plus attorney’s fees. People love Prince here, and they want to honor him, but this law would cause people to be very cautious. Sometimes, people’s hearts are in the right place, but they aren’t very sophisticated about the law, and they get in trouble.”

If such a bill ever does pass, the hope is that the Prince camp would exercise some common-sense discretion over who should and shouldn’t be sued under the law. But if Prince’s heirs are guided by the question, “What would Prince do?,” discretion is not the first descriptor that comes to mind. Waiting for the Legislature to act is not the Prince camp’s only alternative, either. The heirs could sue someone and force the courts to clarify the issue of right of publicity after death through case law.

A legacy: money and memory

Estate planners and lawyers have been quick to emphasize that these legal hassles, and at least some of the tax burden, could have been avoided if Prince had written a will, or could still be avoided if a valid will eventually turns up.

“Minnesota has terrible tax laws, but we have some really great trust laws,” says McClenahan. “There are many ways to protect your assets. The whole Prince situation is unfortunate, because when we’re talking about our legacy, it’s not just about the money we leave behind, it’s about the impact our decisions have on other people, and how that reflects on the way people remember us.”

During his life, Prince was known as a brilliant and mercurial artist who also was a savvy businessman and a passionate advocate for artists’ rights, particularly his own. Control over his artistic destiny and legacy was everything to Prince. So for him to sacrifice that control by neglecting to attend to the most basic legal safeguard imaginable is still, for many, an unimaginable situation.

Prince’s music will always come first in the cultural conversation about him. But his estate case may go down in history as the greatest advertisement for the importance of responsible estate-planning that the world has ever known.

Tad Simons is a St. Paul-based freelance writer and editor who writes monthly about the arts and entertainment industry for Twin Cities Business.