What’s in a name?

As a successful athlete or entertainer, you have likely monetized your fame in a variety of ways, such as securing endorsements, granting licenses and selling copyrighted materials and merchandise featuring your likeness. With this success, it is important to realize that the marketing engine you created can be considered a valuable asset in your estate. Without proper planning, the value of your name, image and likeness (also referred to as your “Right of Publicity” or ROP) can trigger unexpected – and potentially harmful – estate tax consequences.

What is the Right of Publicity?

Your ROP is your right, and your estate’s right, to control how your identity is used for commercial purposes. The ROP is a bundle of separate property rights that are distinguishable from other intellectual property rights, such as copyright and trademark interests that you may also own. Depending on your status in your particular industry and prior marketing efforts, your ROP is often as valuable, if not more valuable, than many of your other assets.

For estate tax purposes, your ROP is similar to any other asset you may own. It is an identifiable, legal form of intangible property, which is freely transferable or licensable. The right is also divisible, such that specific components of your ROP can be assigned, licensed or sold while others can be retained. As such, tax law states that the value of those rights should be included in your gross estate for estate tax purposes.¹ If the value of your total estate, including your ROP, exceeds a certain value – called your estate tax exemption – your estate will have to pay a maximum rate of 40% estate tax on that value.

How do the ROP rules vary?

The ROP is not explicitly created by federal law, but rather by state law(s). However, each state varies greatly on how it defines your ROP. Furthermore, state law varies on the extent to which such rights are protected during your lifetime and after your death.

For example, if you pass away with a large enough estate, a federal estate tax at a maximum of 40% will be assessed against your taxable estate. Applying the federal estate tax on your ROP is determined by the state in which you are domiciled when you die.² However, the laws of other states (and perhaps their state-level estate taxes) may come into play, too, if you monetized your ROP within those states. Therefore, your estate plan should consider the ever-changing patchwork of state laws.

How can ROP affect the value of your estate?

The income tax regulations, which interpret the Internal Revenue Code (IRC) define the value of your gross estate as “at the time of his death . . . the value of all property, whether real or personal, tangible or intangible, and wherever situated.” Under this broad definition, your ROP qualifies as an intangible asset. To the extent they are transferrable at death under state law, they are included in your gross estate and could be subject to estate tax, if your taxable estate exceeds your remaining applicable exemption amount.

The Internal Revenue Service (IRS) values ROPs based upon the “highest and best use” standard, which measures the full income-producing potential of the property regardless of how the estate or heir(s) intends to monetize it. Therefore, even if your estate and heirs do not monetize this intangible asset, your estate may still be responsible for paying estate taxes on the present value of its income-producing potential.

A high-profile case involving an ROP is illustrative of the challenges involved — that of the estate of Michael Jackson. After Mr. Jackson’s passing, the IRS audited his estate tax return and valued his ROP in excess of $400 million. The executors for Mr. Jackson’s estate valued his post-mortem ROP at a mere $2,105 due to the fact that, at the time of Mr. Jackson’s death, he was in a great deal of debt, under public suspicion for child abuse and had little or no licensing agreements in place. Given this discrepancy, the IRS issued the Jackson estate a notice of deficiency and sought additional estate tax, along with interest and penalties, which amounted to more than $1 billion.

The IRS and the Jackson estate ultimately settled their dispute at a valuation of $4.15 million for Mr. Jackson’s post-mortem ROP, delivering a major victory for the estate. However, not all ROP cases will ultimately be decided in favor of the estate. Failing to plan for your ROP rights may have unintended consequences and may result in large unanticipated tax liabilities, plus penalties and interest for your heirs.

What happens if you don’t plan for your ROP?

Regardless of whether your heirs plan on monetizing your ROP or not, inclusion in your estate can dramatically increase total federal and state estate taxes. Not properly accounting for this asset may require your heirs to sell other assets or immediately monetize such rights in a “fire sale” to raise funds to pay the estate taxes. This can have a negative impact on the legacy that you intended to leave, as well as the ability of your heirs to benefit from your estate to the fullest extent possible.

Actions you can take to incorporate ROP into your estate plan

The first action you should take is to establish the facts regarding your ROP by working with your financial and legal advisors. In this regard, you will want to assess:

• ✔  Whether your ROP and your other assets are likely to exceed your federal- estate tax exemption and applicable state-level estate exemptions.
• ✔  If your heirs plan on monetizing your ROP after your death.
• ✔  Your overall estate and legacy goals to ensure your ROP strategy supports heirs

There are three common approaches you may want to consider:

If you don’t want your heirs to exploit your ROP for profit

If you want to prevent your heirs from exploiting your ROP for profit, you may want to consider using an approach similar to what the late actor Robin Williams used.

Upon Mr. Williams’ death, he bequeathed his ownership interests in the right to his “name, voice, signature, photograph, likeness and right of privacy/publicity” to a charitable organization called the Windfall Foundation. Mr. Williams also put in place a restriction that his “ROPs shall not be exploited for a twenty-five (25) year period” following his death. By donating the next 25 years of revenue from his ROP to charity, the plan was designed to remove the entire ROP from Mr. Williams’ taxable estate.

However, entertainers should exercise caution in using Mr. Williams’ approach, because some legal scholars argue that the restrictions imposed by Mr. Williams on the charity should have been considered in valuing the estate’s bequest to charity. In other words, they assert that because the charity did not receive Mr. Williams full ROP rights, since it had to wait 25 years to monetize them, that the estate should not have received a full charitable deduction for the gift.

Leaving parts or all of your ROP to a charity, with no restrictions on how that charity may use the property rights, is the simplest way to avoid a challenge by the IRS. An outright and unrestricted charitable bequest of your ROP to a qualified charity would override the issue of valuation because of the unlimited charitable deduction against estate taxes, regardless of the value of the asset. No estate tax would be due on your ROP if you leave 100% of the rights outright to a qualified charity.

If you want to try to exclude your ROP from your taxable estate

If you want to pass along your ROP outside of your taxable estate, one of the easiest ways would be to move to and be domiciled in another state that does not recognize post-death ROP rights. However, this may not solve for situations where you may have monetized your ROP in another state that grants ROP rights. Nor will this strategy help you address federal estate tax implications if your estate exceeds the lifetime estate tax exemption.

An alternative solution for passing your ROP outside your estate is by giving and/or selling your ROP to an irrevocable grantor trust for the benefit of your family, using your lifetime gift tax exemption. This approach removes the value of the ROP and all future appreciation from your taxable estate.

To report the proper amount of the gift or the sale to the trust, you would be required to file a Federal Gift Tax Return and obtain an independent appraisal that is prepared by a qualified appraiser in order to substantiate the value of the gift assets or substantiate that the sale occurred at fair market value.

As with any gift that you make under your lifetime exemption amount, if the value of the ROP falls after the gift, you will be wasting some of your lifetime exemption. To help solve for this, it may be prudent to include swap provisions in the gift trust instrument so that, if the ROP depreciates after the gift, you can swap it out for other personal assets with higher growth potential.

If you want to use your ROP to fund your legacy

In contrast to gifting the ROP to an irrevocable trust, it may make sense to sell your ROP to an irrevocable grantor trust in return for a promissory note. This has the benefit of removing the future appreciation of your ROP, in excess of the interest rate on the note, from your taxable estate as well as providing you with a cash-flow from the promissory note payments.⁴ Since the irrevocable trust is a grantor trust for income tax purposes, there is no income tax-consequence to you for the sale of the ROP to the irrevocable grantor trust.

To leverage the gift and sale strategies highlighted above, you might also explore holding some, or all, or your ROP in a limited liability company or a family limited partnership before making any gifts or entering into any sales transaction. The IRS has recognized that these structures, if funded and maintained properly, can be awarded valuation discounts due to lack of control and lack of marketability. Such discounts effectively allow you to transfer more ROP tax free and use less of your available lifetime gift exemption amount.

You may also want to divide the various attributes of your ROP into various entities for asset protection purposes. This allows you to determine which ROP interests you wish to keep and which rights you wish to transfer via gifts and/or sales as part of your larger estate plan.

Additional considerations when using a trust structure

If an irrevocable trust is the right approach for you, consider designing the trust as a so-called “directed trust” that names a publicity rights advisor with a particular expertise in this area to direct the trustee as to how to manage the rights. This advisor is typically an independent party, who is not a family member or current employee, to maximize the value to beneficiaries, reduce potential conflicts and to eliminate the trustee’s risk of holding a concentrated non-traditional trust investment.

Also, trusts need to be carefully drafted to consider how the trustee can hold and manage such rights. For example, a trust that receives your ROP should be drafted with intellectual property right provisions as well as provisions that will protect the trustee from holding non-traditional trust assets. It may also make sense to include guidance for the trustee and beneficiaries to consider regarding preserving and maintaining your legacy.

Now is the time to plan for your ROP

Identifying and implementing the right strategy to manage your ROP and help you mitigate potential estate taxes is only possible when you are alive. If you want to pass your ROP to your heirs, you should take time to consider advanced estate planning solutions now. Furthermore, the 2017 Tax Cut and Jobs Act created a fixed period of time in which some estate planning strategies would be available. The window in which to leverage these approaches will only be available until 2026.

Your Merrill advisor can help you tap into the deep estate planning expertise of the Firm and help you explore your options about how to handle your ROP and your taxable estate. Our team will work with you, your attorney and your tax advisor to help you identify and implement the strategy that best supports your goals.

Merrill offers comprehensive services with an understanding of the unique positions of men and women in the sports and entertainment industries: