Taxation & Estate Planning

Michael Jackson's Estate, Part 5 -- Estate Taxes and an Insurance Trust

By Joel A. Schoenmeyer

This CBS News article talks about the tax burden on Michael Jackson's estate. The estate has to deal with a few problems:

1. Determining the amount of all of Mr. Jackson's debts.

2. Determining the value of all of Mr. Jackson's assets. This is particularly hard to do because the value of some of these assets fluctuates with Mr. Jackson's popularity (which is currently high). And how do we value Mr. Jackson's public image?

3. Liquidating Mr. Jackson's assets so that debts and any taxes (including estate taxes) can be paid.

The article notes that Mr. Jackson also set up an insurance trust. From the article:

Jackson's estate may have planned for a big estate tax bill. He had an insurance trust in his name as of Aug. 26, 2003, according to a financial document addressed to the singer and obtained by the AP. Insurance trusts are often set up by estates to pay federal estate tax.

I think the statement that the insurance trust is "in his name" is misleading; they probably mean just that Mr. Jackson set up such a trust with his children or others as beneficiaries (and someone other than Mr. Jackson as trustee). There are a couple of major advantages to creating such a trust:

-because the trust wasn't owned by Mr. Jackson at his death, the trust assets (typically this would be the proceeds from one or more life insurance policies on Mr. Jackson's life) are not included in his estate for estate tax purposes.

-because the life insurance proceeds are liquid, the trustees of the insurance trust can purchase illiquid assets from Mr. Jackson's estate or trust, so that the estate or trust has money it can use to pay bills.

I talked more about insurance trusts in a four-part series a couple of years ago:

Part One
Part Two
Part Three
Part Four

Full post as published by Death and Taxes Blog on July 13, 2009 (boomark / email).