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Valuation Experts Clash Over Prince’s Estate

Valuation Experts Clash Over Prince’s Estate

Business Valuation

Legendary musician Prince died on April 21, 2016 without a will. As a result, it created one of the largest and most complicated probate hearings in his home state of Minnesota’s history.

The Internal Revenue Service is claiming that the executors of Prince’s estate have undervalued the estate by 50%, or about $80 million. The IRS determined that Prince’s estate is worth $163.2 million, well above the $82.3 million valuation submitted by the estate’s administrator, Comerica Bank & Trust.

No will, no estate plan and a vast difference of opinion among valuation experts. Let’s look behind the curtain at how this is playing out.

A Classic Battle of the Experts

We have a classic battle of the experts — the estate's experts and the IRS's experts.

The IRS is disputing the value of a vast array of assets, from real estate, to music publishing and image rights, to interests in companies. In almost every case, Prince’s estate obtained appraisals to substantiate the reported value, but the IRS has its own appraisers who say it is all worth more, a lot more

For example, valuations submitted by the estate estimated Prince’s ownership of NPG Records at $19.5 million and NPG Music Publishing at $21 million, while the IRS believes they're worth $46.5 million and $36.9 million, respectively. Regarding real estate holdings, the IRS valued 185 acres of land in Chanhassen, Minnesota to be $21.4 million, with the estate claiming its value is only $15.7 million.

As a result of this undervaluation, the IRS has doubled the taxes the estate owes to $32.4 million and issued an “accuracy-related penalty” of $6.4 million, citing a “substantial” undervaluation of assets.

Comerica and its lawyers maintain their estate valuations are solid. Comerica, as the estate's executor, sued the IRS this summer in U.S. Tax Court in Washington, DC, saying the agency's calculations are riddled with errors.

What Should Have Happened?

While valuations have always been more of an art than a science, it is important that any valuations submitted with an estate tax return meet certain criteria. With such unusual assets as music rights, it is not surprising that the estate and the IRS have different views on the values. The music industry is constantly changing with streaming services recently boosting the value of publishing and recording rights. Just recently, Bob Dylan sold his song catalog for around $400 million and Stevie Nicks sold an 80% interest in her publishing rights for a reported $100 million.

While most estates will not contain these types of complex assets, many estates do contain interests in closely-held businesses that need to be valued. A timely valuation prepared by a qualified business valuation professional may be necessary.

Advisers generally say you should update wills and revocable trusts for big events like births, marriage, divorce, etc. You can give an unlimited amount to your spouse tax-free during life or on death. Prince's estate may face a 40% estate tax, but it is interesting to contemplate what would have happened had he been married and given his estate to his spouse. The answer? No federal estate tax, at least not until the death of his spouse.

The current federal estate tax law says an individual can give $11.58 million tax free to anyone, or a whopping $23 million for a married couple. With potential changes in the estate tax exemptions under a new administration, proper estate planning is more important than ever to insure that estates aren’t paying unnecessary taxes.

Without this type of planning, Prince foretold the situation that could occur in his song “Paisley Park”…

See the man cry as the city
Condemns where he lives
Memories die but taxes
He'll still have to give

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Published on January 08, 2021