Aretha Franklin: Estate Taxes and Royalties

Aretha Franklin’s passing leaves an incredible hole in America.  She was not only a living leader in soul music (which by itself shaped our culture with her music), but she also was a living icon of both women’s rights, and civil rights.  She sang for presidents.  She was involved in fashion, and charities.  But most importantly, she was an example of being a loving mother, while still struggling through a career. 

 

The evening before she passed, I happened to have watched a video of her singing “(You make me feel like a) Natural Woman” at the Kennedy Center (Here’s the New York Times write up).  That performance demonstrates just how important Franklin was.  In a room full of “luminaries”, she was the star of the show.  President Obama and the award recipients were all awestruck by the truly incredible woman on the stage in front of them.  Those in attendance were individuals who also dedicated their lives to art, and many have their own magnificent contributions.  But they all were humbled by simply being in the room with Franklin.  That’s just how great of star she was.

In the weeks following her death, just like what happened with Prince, Michael Jackson, and Chester Bennington (The front man of Linkin’ Park), her music will likely sell at a very rapid pace.  In fact, her music, much like Dean Martin and Ritchie Valens, will probably live on for decades to come.  Which in turn, means that her music will keep making money (royalties) for years to come.  But what will happen to that money and how will the IRS treat it?

What are Royalties?  Royalties are income derived from a contract between an artist (or author, or patent holder), and a publisher, or someone who uses the patent.  Usually royalties are paid based on that contract for the number of times a song is played; when, where, and how art is displayed; for the number of stories sold; or for the use of a patent.

How are Royalties Taxed*:  US Tax Court decisions have found that royalties, by themselves, are analogous to fruit on a tree.  They are separately taxable from the trunk of the tree (the copyright, the actual patent, piece of art, etc.).  So future royalties are usually not included in the estate.

However, if a royalty payment was owed and payable to the person who died, then that particular payment is attributable to her estate, and would not be considered for income tax purposes to the heir.

ValuationIf the royalties are gifted along with the art, then the entire gift would be included in the estate for estate tax purposes.  For instance if the song “A Natural Woman (You make me feel like)” was left outright to her favorite waitress at the local restaurant, then that song would need to be evaluated for its total value.

Valuation is usually found based on an expert’s appraisal of the future income potential.  Those experts arrive at an appraisal by reviewing the history of earnings, a study of the industry, a market survey and analysis, an assessment of risks, and the possibility of governmental or industrial restrictions.  Additionally, the appraisal should consider the opinion of industry experts.

The American Society of Appraisers provides a database to find an appraiser in a variety of areas, including royalties.  Those areas include real property, machinery, business, gems and jewelry, and personal property.

 

*This is not to be construed as an absolute rule, and should not be relied upon in every case.  If you have a tax question, please speak with a tax professional.

Photo credit to J. Stone, shutterstock.com image 1155535390.  Image of Aretha Franklin in New York, January 14, 2014 at showing of “Selma” at Ziegfeld Theater in New York City. 

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