Aretha Franklin estate echoes planning problems of Prince

Aretha Franklin’s death is going to cause some headaches for her heirs.

The legendary Queen of Soul didn’t have a will or trust at the time of her death from pancreatic cancer last Thursday, according to news reports. That’s especially surprising, estate planners said, given the estimated value of her estate at a whopping $80 million.

Since Ms. Franklin, 76, wasn’t married, the estate will pass to her four children. It’s a situation that echoes that of another virtuoso musician, Prince, who died in 2016 unmarried and without a will.

“This is Prince all over again,” said Bruce Steiner, an estate planning attorney at Kleinberg, Kaplan, Wolff & Cohen.

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Being married would have provided the Franklin estate with a tax haven of sorts. Through something called the “unlimited marital deduction,” an estate passes tax-free to a spouse at death.

Ms. Franklin’s four children will receive the estate in equal portions, but the Tax Man will take a bite out of those pieces. Since Ms. Franklin lived in Michigan, which doesn’t have an estate tax, the estate wouldn’t owe tax at the state level. However, the federal government levies a 40% tax on portions of an individual’s estate valued over $11.18 million. In the case of the $80 million Franklin estate, that would yield a tax bill of $27.5 million.

Absent a trust being established by any will, these assets could be taxed again by the federal government at the time of the kids’ death, when the money is passed to Ms. Franklin’s grandchildren.

Celebrities like Ms. Franklin also must undergo a complex valuation process that assigns an estimated future value to the income from things such as image rights and music royalties. This process can inflate the value of the estate — and hence the amount of tax that’s owed at death.

In Ms. Franklin’s case, that appraised value will likely be high, and not only because of her fame and popularity — she was, after all, the first woman inducted into the Rock and Roll Hall of Fame, in 1987. It’s also due to Michigan law. The state has a postmortem right of publicity, meaning heirs can legally protect Ms. Franklin’s image from unauthorized use, for example.

“She is the Queen of Soul,” said Charlie Douglas, an estate planner. “Let’s assume she’ll have some substantial postmortem rights of publicity.”

The estates of celebrities and music artists must go through this valuation exercise. The appraisal must be reconciled with a parallel appraisal conducted by the Internal Revenue Service of the same assets. Sometimes, the gap can be wide. The IRS initially valued Michael Jackson’s name and image upon death at more than $434 million, while the estate’s estimate was just $2,015.

One way in which the Franklin estate differs, though, lies in one of her children, Clarence, who reportedly has special needs.

Estate planners said Ms. Franklin’s death without a will could put her son in a precarious position. Her estate will be distributed outright to the four children, meaning Clarence could lose any aid currently being received via Medicaid, supplemental Social Security or subsidized housing, for example.

That’s why estate planners often recommend setting up a special needs trust, which would provide income for the child but allow for retention of government benefits.

“Usually with a special needs kid you’d like it to be in the form of a special needs and not an outright distribution,” Mr. Douglas said.