Estate-Planning Issues for Entertainers

Estate planning is central to the post-mortem distribution and protection of an individual's assets. Celebrities have special estate-planning concerns that include intellectual-property valuations, how the valuations affect estate taxes and post-mortem administration of intellectual-property. In the following interview, conducted in Nashville by Entertainment Law & Finance Editor-in-Chief Stan Soocher, entertainment attorney Robert L. Sullivan discusses these and related estate-planning issues that affect artists. Sullivan is a partner in the Nashville office of Loeb & Loeb where his clients include songwriters, music-publishing companies, record companies and recording artists. He has 30-years of experience as an entertainment lawyer and serves as a trustee for the estate of Johnny Cash.

EL&F: In estate planning, how does an artist determine whether, for example, his or her estate should keep or sell the artist's copyright assets?

Sullivan: In determining whether to keep intellectual-property assets, first, the artist, with counsel's assistance, needs to consider whether the estate has sufficient assets to pay estate taxes and other debts. The estate-tax burden associated with copyrights and related revenue streams may be substantial. If there aren't sufficient other assets ' for example, life insurance proceeds ' available to satisfy taxes and creditors, then you may have no alternative but to sell the copyrights.

Another key issue is who will manage the intellectual property in the event of the client's death. Is there a professional copyright administrator in place, or is there a family member or members with aptitude to be in that business? Whether rights of termination can be exercised are also important considerations. If the artist-client owns a publishing company, he or she may have signed writers directly or have entered into joint-venture deals with music-publishing companies whereby the artist/writer brings in other writers to a publisher and gets a piece of that publishing interest. Just like a major publisher does, the individual writer/publisher has to determine what will happen to his or her interests in the copyrights. The length of time remaining for exploitation will affect the value of the catalogue and thus may affect the decision whether to sell.

EL&F: What fundamental considerations are involved in valuing an artist's intellectual-property assets for estate-planning purposes?

Sullivan: You want a realistic number to determine what the estate taxes may be. We recommend that the client obtain a valuation from their accountant or business manager and that this valuation be updated from time to time. The IRS will do its own valuation of all intangible property assets. Often you end up negotiating with the IRS as to what the value is, using your expert to convince the IRS that your valuation is accurate. It is very important to obtain an accurate valuation for planning purposes.

EL&F: How are valuations of an artist's music-publishing interests conducted?

Sullivan: Generally, the valuation will consider the earnings history of the catalogue and will arrive at a valuation that's usually based on a 'multiple-of-earnings' method. You need to make an estimate of value even though you recognize that the multiples in vogue will vary from time to time, and that the publishing income on which the multiples are based will also vary from time to time. Because the multiple is just an estimate, it's not a foolproof formula. But you need some estimate ' even if it's a tabletop, rough-justice estimate ' to determine what estate taxes may be associated with that catalogue. There are many reasons why catalogues can be valued at different multiples, such as the genre of the catalogue, the stability of earnings, or anticipated 'pipeline' earnings. One reason why a catalogue may have a higher multiple is that the writer may have signed an exclusive songwriting agreement as part of a catalogue sale and agreed to write songs for a specified number of years into the future. A lower multiple may be justified based upon the remainder of the term of copyright and termination issues. Further, the multiple can be higher or lower based on an estimate of how the catalogue will be exploited in the future. Is there a lot of performance income because there was a Top Ten song? Will the income tail off dramatically over time? Are earnings skewed because a song was used in a major motion picture over the beginning or end title of a film? In the end, the value is what you can get someone to pay for it.

EL&F: What about valuing other intellectual-property assets, like right of publicity and celebrity goodwill?

Sullivan: You make an estimate in consultation with your accountants and/or business manager. You look at the client's endorsement income, merchandising income and other earnings that relate to the exploitation of the celebrity's persona. This would involve anything where the artist's name or likeness generates income. Sometimes it may be tied with publishing or recording income because the artist may have written and recorded a song that appears in a commercial. In that instance, there are three separate assets that generate income. With a celebrity who has a history of income generated from endorsements, commercials and merchandising, it isn't uncommon for the IRS to place a value on that intangible asset, especially today where an artist's right of publicity commonly continues after death.

EL&F: What factors work into planning for how the intellectual-property assets of an artist's estate are to be managed?

Sullivan: First, you must analyze the terms of existing contracts and determine if, and how, management of assets, such as copyright administration, may be changed. Then you must determine whether the artist-client is happy with those relationships or anticipates making a change. It's usually best to specifically provide in the estate-planning document, the will or trust, the client's wishes as to who should be in charge of the assets; for example, whether publishing assets in a separate trust are to be managed by a particular individual or by an institution. What you want to avoid is a situation where by default you have management by committee (e.g., the heirs) that may have different ideas as to how the assets should be administered. It's particularly important for licensing activities these days that entities that want to exploit works be able go to one central source, get a signature and move forward. I have seen instances where there are multiple owners of copyrights and an interested party can't get clearances in time, particularly in film and TV where opportunities move very quickly.

In estate planning, an artist can give broad or limited powers to trustees, or make certain powers subject to the approval of the trust beneficiaries, say, to decide with the consent of a majority of the beneficiaries to sell the catalogue. It also may be that the trustee is required to hire a professional management/administration company. The trustee then makes the global business decisions.

In fact, in setting up a trust, the artist-client has a lot of flexibility with the powers he or she wants to give the trustees. As noted above, this could include whether trustees can terminate the trust and sell a music-publishing catalogue, or perhaps whether the trustees are limited to administering the copyrights and distributing the income out as it comes in. And with an artist-client who has built up a catalogue, there may be a conflict between whether the catalogue should remain in the family trust and the economic reality that the beneficiaries might be better off with all or part of the catalogue being sold. The decision may depend on special needs of the beneficiaries, or it may be that the value of the intellectual property spikes to a historic high. Like any other business, you may make a decision that at a certain price it makes economic sense not to hold onto these assets any longer where the proceeds of the sale can now be invested elsewhere at a higher rate of return.

EL&F: Revenue streams from sound recordings may also be valuable. What estate-planning considerations are key there?

Sullivan: First, you must determine whether the artist owns sound recordings or if there is only a contractual right to receive income. If the artist owns sound recordings, there are similar issues as to the valuation and ownership of a music-publishing company. If there's a right to be paid from streams of income, there may be artist-approval rights involved ' consents to licensing that you have in music-publishing scenarios. Thus, estate planning may need to address not only who is to receive the sound-recording income, but also who is to make decisions as to whether the artist's recordings are utilized, for example, in commercials for political campaigns or political purposes ' an issue that applies to use of compositions, too ' because that type of use [depending on the reacion of comsumers to the use] can have a major impact on other estate assets going forward, as well as on recording income.

It's important in estate planning in most instances that the wishes of the artist-client are made known during his or her lifetime to family members. As a general rule, this kind of communication is particularly helpful with celebrities. Many times, clients don't want to address these issues, but my philosophy is that it's helpful to family members to understand why a particular family member or an institution ' and with what powers ' will be left in charge of intellectual-property assets.

EL&F: In recent years, there has been an increase in estate sales of artist memorabilia? How is this issue approached in estate planning?

Sullivan: Memorabilia associated with celebrities is something that not only involves family members, but also fans who believe that items should be shared with everybody. Dealing with memorabilia is a difficult decision faced first by the artist-client, then by whomever he or she selects as trustee as to what to do with those items. But memorabilia is personal property, an asset that the estate has to pay taxes on. The artist-client can make a choice as to what assets he or she wants to use initially to pay estate taxes, but ultimately, every asset is subject to taxes. So sometimes in estate planning, one of the sources that can be used to raise cash is memorabilia. In many cases, an auction is held to sell certain memorabilia to assist in the payment of estate taxes while other memorabilia is preserved for the estate.

EL&F: Museums are also used to preserve an artist's legacy.

Sullivan: Yes, but it's difficult to put a successful museum project together. You generally have to raise substantial amounts of money, through private developers in connection with a charitable foundation and some sort of municipal support. The point is, these are much more difficult to do than might appear at first blush. You don't see a lot of celebrity museums because they're usually not economically successful. Concerns include who will run, manage and control the museum. Then what benefit, if any, will there be to the estate? Does the museum want the estate to simply donate memorabilia? And will the museum pay licensing fees to the celebrity's estate? With the licensing of a celebrity name, the estate will want input and veto power over the types of merchandise sold and advertisements used. Licensing rights could be for a specific amount of time that is renewable, assuming there hasn't been some sort of material breach of that provision by the museum.

Many times the way it's dealt with is to donate memorabilia for an exhibit at a museum or hall of fame. This can be done either as a loan or charitable donation. A charitable donation may be an absolute gift over which the estate doesn't retain control. With a loan, you generally have more control over how and where the memorabilia will be displayed in the museum.

Estate planning is central to the post-mortem distribution and protection of an individual's assets. Celebrities have special estate-planning concerns that include intellectual-property valuations, how the valuations affect estate taxes and post-mortem administration of intellectual-property. In the following interview, conducted in Nashville by Entertainment Law & Finance Editor-in-Chief Stan Soocher, entertainment attorney Robert L. Sullivan discusses these and related estate-planning issues that affect artists. Sullivan is a partner in the Nashville office of Loeb & Loeb where his clients include songwriters, music-publishing companies, record companies and recording artists. He has 30-years of experience as an entertainment lawyer and serves as a trustee for the estate of Johnny Cash.

EL&F: In estate planning, how does an artist determine whether, for example, his or her estate should keep or sell the artist's copyright assets?

Sullivan: In determining whether to keep intellectual-property assets, first, the artist, with counsel's assistance, needs to consider whether the estate has sufficient assets to pay estate taxes and other debts. The estate-tax burden associated with copyrights and related revenue streams may be substantial. If there aren't sufficient other assets ' for example, life insurance proceeds ' available to satisfy taxes and creditors, then you may have no alternative but to sell the copyrights.

Another key issue is who will manage the intellectual property in the event of the client's death. Is there a professional copyright administrator in place, or is there a family member or members with aptitude to be in that business? Whether rights of termination can be exercised are also important considerations. If the artist-client owns a publishing company, he or she may have signed writers directly or have entered into joint-venture deals with music-publishing companies whereby the artist/writer brings in other writers to a publisher and gets a piece of that publishing interest. Just like a major publisher does, the individual writer/publisher has to determine what will happen to his or her interests in the copyrights. The length of time remaining for exploitation will affect the value of the catalogue and thus may affect the decision whether to sell.

EL&F: What fundamental considerations are involved in valuing an artist's intellectual-property assets for estate-planning purposes?

Sullivan: You want a realistic number to determine what the estate taxes may be. We recommend that the client obtain a valuation from their accountant or business manager and that this valuation be updated from time to time. The IRS will do its own valuation of all intangible property assets. Often you end up negotiating with the IRS as to what the value is, using your expert to convince the IRS that your valuation is accurate. It is very important to obtain an accurate valuation for planning purposes.

EL&F: How are valuations of an artist's music-publishing interests conducted?

Sullivan: Generally, the valuation will consider the earnings history of the catalogue and will arrive at a valuation that's usually based on a 'multiple-of-earnings' method. You need to make an estimate of value even though you recognize that the multiples in vogue will vary from time to time, and that the publishing income on which the multiples are based will also vary from time to time. Because the multiple is just an estimate, it's not a foolproof formula. But you need some estimate ' even if it's a tabletop, rough-justice estimate ' to determine what estate taxes may be associated with that catalogue. There are many reasons why catalogues can be valued at different multiples, such as the genre of the catalogue, the stability of earnings, or anticipated 'pipeline' earnings. One reason why a catalogue may have a higher multiple is that the writer may have signed an exclusive songwriting agreement as part of a catalogue sale and agreed to write songs for a specified number of years into the future. A lower multiple may be justified based upon the remainder of the term of copyright and termination issues. Further, the multiple can be higher or lower based on an estimate of how the catalogue will be exploited in the future. Is there a lot of performance income because there was a Top Ten song? Will the income tail off dramatically over time? Are earnings skewed because a song was used in a major motion picture over the beginning or end title of a film? In the end, the value is what you can get someone to pay for it.

EL&F: What about valuing other intellectual-property assets, like right of publicity and celebrity goodwill?

Sullivan: You make an estimate in consultation with your accountants and/or business manager. You look at the client's endorsement income, merchandising income and other earnings that relate to the exploitation of the celebrity's persona. This would involve anything where the artist's name or likeness generates income. Sometimes it may be tied with publishing or recording income because the artist may have written and recorded a song that appears in a commercial. In that instance, there are three separate assets that generate income. With a celebrity who has a history of income generated from endorsements, commercials and merchandising, it isn't uncommon for the IRS to place a value on that intangible asset, especially today where an artist's right of publicity commonly continues after death.

EL&F: What factors work into planning for how the intellectual-property assets of an artist's estate are to be managed?

Sullivan: First, you must analyze the terms of existing contracts and determine if, and how, management of assets, such as copyright administration, may be changed. Then you must determine whether the artist-client is happy with those relationships or anticipates making a change. It's usually best to specifically provide in the estate-planning document, the will or trust, the client's wishes as to who should be in charge of the assets; for example, whether publishing assets in a separate trust are to be managed by a particular individual or by an institution. What you want to avoid is a situation where by default you have management by committee (e.g., the heirs) that may have different ideas as to how the assets should be administered. It's particularly important for licensing activities these days that entities that want to exploit works be able go to one central source, get a signature and move forward. I have seen instances where there are multiple owners of copyrights and an interested party can't get clearances in time, particularly in film and TV where opportunities move very quickly.

In estate planning, an artist can give broad or limited powers to trustees, or make certain powers subject to the approval of the trust beneficiaries, say, to decide with the consent of a majority of the beneficiaries to sell the catalogue. It also may be that the trustee is required to hire a professional management/administration company. The trustee then makes the global business decisions.

In fact, in setting up a trust, the artist-client has a lot of flexibility with the powers he or she wants to give the trustees. As noted above, this could include whether trustees can terminate the trust and sell a music-publishing catalogue, or perhaps whether the trustees are limited to administering the copyrights and distributing the income out as it comes in. And with an artist-client who has built up a catalogue, there may be a conflict between whether the catalogue should remain in the family trust and the economic reality that the beneficiaries might be better off with all or part of the catalogue being sold. The decision may depend on special needs of the beneficiaries, or it may be that the value of the intellectual property spikes to a historic high. Like any other business, you may make a decision that at a certain price it makes economic sense not to hold onto these assets any longer where the proceeds of the sale can now be invested elsewhere at a higher rate of return.

EL&F: Revenue streams from sound recordings may also be valuable. What estate-planning considerations are key there?

Sullivan: First, you must determine whether the artist owns sound recordings or if there is only a contractual right to receive income. If the artist owns sound recordings, there are similar issues as to the valuation and ownership of a music-publishing company. If there's a right to be paid from streams of income, there may be artist-approval rights involved ' consents to licensing that you have in music-publishing scenarios. Thus, estate planning may need to address not only who is to receive the sound-recording income, but also who is to make decisions as to whether the artist's recordings are utilized, for example, in commercials for political campaigns or political purposes ' an issue that applies to use of compositions, too ' because that type of use [depending on the reacion of comsumers to the use] can have a major impact on other estate assets going forward, as well as on recording income.

It's important in estate planning in most instances that the wishes of the artist-client are made known during his or her lifetime to family members. As a general rule, this kind of communication is particularly helpful with celebrities. Many times, clients don't want to address these issues, but my philosophy is that it's helpful to family members to understand why a particular family member or an institution ' and with what powers ' will be left in charge of intellectual-property assets.

EL&F: In recent years, there has been an increase in estate sales of artist memorabilia? How is this issue approached in estate planning?

Sullivan: Memorabilia associated with celebrities is something that not only involves family members, but also fans who believe that items should be shared with everybody. Dealing with memorabilia is a difficult decision faced first by the artist-client, then by whomever he or she selects as trustee as to what to do with those items. But memorabilia is personal property, an asset that the estate has to pay taxes on. The artist-client can make a choice as to what assets he or she wants to use initially to pay estate taxes, but ultimately, every asset is subject to taxes. So sometimes in estate planning, one of the sources that can be used to raise cash is memorabilia. In many cases, an auction is held to sell certain memorabilia to assist in the payment of estate taxes while other memorabilia is preserved for the estate.

EL&F: Museums are also used to preserve an artist's legacy.

Sullivan: Yes, but it's difficult to put a successful museum project together. You generally have to raise substantial amounts of money, through private developers in connection with a charitable foundation and some sort of municipal support. The point is, these are much more difficult to do than might appear at first blush. You don't see a lot of celebrity museums because they're usually not economically successful. Concerns include who will run, manage and control the museum. Then what benefit, if any, will there be to the estate? Does the museum want the estate to simply donate memorabilia? And will the museum pay licensing fees to the celebrity's estate? With the licensing of a celebrity name, the estate will want input and veto power over the types of merchandise sold and advertisements used. Licensing rights could be for a specific amount of time that is renewable, assuming there hasn't been some sort of material breach of that provision by the museum.

Many times the way it's dealt with is to donate memorabilia for an exhibit at a museum or hall of fame. This can be done either as a loan or charitable donation. A charitable donation may be an absolute gift over which the estate doesn't retain control. With a loan, you generally have more control over how and where the memorabilia will be displayed in the museum.