Will boxing legend Muhammad Ali's estate plan float like a butterfly or sting like a bee?
While details of Mr. Ali's will haven't yet surfaced following his death, there are particulars of his life, business affairs and family dynamics that could have interesting implications for his estate.
Mr. Ali, a three-time world heavyweight boxing champion and arguably the most recognizable sports figure of the 20th century, left an estate worth somewhere between $50 million and $80 million.
Given Mr. Ali was one of the most recognizable people on the planet, it's hardly a surprise he earned millions of dollars per year through endorsements and image licensing deals. Those deals funneled through his company, Goat LLC (which rather humbly stands for “greatest of all time”).
The self-proclaimed “Greatest” sold stakes in the company over the years, ultimately retaining a 20% interest. Similar to other deceased celebrities, such as Prince and Michael Jackson, the estate must put a present value on the anticipated future earnings that could come from these publicity rights, in order to determine the ultimate tax.
If it sounds like a complex task, that's because it is — the IRS and estate of the deceased could have widely varying estimates of the future income stream from these sorts of intangible assets. The death of a well-known music artist or sports figure makes it likely their popularity will balloon following their death, and appreciate the value of these assets.
In the case of Michael Jackson, the IRS valued his name and image at more than $434 million upon death, whereas his estate valued it at $2,015. The parties are now in court.
“Typically, you land somewhere in the middle” when negotiating with the IRS, said Amy Joyce, partner at Margolin, Winer & Evens.
Richard Behrendt, director of estate planning at Annex Wealth Management, said this sort of valuation is typically less an issue with athletes than musicians such as Michael Jackson and Prince, for example, because the list of athletes with an “iconic commodity” is shorter.
However, “Muhammad Ali and Michael Jordan are in pretty elite company there,” said Mr. Behrendt, a former estate tax attorney for the IRS.
Of course, if Mr. Ali left everything to his wife, Lonnie — including the 20% company stake — this valuation exercise becomes a moot point because of something called an unlimited marital deduction. That allows the transfer of an unrestricted amount of assets to a spouse estate-tax-free at any time, including death.
“You kick the can down the road,” Mr. Behrendt said.
A non-spouse receiving a stake in Mr. Ali's image rights wouldn't have the same luxury. In all, Mr. Ali was married four times and had nine children, including an adopted son and two daughters outside of marriage.
Regardless of the party that inherits the rights, Arizona is one state that has favorable rules for protecting image rights, due to something called a post-mortem right of publicity, said Charlie Douglas, board member of the National Association of Estate Planner and Councils and an Atlanta-based wealth adviser.
“The estate has an enforceable right that could prevent others from exploiting his name, likeness and image for commercial usage,” Mr. Douglas said.
Mr. Ali maintained a primary residence in Arizona, one of around 35 states that doesn't levy a state estate tax. That means his estate would only be subject to the federal 40% tax rate on estate values exceeding the $5.45 million exemption. Some states impose an additional tax hit ranging as high as 20%.
However, Mr. Ali reportedly also owned property in Kentucky, the state in which he grew up. Kentucky is one of six states with an inheritance tax, which is levied on the transfer of assets to heirs. The state has a maximum 16% tax rate on inherited assets, not much below the country's highest rate of 18% in states like Nebraska.
Certain parties are exempt from paying the inheritance tax, depending on state rules. According to Kentucky law, if Mr. Ali willed his residence to his wife, Lonnie, or children, they would be exempt from the tax, but nieces, nephews, aunts, uncles, and daughters- and sons-in-law wouldn't be, for example.
Maryland and New Jersey are the only states to have both an estate and inheritance tax.
REFERENCES TO CHILDREN
How Mr. Ali references his nine children in his will could also come into play, according to Mr. Douglas.
“Because he has children of all different sorts — out of wedlock, adopted and natural-born — I think the children will be an interesting issue in how he defines them, who he provides for, and was he intentional in omitting to provide for them,” Mr. Douglas said.
Using a blanket reference to children, rather than using intentional references to each child, could ultimately “give them a leg to collect a share” because a non-mention almost presupposes the deceased forgot about them, Mr. Douglas said.