Listen to Lawrence…Bob Dylan’s creative estate planning

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I came across this fascinating article and wanted to share it with all of you. Bob Dylan’s creative estate plan really pays off in this particular situation. Take a peek at the details below.

IRA guru Ed Slott just wrote a funny and insightful article on the tax ramifications of Bob Dylan’s sale of his song catalogue to Universal that was announced this week. Terms were not disclosed but, just last week, Stevie Nicks of Fleetwood Mac fame sold an 80% interest in her catalogue for a reported $100M. So you can only imagine what Universal paid for Dylan’s.

Here is Ed’s article:

Bob Dylan’s tax planning could be tangled up in … green?

Bob Dylan has sold his immense collection of songs. The financial details were not disclosed, but most commentators estimate the deal is worth hundreds of millions of dollars.

While one song Dylan did not write was “Taxman” (that was George Harrison), he may have been thinking about that when deciding to go through with this sale. (While “Johnny’s in the basement mixing up the medicine,” Dylan was “on the pavement thinking about the government.”)

In fact, Dylan may have had his eye specifically on year-end tax planning as an added incentive here since he was able to lock-in today’s low tax rates. Even on this kind of gigantic capital gain, the top federal tax bill will only be 23.8% (the 20% long-term capital gain rate plus the 3.8% tax on net investment income = 23.8%), plus any applicable state income taxes.

Who knows what future tax rates might climb to on this kind of wealth? This is why so many people are considering year-end Roth conversions. At a minimum, today’s low tax rates can be locked-in without having to worry about the uncertainty of what future higher rates may do to people’s retirement savings. This is especially important for wealthier people who are most likely to be hit with tax increases.

HE SHALL BE RELEASED

Dylan did something else interesting here. He not only will pay a relatively low capital gain rate for 2020, but that is a one-time tax hit. He has effectively exchanged future ordinary income tax rates for today’s low capital gain rate. That is always a good tax plan.

Now that he has sold, he will no longer receive whatever annual income his song catalog generates in the future, since “when you ain’t got nothin’, you got nothin’ to lose.” That would have been taxed at 37% at today’s tax rates and maybe much higher if future tax rates increase on top earners like Dylan. That is very likely.

A BETTER ESTATE PLAN, TOO

Dylan’s sale takes the entire value of his song collection out of his estate. Yes, it is replaced with gobs of cash, but that is much easier to value.

There will be no extended legal and tax battles with the IRS over the estate tax value of the song collection at death. This means less problems for heirs and possibly a lower estate tax bill than even the cash left in the estate might generate. Plus, the cash can more easily be distributed to his family. He will still have a large estate, but more manageable and easier to plan for.

The cash can be available for a wider variety of estate planning strategies, whether it be charitable planning or other wealth transfer vehicles. It’s just easier to work with cash than intangible property of uncertain value. Estate taxes can be better planned for.

While the celebrity and dollar amount here make interesting reading, advisors with wealthy clients might want to do similar types of last-minute year-end planning to reduce potentially higher future income and estate taxes.

After all, “you don’t need a weatherman to know which way the wind blows.”

I hope you find this interesting! Please forward this information to your friends and relatives.

As always, please send me your questions. If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.

Let’s stay connected.

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