and an interesting info making the rounds
Valuation Issues Surrounding the Right of Publicity
Even if the beneficiaries choose not to exploit the celebrity’s right of publicity, descendible property rights to postmortem publicity is an asset that still
needs to be valued for federal estate tax purposes at its Fair Market Value at the time of death. The “highest and best use” standard measures the full market potential of an asset regardless of how the descendant will actually use the publicity rights. In valuing such assets, the practitioner should consider the three main approaches to valuation:
the Income Approach, the Market Approach, and the Cost Approach. Although there is no best practice for valuing publicity rights, the Income Approach and the Market Approach are the most appropriate methods to estimate the Fair Market Value of publicity rights. The Cost Approach, which relies on the underlying concept that an investor would pay no more for an asset than it would cost to recreate a similar asset from scratch, is generally inappropriate because it would be nearly impossible to calculate the amount “invested” in an individual to establish and support his or her personal brand during his or her lifetime.
The most common method to value a celebrity’s persona involves a combination of the Income Approach and the Market Approach. Under this methodology,
the value of a celebrity’s persona is based on the present value of the potential stream of income that could be realized from this right. This is determined by projecting the expected future benefits from the ability to continue to exploit the celebrity’s persona, and discounting these benefits back to their present value at a rate of return that reflects the risk involved in realizing the benefits. These benefits may involve streams of income from both existing contracts, licensing, and sponsorship agreements, as well as anticipated agreements. The latter source of income is far more difficult to estimate as it is both potentially long lasting and subject to changing consumer preferences. Numerous assumptions will need to be made in attempting to project the future benefits, including the amount of income to be expected and the duration of the income. The amount of income will be influenced by the appropriate royalty or licensing rate, which will depend on both the celebrity’s popularity and the particular item involved (e.g.,
photographs, clothing, reproductions). In many cases, future royalty rates may be estimated based on rates achieved by the celebrity in past deals, or similar agreements achieved by other celebrities. By considering actual royalty rates or comparable rates in the determination of future rates, this latter analysis reflects the application of the Market Approach in the valuation.
Of even further difficulty may be estimating the post-mortem duration of income from the celebrity’s status. Although beyond the scope of this article, this may be accomplished through the use of a “lifing” or “survival” curve, which attempts to estimate the remaining useful economic life of an asset, or the amount of time the asset is expected to survive and continue producing income. To estimate remaining useful life, appraisers often study the lives of similar intangible assets by selecting a population of comparable assets and analyzing the turnover, or “decay,” of these assets over time. For instance, for licensing agreements involving a celebrity’s likeness, the appraiser may look at the pattern of royalty income over time. An illustration of this type of analysis is presented below.
In addition, as we have noted previously, the recognition, application, and protection of the right of publicity varies greatly from state to state. As such, the legal landscape must be considered in making assumptions and estimates for use in the valuation analysis. For instance, the appraiser must consider whether the rights in question are actually descendible in the individual’s state of residence and, if so, how long do they last post-mortem? Not all states recognize a post-mortem right of publicity, and for those that do recognize it, the number of years that post-death rights are recognized varies significantly. Indiana and Oklahoma, for instance, provide recognition of the right of publicity for 100 years following the death of an individual, while Tennessee limits the right to just 10 years. Kentucky, Nevada, and Texas all recognize the right for 50 years post-death, and California for 70 years. New York does not currently recognize a post-mortem right of publicity, although there is legislation pending in the state that would grant such a right.
Finally, it may also be necessary to consider that death may actually cause a surge in an entertainer’s popularity and the associated income from the licensing of their image or likeness. This phenomenon was most clearly illustrated with the estate of Michael Jackson, who received an intense amount of interest (and a large surge in income) following his death.
Summary
A celebrity’s persona and likeness may produce considerable income for the individual both during life and after death. As such, the right to commercially exploit this image can be an extremely valuable asset. In the relatively recent past, it was common practice to ignore this right in determining the value of a decedent’s estate for federal estate tax reporting purposes. However, in the wake of the Andrews decision, estate practitioners must consider the value of this asset, and do what they can to protect the estate from the potentially unwelcome circumstance of needing to use liquid assets to pay taxes on the value of illiquid property or, worse, having to sell or license the property against their will in order to generate cash to satisfy the taxes. Whether it be through the gifting of the right of publicity to beneficiaries before death, or determination of the value of this asset upon death, estate practitioners should consider a well documented and supportable valuation of this right as a critical component of the pre-death estate planning strategy and the post-death federal estate tax reporting requirements of a celebrity client.
http://www.srr.com/article/right-of-publicity-an-often-overlooked-asset-in-estate-planning
