Spotlight: Some clients income streams come from a deceased relative

Some clients’ income streams come from a deceased relative.

By Caren Cheler Published: July 1, 2007

AS THE ONLY LIVING RELATIVE OF a famous rock star, “Kimberly” never had to work a day in her life. She could always count on the periodic checks that came every time a radio station played a song written by her brother’s band. That is, until last year. Suddenly, the checks stopped coming, and Kimberly realized she might not be able to pay her bills. She had saved very little and was not sure how she was going to finance her lavish lifestyle. And then a year later, as quickly as they had disappeared, the checks began rolling in again. By then, Kimberly was a changed woman.

“She got a big-time scare,” said Tif Joyce, president of Joyce Financial Management in Sonoma County, Calif. “She finally heard what I was talking about when I would tell her that monitoring her expenses was very important.”

Joyce says he contacted one of the two companies that track and then issue royalty checks to musicians to get a sense of the income stream Kimberly could expect going forward, but he was told there was no way of predicting that. Not only were Kimberly’s royalty checks limited to how often the band’s songs were used, but because her brother died before the band broke up, she only received checks for the songs written before her brother passed away.

“They can’t really get an idea in advance how much it’s going to be. It could be 500 grand in a year, or it could be nothing. And that makes for really difficult planning,” Joyce said.
Kimberly still hasn’t gotten a job, but at least she’s begun monitoring her expenses, Joyce said.

It’s not uncommon for the beneficiaries of such royalty checks to feel like they’re living high on the hog. For decades, the work of musicians and writers has provided for their families long after they died. Kurt Cobain, lead singer of grunge-rock band Nirvana, earned about $50 million in 2005, even though he committed suicide 12 years ago, according to Forbes magazine’s list of the wealthiest dead people. Elvis Presley, who’s been deceased since 1977, churned out $42 million last year. In fact the 10 wealthiest people on Forbes’ death list—Charles M. Schulz, John Lennon, Albert Einstein, Andy Warhol, Dr. Seuss (Theodor Geisel), Ray Charles, Marilyn Monroe, Johnny Cash, J.R.R. Tolkien, George Harrison and Bob Marley—earned some $247 million last year. But advisors say beneficiaries who think the income stream is going to last forever had better think again. Grunge rock won’t be cool forever.

“The important thing is, you can’t spend it all,” Joyce said. “You need to save enough of that income so that you’re independent, because you never know when it’s going to stop entirely.”
And that would apply not just to royalties from a song or a book, but for all types of perpetual income streams. And a c cording to Chip Roame, managing principal at Tiburon Strategic Partners, a consulting firm based in Tiburon, Calif., there are essentially four kinds: Aside from royalties, there are certain types of trusts set up by prior generations, lottery winnings and farm income.

“There are a fair number of farming families where someone is receiving income from the farm. They don’t actually live on the farm. They may live in big cities or resort towns, but they’re still collecting annuities from grandpa’s farm,” Roame said.

Most of these income streams are unpredictable. One advisor had a client, a retired schoolteacher, whose ex-husband wrote a poem that was used in a Janis Joplin song. She received nothing from the poem for years. “Thirty years later, Mercedes decides to use the song in one of their commercials, and bang, she gets royalties,” Joyce said.

The main goal, according to advisors, is to make that income stream predictable. And that is most easily achieved by directing that income into a trust that will build up a reserve and generate a more dependable and stable income stream.

The beneficiary should also realistically assess their monthly income needs. The trust can then issue monthly payments to cover those costs.

“It’s an income stream like any other. Whether you’re talking about a songwriter, a patent, a lottery winner or a commissioned salesperson, they all have an income stream that is erratic,” said Mark LaSpisa, president of Vermillion Financial in South Barrington, Ill.

It doesn’t matter whether you’re talking about music royalties or more prosaic investments: LaSpisa said he has a client who receives periodic checks from interests in her late father’s oil wells. She used to get about $20,000 a year, but when the price of oil shot up about a year ago, she received closer to $80,000. To stabilize her cash flows, LaSpisa identified her monthly living expenses and then created a trust in which his goal was a reserve of six months worth of expenses. He then had the client draw down a set amount from the reserves in order to pay her monthly expenses. After a year, they looked at the cash flow patterns to see whether her monthly payments met her monthly needs and whether her reserves were building up.

It sounds like a pretty straightforward strategy, and it might work if clients actually listened to their financial advisors. The fact is many don’t. Some beneficiaries, who are accustomed to buying what they want when they want it, don’t want to be bothered with a monthly budget—particularly if it means they will have to cut their spending. Advisors say that’s even more typical of people who were not accustomed to having money and suddenly find themselves swimming in it.

LaSpisa had a similar issue with a client who played football for the Chicago Bears. When the client was single, he followed a program and kept his spending in check. But when he got married, his new wife refused to control her spending, and the couple lived beyond their means. The client eventually left.

“She had a $40,000 engagement ring. She wanted to buy a $2 million house. He was a real, solid, dependable guy, but the wife wanted all these toys, and she didn’t want someone telling her she couldn’t have a brand new Mercedes every year,” LaSpisa said. “So we graduated them. We let them go elsewhere.”

Clients with erratic income have more than their monthly expenses to worry about. They also need to set money aside for taxes. Income taxes may seem benign because the money coming in will always exceed the size of the tax bill, but that only applies if the beneficiary doesn’t spend that income. And then there are the estate taxes. Every time the copyright or intellectual property passes through a generation, the federal government gets its share, and the rate today is a whopping 45 Percent.

Authors, entertainers and athletes need to think of themselves as business owners—as if they were Author Inc. or Entertainment Inc., says Kevin Miller, first vice president at Citigroup Smith Barney, in the Baltimore-based wealth planning center. For instance, they may have to refrain from spending about 50 percent of what they receive in royalties if they want to make sure they can cover their tax bill. Without any kind of structure or discipline, some don’t have the funds available come April 15, and they find themselves with tax liens against their intellectual property, Miller explained.

“We’ve seen that a lot with entertainers and athletes, where they may have forgotten that income tax bill, and wind up with a liquidity crunch,” Miller said.
Rather than deal with the vagaries of the income stream, some simply opt to sell the underlying asset—whether it’s the rights to a book, a song or an oil well. In fact there are lots of reasons people sell. One advisor said he had a client who didn’t want his wife to have to deal with the partners who shared the asset.

Others want the cash up front. Last year, for instance, Michael Jackson nearly had to sell the rights he bought in the 1980s to more than 200 Beatles’ songs—an asset now estimated to be worth at least $400 million—in order to pay his hefty legal bills. David Bowie sold the rights to 25 of his albums for $55 million back in 1997 to bankers who then issued bonds secured by the music royalties. James Brown and the Isley Brothers had similar sales of their own.

And then there are those who want to sell their royalty generating assets because they don’t want to leave control of them to their spouse or children. Some fear—rightfully so—that their beneficiaries won’t be able to budget themselves properly if they’re forced to live on an erratic income stream. Others may opt to sell the assets because they don’t believe their family members will be able to maximize the assets’ potential. The assets may yield more money by being sold to someone who can take it to the next level and is willing to pay up for that opportunity, Miller added.

“Somebody who has been a very popular figure will have a continuing appeal after their death. It’s a matter of finding a person who is going to market that image and campaign to maximize the royalty stream,” Miller said. “Absent that, someone could fall asleep at the switch and pass over a lot of opportunities that could have been there, leaving a lot of money on the table that could have gone to the family.”

There will always be someone out there to buy these income streams, whether it’s Wall Street or one of the law firms that advertise on television that they’ll buy anything from lottery winnings to lawsuit settlements.

But in finance, as in life, nothing is simple, and monetizing the royalty stream isn’t always a slam dunk. There’s a tradeoff. The portfolio set up with the proceeds of the sale may not kick off as much as the original assets on a monthly or yearly basis. The beneficiary has gotten rid of the unpredictability of the income stream, but they are now beholden to the prevailing market investment rates.

“If property is generating a 10 percent income stream, and you put it into bonds that are generating a 4 percent to 5 percent income stream, that’s a dramatic reduction in the income stream,” said David Reagan, a senior vice president at City National Bank, Irvine, Calif.

That can be a hard pill to swallow. And so, most hold tight to the vagaries of the royalty checks, while the wisest—like the family of Robert May, who wrote “Rudolph the Red-Nosed Reindeer,”—turn their asset into a family business. And they know that as long as that reindeer continues to “go down in hi-sto-ry ,” the checks will keep rolling in.

Caren Chesler is a freelancer who has written for the New York Times, Investment Dealers’ Digest, and Investor’s Business Daily.

Some clients income streams come from a deceased relative – Vermillion Financial Advisors, Inc.

Some clients income streams come from a deceased relative