Michael Jackson: 5 Financial Lessons We Can Learn from the King of Pop

It is amazing how many celebrities, professional athletes and entertainers who generate multi-million dollars of revenue, some even in the billions, can attract some of the most brilliant people in the world yet still miss the mark on handling their personal finances.  Some recent examples lately are the likes of Donald Trump, Kevin Bacon, Brittney Spears, Lindsay Lohan, Whitney Houston and MC Hammer.

Just like working out, going to the gym or beginning a new diet, it takes constant awareness and work to stay fit.  It is a matter of making the appropriate lifestyle choices to make that mental picture of YOU become reality.  This same is true about building wealth and the pursuit of your dreams.  Getting rich is one thing, but staying rich is another!

Growing up, I idolized Michael Jackson.  I still remember having bought one of his red “pleather” jackets (from Spencers, heh!) with zippers in front and back.  And oh yes, let’s not forget the one white glove…I was BAD!  Between my sister, god-brother, god-sister and cousins, we had the whole Jackson Five band thing going on. Every time our families would get together for barbecues, birthday parties or holidays, we’d have to perform our Michael Jackson routine.  Oh, the memories! Our parents made us perform Billie Jean, Beat It, Thriller and lastly, We are the World…

It is in this positive light that I choose to look at more of the good things that “The King of Pop” did with his financial affairs.  Sure we can learn from his mistakes, too, as there are plenty of them, but let’s change our perspective for a moment.

Chicago’s WGN Morning News with Robin Baumgarten and Larry Potash, was kind enough to have me on to share these lessons.  After the broadcast, some of you sent me comments and emails for more info so I’d like to expand to hopefully answer your questions.  There’s only so much you can say in a 3.5 minute segment!

Here are those lessons in a little more detail:

1) Cash is King:

If you don’t have the cash to pay it back, put the credit cards away!  No matter how much money you have coming in, if you haven’t plugged up the holes in your spending, your bank account will always be empty!   After all, how high will a balloon fly if there is a hole it in?

Michael had a King’s lifestyle, which he obviously earned.  He was known to go on seven-figure shopping sprees, which many sources say, was another form of medication to dealing with his personal issues.

It is said that he owes approx. $400M in debt.  His creditors will not just take it easy and write off these debts as losses.  But due to the illiquid nature of his the assets within his estate, his family may be forced to sell certain assets (cars, jewelry, memorabilia, collectibles, etc.) to raise the cash to pay off those debts.  This usually is done in the form of an estate sale.

How much liquid cash did he have? According to the Associated Press, Michael had less than $700k of liquid cash, fairly small for an income of his magnitude considering it was not uncommon from him to spend that in one day.

The King of Pop was asset rich but cash poor. His most prized asset is the Sony/ATV catalog, a net value of a 50 percent stake in the Sony/ATV Music Publishing catalog –  at $390.6 million to $1 billion. The 750,000-song catalog includes music by the Beatles, Bob Dylan, Neil Diamond, Lady Gaga and the Jonas Brothers.  The only way to get cash from this type of asset is to sell a portion of his shares or borrow against it.  Too bad he ended up borrow against it since it was reported that he would earn $11-18 million per year from his stake in Sony/ATV Music.  Which leads me to my next point…

2) Caution Borrowing Money from Friends:

Here’s my rule – if your family member of friend is asking to borrow money from you, just give them what you can live without.  In other words, if they ask you for $100 dollars and you’d really miss $100 not being paid back.  Then don’t lend it.  Give them $40, if that’s comfortable for you, and NEVER expect it back.  If your friend or family member pays you back, it’s a bonus!  If not, well, you weren’t disappointed.  That way you can still go into your common circle of friends with no grudge or gossip and you live in freedom!

Keep in mind the phase “relationship over revenue”.  If you don’t lend them the money, chances are, they will do what they need to get their needs met and you’ve actually helped them.  You haven’t handicapped them to finding other ways to get the money they need.  Perhaps this is the time they need to cut down on Starbucks, do their own manicures and pedicures, take the bus or train to save on gas, etc.  You may have taught them to VALUE money again and you haven’t allowed money to get between you.

Perhaps our government can learn from this because simply throwing money at a problem doesn’t fix things.  It is a band-aid solution for something that ultimately needs surgery.

Michael Jackson had a good friend who happened to be the son of the King of Bahrain, who loaned him plenty of money and later sued him for $7M.   This obviously caused a good friendship to turn BAD…(no pun intended!) Speaking of “BAD”…

3) Invest then Reinvest Your Profits to Buy Assets:

Michael took the majority of his earnings from his album “Bad” and in 1985 purchased ATV Music, which included in its catalog some 250 Beatles tunes, for $47.5 million.  Ten years later in 1995, Sony proposed to merge with ATV music and paid Michael $150 million to do it!  Now THAT is a return on investment (ROI).  This asset also became a source of yearly income for Michael in the range of $11-18 million per year.

Question to ask yourself, “Are the things I am buying building ME wealth or someone else?”  If it is someone else, this is now your beginning to creating your wealth-building plan.

4)  Establish and Continually Update Your Will:

Regardless if Joe Jackson truly scarred Michael for life, the fact that he created a will brings some peace to his family.  60% of Americans do not have a will and leave the dealing of their estate not only in public record, but in the control of other people.  Since Michael took control of this aspect of his estate, he ensured the peace of mind for his children and is continuing to show his love and concern for them, even after his death.

If he disinherited his father, no big deal, his father’s feelings are hurt.  But if he never created this will or done any estate planning, his children could have been left to his father.  Then executor and trustees of Michael Jackson’s estate might have more problems on their hands spending more money from his crumbling wealth with more, unnecessarily legal fees.

5)  Create a Liquid Estate to Pay Large Death Taxes:

Along with the debt Michael’s estate hopefully can pay off, there is another sleeping giant awaiting to attack his money.  In 9 months after his death, his family estate attorney or executor of his estate must file a United States Federal Estate Tax (form 706).  In this tax year 2009, the government gives you an estate tax exemption of $3.5 million dollars.  Here’s what that means…

If the value of your home, cars, jewelry, retirement accounts and life insurance you owned in your nametotals  less than this amount, then you are in luck.  No estate tax is due.  But any amount above $3.5M, will be taxed between 18%-45% on a graduated scale.  Ouch…

Let’s just say for easy math, that the estate of Michael Jackson is finally worth $103,500,000.  Since the estate tax exemption is $3.5M, we subtract that from this total, leaving a taxable estate of $100M. According to the current federal estate tax scale, in this basic example, Michael Jackson would have a taxable estate tax of $45 million dollars.

Picture yourself a family member and you are either Jermaine, Jackie, Janet, Tito, Marlon and his mom…what difficult conversations will you have to agree upon to sell from Michael’s estate to RAISE the $45 million you need to pay the IRS?  Would you fire-sale Neverland Ranch to an opportunistic bidder?  Sell whatever valuables or memorabilia ,at a discount, so you can pay within the 9-month timeframe without additional IRS penalties?  Would you have to suck it up and sell Michael’s share in Sony/ATV Music knowing that you will probably be low-balled during negotiations?

OR

Are you glad that Michael established the “Michael Jackson Life Insurance Trust“?  (Yes, they should be jumping for JOY!)  This is usually funded with a permanent, whole or universal, life insurance policy.  Purchased for pennies on the dollar, this would provide the $45 million they need which would be immediate, liquid, tax-free dollars to pay off the IRS federal estate tax bill while keeping Michael’s other assets intact.  GREAT JOB Michael!!

Like Michael Jackson, keeps the freedom of choice and control on YOUR SIDE, not the IRS!  As our friend, IRA expert Ed Slott says on his national PBS broadcast, “It’s either you choose your plan or you settle for the government plan…but you choose!”