The buzz on the news is all about how tragic Michael Jackson's death is tragic. And for his fans, his family and loved ones, it certainly is. But is it a tragedy for the people he owes money to - or do those creditors lose the ability to pursue their claims as a result of Michael's death?
Based on recent news stories, Michael Jackson had a lot of creditors. It is the responsibility of the "personal representative" of his estate (or living trust - if he had one) to evaluate those claims, to compromise them and/or to cause those claims to be paid. An estate cannot be finally distributed until all of the creditor's claims are resolved.
Michael Jackson's biggest creditor is likely to be the IRS - in the form of estate taxes. Estate taxes are due 9 months after Michael's death. The tax is 45% of the value of his assets in excess of his $3.5 million lifetime exemption against those taxes (less the value of the debts he owed). The personal representative will likely need to sell assets to raise the cash to pay the estate tax.
There is a possibility of deferring tax on his music-related assets so that payment of the tax on those assets can be made over 15 years. That deferral provision will likely be used, as the cash generated by those types of assets comes in over time but the estate tax (unless deferred) is due 9 months after death. However, the value of those assets must equal more than 35% of his total assets in order for the deferral to be available. If this threshold isn't met, the music assets may need to be sold to raise money to pay that tax.
The IRS gets paid first - before any other creditor.
Any other creditor can seek payment from the personal representative, but must first follow special probate rules. These rules require the filing of the right papers with the probate court in order to preserve the creditor's right to pursue those claims. Creditors need to be sure to familiarize themselves with these rules and file their claims in a timely fashion, or they could very well find that their claims are barred. (The time for filing can be as short as 4 months after the personal representative of the estate is appointed by a court, and can never be longer than 1 year from the date of Michael's death.)
Keep in mind that the IRS and other creditors get paid before the beneficiaries of Michael's estate. Until those tax and creditor issues are resolved, the estate cannot be finally distributed. It is likely that this process will take years - at least 2 years and potentially many, many more.
That doesn't mean, however, that his children won't have access to cash for their support during the period of estate administration. The children (through their guardian) could ask the court to provide for their support until the probate estate is ready to be distributed by filing a petition requesting a "family allowance" if there is the probate of a will (or an intestacy). This option is unavailable if there is no probate or intestate administration.
So, if Michael's creditors file their claims properly Michael Jackson's death probably won't inhibit their ability to collect. But if they don't learn enough about the vagaries of California probate law, they could lose their right to pursue their claims. In other words - if they snooze, they lose!