We believe everyone needs to have an estate plan. Contrary to popular belief, an estate plan is not just for the rich and the powerful, and even people with little or no assets can benefit from having an estate plan. A properly prepared estate plan not only specifies who will inherit your assets and how when you die, but also contains documents specifying how your assets or care will be handled if you’re alive, but not able to handle your affairs. For example, a college student may want to specify who will care for them or pay their bills in they are left in a coma after a car accident. This is all a part of estate planning and a description of the common components that comprise a properly prepared estate plan can be found here.
There have been and continue to be many examples of the benefits of proper estate planning, but also the disasters that result in the absence of good planning. In this regard, some valuable lesson (both good and bad) can be had by observing celebrity estate planning. Of course these are exceptional cases, but we believe there can be valuable lessons to be learned from the extremes.
- Not Having an Estate Plan In the First Place: When you die without an estate plan (i.e. without a will or trust which is legally known as dying “intestate”) who inherits your estate is based on the laws of the state and in many cases it is “up for grabs.” Examples include Arethra Franklin, Amy Winehouse, Prince, John Lennon, Tupac Shakur, and Jimi Hendrix to name a few. Not only does this result in (1) the estate having to be being administered in a very public court-supervised probate proceeding, (2) increased attorneys’ fees and probate fees and costs, plus (3) the delay that court proceedings entail (usually 1 year minimum), but in the event of a dispute, as exemplified in the estates of John Lennon and Jimi Hendrix, the delay could be many years or even decades. Although celebrity estates will usually have sufficient assets to cover probate fees, avoiding probate can be especially critical for modest estates (say a $100,000 estate) as probate fees can average between 2-8% of the estate depending on the court, which in most cases could be completely avoided through proper planning. Finally, probate proceedings generally require that all your creditors and heirs be notified of the proceedings and you never know who could come out of the woodwork. For example, refer to our prior article on the case of Prince where a Colorado prison inmate claimed (unsuccessfully) to be the long lost son of the artist. For those who don’t mind paying attorneys to air your dirty laundry out in public, a properly prepared estate plan is probably not for you.
- Failing to Update Your Estate Plan: A revocable living trust can be amended at any time during your life, and therefore, an estate plan is not intended to necessarily set your wishes in stone, but should be reviewed and/or modified if there are changes in circumstances (e.g. your wishes), changes in estate tax laws, or changes in life events (e.g. divorce or birth of new heirs). In the case of Barry White, for example, its was reported by Kiplinger that when he died in 2003, he was separated but not yet divorced from his second wife at the time. However, by failing to update his estate plan, his second wife ended up inheriting his entire estate while his live in girlfriend of several years and White’s 9 children were cut out. In the case of Heath Ledger’s estate, he had a will, but it was executed before the birth of his daughter Matilda and he died before he could update the will which would have cut his daughter out of the inheritance entirely were it not for the generosity of Ledger’s heirs who decided the inheritance should remain hers.
- Tax Issues: While Federal Estate Taxes are currently not an issue for most of us with the current estate tax exemption in 2019 of $11.4 Million per individual, if you reside in one of the 16 or so states that have a separate state inheritance tax, then proper estate tax planning may still be needed. When Joan Rivers died, it was reported that her will explicitly declared that, although she had residency in New York (which has a separate estate tax), she was “domiciled” in California (which does not have an estate tax), thereby giving her heirs the argument that her sizable estate should not be subject to New York’s estate tax. Estates and trusts are taxed at different rates from individual taxpayers and so this should be considered as part of an overall estate plan.
- Funding the Trust: Establishing the Trust as part of your estate plan is just half the battle. The other half is making sure the assets you want to pass through the trust actually get transferred to the trust. This is otherwise called “funding the trust” and it entails preparing transfer documents such as deeds, checking beneficiary designations, transfer agreements and the like so that these assets are no longer in the individual’s name, but rather in the name of the trust. In the case of Michael Jackson, the “King of Pop” reportedly did create a revocable living trust that was supposed to transfer his wealth to his children and mother, but it apparently was never funded resulting in a probate process that lasted nearly 10 years and is still ongoing to this day.
Examples of Good Estate Planning:
- Preserving your Legacy and Ensuring that Your Loved Ones are Taken Care of: One of the primary purposes of the trust is to ensure that the assets you worked so hard to accumulate go to who you want it to go to, in the manner you want it to be given to them. To be fair, not all celebrities drop the ball when it comes to estate planning. In the example of David Bowie, who was not only famous for his music, but also for his involvement in the creation of “Bowie Bonds.” Bowie, who was married to supermodel Iman for many years and had a daughter Alexandria with her, and also had a son Duncan from a previous marriage. His will left 50% of the estate in trust to Iman for life (known as a “QTIP Trust”), 25% to Duncan and 25% to Alexandria through a trust until she was 25 (she was a minor at the time of Bowie’s death). Volumes could be written about the potential planning opportunities in the case of Bowie, and some say improvements could have been made in his estate plan. However, through proper planning, Bowie was assured that the individuals he wanted to benefit from his legacy did in fact come to fruition upon his passing without substantial contests from third parties.
- Maintaining Privacy: One primary benefit of proper estate planning is the privacy of wealth transfer. By contrast to the situations above where the decedent’s estate was fought over publicly in the court system by who knows who, the trust, by its very nature of avoiding probate, allows the transfer of wealth to be relatively private. Indeed, although Steve Jobs died as one of the richest men ever, very little is known about the transfer of his estate and where his legacy ultimately went. Known as a very private person when he was alive and being in the unique position of being aware of how long he was going to live, it doesn’t surprise many that the Jobs estate was a result of careful meticulous planning, and as a result, the details of the value of his estate remain obscure, as well as who were the beneficiaries of his estate. Even more astonishing is the fact that many experts believe that the Jobs estate did not pay any estate tax.
Success and failure can often be best illustrated by the extremes. However, one does not need to be “Keeping up with the Kardashians” in order to benefit from an estate plan. The goals of avoiding the public probate process and the fees involved, preserving the privacy of your estate, minimizing disputes and contests, making sure you are properly cared for in your golden years, and most perhaps most importantly, ensuring that legacy you’ve worked over a lifetime goes to those that you love; these are all benefits that can all be accomplished by proper estate planning whether your net worth is in the thousands or the billions.