I am always surprised when I hear that 55% of adults do not have a will or trust. When people die with a lack of estate plan, they frequently leave a mess behind for their loved ones. Prince became the latest celebrity to pass away with a shocking lack of estate plan, although he is not alone. Some other well-known musicians who died without a will or trust include: Amy Winehouse, Kurt Cobain, Tupac Shakur, Jimi Hendrix, Bob Marley, Sonny Bono, Barry White, Marvin Gaye, and John Denver. These people had significant assets and dealt with attorneys on a regular basis, so why would they not have even a simple will?
Standard will vs. revocable living trust?
A standard will just indicates who gets what (beneficiaries) and who will be in charge of managing your affairs after you’re gone (executor). A will can even be handwritten (but should be notarized and witnessed) or videotaped. You can get a basic will from the legal forms store or legalzoom.com. It is certainly better to have a will than a complete lack of estate plan documents. However, the problems with a will are that it can be challenged in court, your heirs have to go through probate (a potentially expensive and time-consuming legal process), and you lose confidentiality because your financial affairs can become public record. I always recommend using an attorney to draft all estate planning documents as opposed to the do-it-yourself route because you want your documents to be as bulletproof as possible.
Most people with significant assets use a revocable living trust as opposed to (or in addition to) a will. This glorious document is usually entombed in a nice-looking three-ring binder and costs two to three times as much to create as a will. The trust enables you to name beneficiaries and a “successor trustee” who takes over when you are no longer capable. The main advantage of a revocable living trust (compared to a will) is your heirs get to avoid the ugly probate process, your affairs remain private, and it is much more difficult to contest a trust than a will. The other advantage of the trust is it can remain intact and continue to hold and distribute assets for many years after your passing. For example, you can instruct your successor trustee to distribute assets to your children when they reach a certain age, or distribute the assets over a period of years. Another popular strategy is to name an income beneficiary, who gets the income from your trust after your death (e.g., spouse from a second marriage) and then residuary beneficiaries who get the assets after the income beneficiary dies (e.g., kids from a prior marriage). Some people are surprised to find out that your typical revocable living trust does not provide any asset protection from creditors. However, other types of trusts can accomplish that goal as well.
Advanced estate planning for high net-worth:
The next level of estate planning is for the top 1% in terms of net worth. An individual can pass $5.45 million, and a couple can pass on $10.9 million without any federal estate tax. Some states have an inheritance tax that kicks in at lower levels. Nevertheless, if your estate (everything you own) is valued at more than the estate tax exemption limit, then 40% of the overage is due to Uncle Sam nine months after you die. This may seem like a good problem to have…until someone has to write that check. Prince’s estate is estimated to be valued at around $300 million. His family doesn’t like the idea of writing a $100+ million check, so his heirs have hired attorneys to argue that his assets are not really that valuable.
Michael Jackson’s estate tried to claim that his image and likeness (upon which future licensing deals will be based) was only worth $2,105 when he died in 2009. Suffice it to say, the IRS had a different estimate ($434 million). That battle is heading to tax court next year.
Prince and Michael Jackson could have used various irrevocable trusts and advanced estate planning techniques to reduce their estate tax liabilities significantly. However, like most planning, it would have needed to be done in advance.
Celebrities and non-celebrities alike avoid estate planning discussions because they involve topics we’d rather not consider. The probability of your imminent passing may be low, but the damage done from a lack of estate plan is so significant that it warrants your immediate attention. Remember, when it comes to a lack of estate planning, something is better than nothing. Besides, you can always change your documents with a simple amendment. So, without further delay, make sure you have up-to-date estate planning documents.