Prince’s death was a shock, and now there is another. Probate documents filed in court say that Prince died without a will. His sister, Tyka Nelson, age 55, confirmed that she does “not know of the existence of a will.” Although Prince did not have a spouse or children, the court filings list five half-siblings: half-brothers John Nelson, Alfred Jackson and Omar Baker, and his half-sisters Norrine and Sharon Nelson. Minnesota law provides that half-siblings are treated the same as full siblings. Prince’s net worth is not yet clear, but is surely in the hundreds of millions of dollars. And that means the IRS will collect handsomely, perhaps 40%.
Unexpected celebrity deaths can make the rest of us think about what documents we need to have in place. The tax and financial hassle of probate or intestacy can be huge, even for normal sized estates. When you add the kind of zeros that go with a successful entertainer, the failures are much more palpable. Prince is the latest example, echoing the passing of Philip Seymour Hoffman, James Gandolfini, Amy Winehouse, Heath Ledger, and others.
All of these estates had issues or gaffes of one sort or another. For example, Seymour Hoffman had three children with Marianne O’Donnell, but they were unmarried. Plus, he mentioned only one child in his will, not all three. And while it is tough to compare any of these, like Prince, Amy Winehouse didn’t even have a will. We do not know what either one of them would have wanted. Amy Winehouse’s parents inherited her estate, while her ex-husband got nothing.
Heath Ledger had a will, but it was five years old. It gave his parents and sisters his $20 million estate, failing to mention Michelle Williams or their child. And after Mr. Gandolfini died at 51, reports said his will clumsily sent $30 million of his $70 million to the IRS. The stories should make tax advisers and estate planners cringe. And although it isn’t an easy subject for anyone to discuss, a few key points deserve mention.
A will would have been clear as to what Prince wanted, but even a will is public. There is actually no reason the public has to know about who you benefit and who you may disinherit. Incredibly, Hoffman, Ledger and Gandolfini, all ended up with wills in probate. Probate is public, expensive, time consuming and unnecessary. It is worse not to even have a will.
Prince joins Amy Winehouse in not having one, and that can foment litigation. After dying without a will, singer John Denver’s family spent six years in court. But a will still has to go through the courts. For very little money, a revocable trust disposes of your assets outside court. You still do a simple pour-over will. It gives everything to the revocable trust. Simple and confidential.
Update wills and revocable trusts for big events like births, marriage, divorce, etc. With no will, we do not know what Prince wanted, and that is where state law usually comes in. If you are slow to update your will/trust, make sure it has good drafting. Most wills say “or other children I may have” to cover later births. Hoffman’s and Ledger’s didn’t.
Prince did not have a spouse, but some unmarried people still give their assets to a non-spouse loved one. For example, Seymour Hoffman gave his $35 million estate to Marianne O’Donnell, but they were never married. Curiously, marriage saves taxes. You can give an unlimited amount to your spouse tax-free during life or on death. Heath Ledger’s will gave his parents and three sisters his $20 million estate, but they generously disclaimed it so his daughter Matilda inherited it.
Marianne O’Donnell ended up with Seymour Hoffman’s entire estate, but since they were unmarried, taxes devoured approximately $15 million. If they had been married, it would be tax-free. Any legal marriage saves gift and estate taxes, one of many reasons the legitimacy of gay marriage is so important
Marriage isn’t only about taxes, and estate planning isn’t either. Do not pay taxes unnecessarily, but you want assets to go as you wish. Mr. Gandolfini was criticized for benefiting his sister, which meant paying estate taxes. However, he wanted his sister to receive a large share, and taxes may have been inevitable. Your wishes are more important than tax efficiency.
Some may criticize Prince for not planning ahead. But from a tax viewpoint, it may not matter. The current federal estate tax law says he can (by will or intestacy) give $5.45 million tax free to anyone. Add to that gifts to qualified charities, such as the Jehovah’s Witnesses. But beyond that, Prince’s estate will have to pay. The current federal estate tax rate is 40%. For every million dollars going to a half-sibling, for example, the IRS will get $400,000. That would not have been helped by a will.
Bernie and Hillary are promoting a ‘sensible’ estate tax that would hike the rate to 45% and cut the exemption from $5.45 million down to $3.5 million. Even if it passes, it won’t apply to Prince. Mr. Gandolfini was criticized for leaving 80% of his estate to his sisters and his 9-month-old daughter, making 80% of the estate taxed. But sometimes you can do what you want and save taxes. Mr. Gandolfini took some tax-efficient steps. His teenage son received $7 million in life insurance proceeds via an irrevocable life insurance trust, a tax efficient transfer. No estate tax there.
As the facts and claimants come forward, one big question will be just how big Prince’s estate may be. And the IRS is sure to collect handsomely.
For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.
via The Tax Lawyer http://ift.tt/1VR8Hf5