People who practice estate planning are always looking for examples to set before their clients of the value of planning. The death of celebrities often creates that kind of a learning experience. (see earlier article) Much has been made of musician Prince’s lack of a will after his unexpected death in April. It is hard to understand why someone who exerted such control over his music did not have an estate plan in place, including many ways of saving on estate and income tax. In reality, if you do not have a plan, your state has a plan for you, called the laws of intestacy.
That’s exactly what happened to Prince, who died on April 21. He probably had hundreds of millions of dollars in assets, including rights to unreleased music and royalties for many years into the future.
Prince had one sister, numerous half siblings and a possible adult child. Without a will, Minnesota intestacy law will dictate the distribution of his assets, and Minnesota law treats full and half siblings identically.
So what could have Prince done to protect his assets from an extremely high federal estate tax rate? Prince could have created a charitable foundation trust with possible charitable remainder and/or a charitable lead trust. A charitable remainder trust is designed primarily to save on income taxes. The person creating the trust funds it with appreciated assets, can take an income tax deduction over five years, receives an income stream for life and can assign the stream to a second person as well. At the founder’s death, the trust’s assets go to a selected charity. A charitable lead trust, on the other hand, pays income first to a designated charity organization. The remainder passes to heirs, free of estate and income tax. There is no income tax deduction for the founder, who also pays tax on the trust’s investment income during his or her lifetime. This trust is a good tool for passing assets tax-free to the next generation.
Prince could have used an irrevocable life insurance trust (ILIT) where the death benefit is a tax-free inheritance to the beneficiaries and the value of the life insurance is removed from Prince’s estate.
An intentionally defective grantor (IDGT) is another vehicle for moving assets on to the next generation. In an IDGT, the founder loans the trust assets, receiving an interest rate below the rate at which the assets are expected to appreciate. The grantor pays income taxes on trust income, allowing the assets to appreciate unencumbered by that expense, and beneficiaries receive the assets tax-free.
We may not be in Prince’s income or creative category, but his lack of planning and untimely death should give everyone time to think.
