What happens if you die without an estate plan?
If you’re the late rock star Prince, you lose half of your estate to state and federal estate taxes. It appears the government will be dancing to Prince’s “1999” all the way to the bank.According to news reports, when Prince died in April of 2016, he had no will and no other estate plan in place. As a result, almost $100 million of his estimated $200 million estate could wind up in the hands of the tax man. That’s because the estate will be subjected to a federal tax of 40 percent and a Minnesota estate tax of 16 percent. After the calculation has been completed, experts are predicting the tax burden will amount to approximately 50 percent of the total estate.
Clearly, dying without an estate plan can have devastating financial consequences. However, the consequences extend beyond the reduction of the value of the estate. Dying intestate also impacts how and to whom an estate is distributed. There is a very real likelihood that Prince’s estate may go to unintended beneficiaries and his intended beneficiaries may receive nothing.
For example, under California law, when a resident dies without a will or trust, the laws of intestate (without a will) succession apply. State law, not the estate owner, determines who inherits the estate. A spouse receives all of the community property. But if other heirs exist, the spouse is required to share in the distribution of separate or personal property. In addition, access to financial accounts titled only in the name of the deceased, such as checking and savings accounts, may be frozen until the estate goes through probate. Quite literally, a spouse and/or dependents could be deprived of any financial support, and face homelessness or bankruptcy.
Prince left no surviving spouse behind, but a sister and five half-siblings have laid claim to his estate. Even if Prince did not intend to bequeath equal portions of his estate to those relatives, his intent no longer matters. Any business associates or friends he may have desired to benefit from his largesse will be left out in the cold.
Sadly, there are many estate planning strategies available that could have kept Prince’s estate intact and sheltered from excessive taxation. Those same strategies would also have ensured that Prince’s desires concerning the distribution of his estate be honored. The best approach would have been to place Prince’s property, including copyrights and trademarks to songs and related items, in trust. This approach has several benefits.
First, when property is transferred to a trust rather than a person, the value of the taxable estate is reduced. That means upon death, there is less to tax, resulting in a lower estate tax liability. While the trust is required to pay tax upon earnings, and beneficiaries pay tax upon distributions, the assets themselves are not taxed. In addition, the tax on earnings and distributions is much lower than an estate tax.
Second, a trust not only permits an estate holder to designate who will benefit from the income derived from assets placed in trust, it also permits the grantor to determine how, why, and when that income will be distributed. This is useful when a grantor determines a potential beneficiary may lack the ability to appropriately manage finances or use any proceeds for bad pursuits, such as illegal drugs. In the alternative, a grantor may provide that trust income be used only for designated purposes, such as the payment of expenses for a college education or extraordinary medical expenses. In addition, distributions may be limited by age, financial and employment status, or used only to reward certain behaviors, such as philanthropy or an attending church.
Finally, a trust enables an estate holder to implement a vision for the future, beyond death. Say, for example, that Prince wanted to donate his writings and instruments to a museum or wanted the proceeds from the licensing of his music to be used for a specific purpose. That vision can be specifically stated in a trust and the executor of that trust is bound to take designated steps to carry it out.
There are many types of trusts available and they can be used to accomplish a multitude of purposes. Those purposes may include:
- To provide for the continued support of dependents, such as spouses and children.
- To donate assets or income from assets to specific causes or charities.
- To protect the inheritance rights of heirs from prior marriages, or to permit children not related by blood from a blended family to inherit.
- To protect assets from former spouses, family members, and creditors.
- To provide multiple generations of heirs with support or assistance.
- To remove an estate from probate.
- To keep the details of an estate private.
- To protect assets from excessive taxation upon the grantor’s passing.
Most people will not be subjected to the level of federal tax imposed on Prince’s estate. Currently, estates valued at less than $5.45 million for individuals or $10.9 million for married couples are not taxed by the federal government. That does not, however, mean an estate plan is unnecessary. Some states do impose inheritance or estate taxes. In addition, prior to death, a testator can designate who benefits from their estate and how. Post-death, that option is no longer available.
Estate planning preserves wealth, as well as assets, ensuring that the only parties who benefit are your designated heirs. Why leave that to chance?