Prince may have sung that "Money Don't Matter 2 Night," but it's clear that the $300 million estate he left behind matters quite a bit. Since Prince didn't plan his estate, his family and loved ones are stuck with the headache of probate proceedings. Between the current federal estate tax rate of 40% and an additional 16% from the state of Minnesota, the majority of Prince's estate is going to the Tax Man. Needless to say, there is much that could have been done to avoid probate and minimize estate tax.
Prince's situation is in the news because of his fame and large estate, but anyone could have made the same estate-planning mistakes, regardless of wealth. So what can you do to prevent the same thing from happening to your family? Consider these three strategies:
1. Think About Your Legacy Now
Minimizing tax is a significant benefit of estate planning, but that's not its only purpose. Estate planning is also a way to show proof of a life well lived and help family and friends achieve their dreams. The real tragedy in Prince's situation is that we'll never know the legacy he wanted to leave behind.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Prince certainly left behind an unforgettable musical legacy. But were there any goals he had not yet fulfilled? Are there loved ones that he wished to provide for? Is there a cause or purpose that Prince would have wanted to promote? What would he have liked to change in the world around him? All of these questions will be left unanswered because he didn't provide any estate planning guidance.
Before planning your estate, think about the mark you want to make on the world. Use your goals, desires and values to guide the planning process. A competent estate-planning professional can help you create a plan that leaves your legacy behind and protects your loved ones.
2. Reduce Estate Taxes with a Trust
Prince had many long-term friends and reportedly remained close to both of his former wives. Unfortunately for them, none will get any of his estate. Instead, his estate is now subject to claims from a variety of relatives with whom Prince shared little, if any, connection. A claim has even been filed by a previously unknown son who is now in prison. (At least that can be resolved by a paternity test.)
Prince could have avoided this situation by creating a trust to benefit those close to him. With proper planning, a trust could have helped him reduce his estate taxes and avoid probate. A trust is particularly important for single people because they typically do not have a statutory scheme to give assets to the people truly important in their lives. Unmarried life partners are often excluded in the absence of a trust or will.
The best estate-planning tool to avoid probate and provide greater benefits to your loved ones is a revocable trust. If beneficiaries are too young to manage wealth, or you're concerned about their money management skills, specialized provisions may be included to provide control over distributions. Three good options to look into are incentive provisions, spend-thrift provisions and provisions for a discretionary lifetime trust. Special needs provisions may also be used for beneficiaries receiving or expected to receive needs-based government benefits.
For all beneficiaries, specialized provisions should be considered to protect the estate from lawsuits, divorce, creditor claims, bankruptcy and even estate tax that may be incurred by your loved ones after you are gone.
3. Form a Charitable Trust or Foundation
In life, Prince was known to be very generous in his support and mentorship of new artists. Perhaps he would have wanted to continue providing assistance to young artists through a charitable foundation. Or as a devout Jehovah's Witness, maybe he would have wanted to designate funds for specific causes within his church.
Prince could have formed his own charitable organization, either as a public charity or a private foundation. Public charities have higher tax-deductible limits for contributions, as well as the ability to receive financial support from other public charities and private foundations; however, there are strict guidelines on activities and governance. Private foundations have fewer qualifying restrictions and can be a fallback option for organizations that do not qualify as a public charity, although deductions are lower.
Charitable trusts are another good option, as they can provide a tax deduction and income to your beneficiary. An often-overlooked giving alternative is a pooled income fund (PIF), a charitable structure established and maintained by the charity. Donors receive a "share" of the fund and income tax deductions each year they make a gift, allowing PIFs to provide greater deductions and economic returns than other alternatives.
You do not have to be as wealthy as Prince to establish a charitable-giving program. You can work with a regional donor-advised fund to obtain many of the advantages of your own charitable organization without formation or administrative costs. Another alternative is an endowment fund, established and maintained by the charity itself. Finally, you can simply make a charitable gift in your trust or estate plan. This is an easy, accessible way to give without the cost, time and complication of an endowment fund.
We all want to make a difference in the world and ensure that our loved ones are taken care of, even after we're gone. What would you like to change in the world? What would you like to preserve for future generations? Estate planning can help you answer these questions and rest easy knowing that your legacy will be maintained.
John M. Goralka is the founder of The Goralka Law Firm, an estate planning, trust administration, business and tax firm.
-
Stocks Rise to End a Volatile Week: Stock Market TodayThe market's fear index reached and retreated from a six-month intraday peak on Friday as stocks closed the week well.
-
Kiplinger News Quiz, Oct 17 — Longest Government Shutdown?Quiz We covered stories about the shutdown, Medicare and vehicle recalls this week, but why? Test yourself on the latest financial and business news.
-
Treat Home Equity Like Other Investments in Your Retirement Plan: Look at Its Track RecordHomeowners who are considering using home equity in their retirement plan can analyze it like they do their other investments. Here's how.
-
Financial Fact vs Fiction: The Truth About Social Security Entitlement (and Reverse Mortgages' Bad Rap)Despite the 'entitlement' moniker, Social Security and Medicare are both benefits that workers earn. And reverse mortgages can be a strategic tool for certain people. Plus, we're setting the record straight on three other myths.
-
Medicare Open Enrollment: Why You Need to Pay Extra Attention to Part D, From a Financial AdviserThe lowest premium for prescription drug coverage might not actually save you the most money. Make sure you take copays into consideration and do the math.
-
How the One Big Beautiful Bill Will Change Charitable GivingTaxpayers who don't itemize will be able to take a bigger deduction for donations, which could boost giving. However, high-income donors could see their tax benefits reduced.
-
Five Retirement Planning Traps You Can't Afford to Fall Into, From a Wealth AdviserTo help ensure you reach your savings goals and enjoy financial security in your golden years, be aware of these common pitfalls. The key is to be proactive, informed and flexible.
-
Your 401(k) Can Now Include Alternative Assets, But Should It? A Financial Adviser Weighs InMany employer-sponsored plans offer limited investment options, which can stunt growth. But participants considering alternatives might need some sound advice to get the most from their accounts.
-
Will Taxes Shred Your 401(k) or IRA During Your Retirement? It's Very LikelyConventional wisdom dictates that you save in a 401(k) now and pay taxes later, but turning that rule on its head could leave you far better off. A financial planner explains why.
-
More Retirees Are Renting: Should You? A Financial Adviser Weighs InIn some ways, renting is cheaper, more flexible and easier, but unless you understand the implications for your taxes and health costs, it might not be for you.
