When You're a PRINCE,
Don't Plan Like a PAUPER
Being a product of the 80s, it is difficult for me not only to come to terms with the premature loss of the artistic genius that is now the person formerly known as Prince, but also to write an article throwing shade on his apparent lack of planning prowess. For all of his meticulous attributes, his attention to every detail in a song or performance, his control over every aspect of his musical universe, his ambitions to super-perform, and his careful crafting of an image and legacy truly worthy of a prince, it appears that he sure blew it when it came to actually planning for that legacy. As silly as his early departure is, so, too, is the unnecessary mess he left behind.
If it is indeed true that he did not leave behind a will or a trust, then this Prince shamefully planned like a pauper. Unfortunately, in my experience in representing successful business owners and high net worth clients, Prince is certainly not alone in this failure. Either by fear, ignorance, distraction, or lack of prioritization, high net worth clients routinely fail to take advantage of available planning devices to optimize the administration of their estates.
Whether you are a famous musician, a successful business owner, or have simply had the good fortune to obtain a significant net worth, the challenge is the same. You should make it a priority to create an estate plan to achieve the following principal objectives:
- Privacy
- Asset Protection
- Estate Tax Minimization
- Proper Wealth Disposition, Succession & Preservation
- Charitable Giving
- Efficiency of Administration
- Certainty
If you die without a will or a trust in place, you will achieve none of these.
When you are a pauper, and have no assets to speak of, you do not have the luxury or burden of addressing such objectives - because you have no material assets. On the other hand, for all of you princes out there, there is a responsibility that comes with having material wealth; and if you fail to plan responsibly, the results can be catastrophic to your assets and the people who inherit them (or, in some cases, fail to inherent them).
So, assuming it is ultimately established that Prince had no will or trusts in place, here are some of the failings in his plan:
1) Publicity. Since he will have died "intestate" (meaning, without a will), then all assets in his name will have to be administered by a judge through the probate court system. This is a formal legal proceeding which takes place in a public forum; consequently, all assets, heirs, and related issues will be available for public inspection. This not only creates a media circus in the event of prominent decedents, but also inevitably brings undesirable attention and individuals to the forefront as they target the intended beneficiaries.
2) Expense and Delay. As with any court proceeding, going through the probate process is generally a very expensive and lengthy proposition. The more assets, heirs, complexity, and conflict left behind, the more likely you are to have a prolonged and costly estate administration. Few people are aware that most lawyers are able to charge a percentage of the estate as their fees for the probate administration - and some as high as 10%. For those that charge hourly, such as me, it is still a rather robust billing opportunity given the complications that arise.
3) Laws of Intestacy/Unintended Dispositions. Whether you have a will or not, it turns out that each state has actually prepared a basic will for you in its statutes. Legislators have, in their collective wisdom, decided what an appropriate disposition scheme should be for a person who dies in your state. As you can guess, what the state has provided, and what you would actually opt to do if given the choice, can differ wildly. With Prince, for example, the laws of intestacy create a dramatic difference in disposition of assets to siblings. As you may have heard, Minnesota has an interesting provision in its intestacy statute that treats half-siblings the same as full siblings. Therefore, his full sister, Tyka, in one state could receive all of his estate, but in Minnesota, she has to share with the five living half brothers and sisters. While we do not know, and may not ever know, what Prince actually would have wanted, leaving it up to the state can create some unintended and rather arbitrary results. In most all cases in which I plan, the clients have disposed of assets in a manner quite varied from the provisions of the state's intestacy statute. The reason, not surprisingly, is that the intestacy statutes, as an attempt to plan for the majority of the state's citizens, are more directed toward those who do not have significant assets at death.
4) Will Contest. Another issue with the probate court system, is that those with a beneficial interest in the assets have a fairly easy avenue through which they can sue the estate in the form of a will contest. Given that the initial meetings pertaining to the Prince estate reportedly resulted in disagreement and acrimony, the court system will likely be used to enforce claimed rights or attack claimed abuses. This type of court battle is virtually inevitable in large estates without a plan.
5) Exposure of Assets to Creditors. When the amount of assets involved in the estate are significant, the ultimate loss of such assets to creditors in a poorly-conceived plan is a virtual certainty. First, by going through the probate process, the Prince estate will have to provide public notice to all creditors of Prince and their opportunity to sue to the estate to recover any claims. Generally, an invitation to sue is not desirable. Second, by failing to dispose of his assets in a protected way, all of the assets will be distributed outright to the heirs. Owned by these heirs in their individual names, these assets will then be subject to claims of their creditors, and potentially spouses upon divorce, if they fail to separate and protect. Most heirs aren't savvy enough, or focused enough, to plan in a way that protects the wealth they have received.
6) Maximum Taxes. By having no plan in place, it is your best way to ensure you will pay the most taxes possible on your estate assets. There are a variety of taxes applicable to estate assets - federal estate tax, state estate tax, and generation skipping tax, and even estate income tax - and each needs to be specifically planned for in order to minimize their adverse effect on the estate. You can create estate planning structures during your lifetime and at death that serve to legally minimize, and even avoid, such taxes. An estate without a plan will fail in this regard miserably.
7) Failed Wealth Succession. Simply transferring assets of this magnitude outright to individuals to do as they wish is dangerous and generally results in the assets being all but depleted by the following generation. If you have little to give, then you give outright and have no need to worry about the effects of the wealth on the recipient. If you have millions to give, however, then orchestrating a responsible wealth succession plan is a necessity. Either through waste, poor investment decisions, fraud, abuse by "friends" and family, creditor attack, incompetence, or any other threat to the wealth, such wealth is likely to be squandered in the long run.
8) Lack of Philanthropic Planning. While I did not know Prince, I can say with great confidence that had he embarked on proper planning as he should have, then he would no doubt have had a charitable component to his plan. Either due to being purely philanthropic, or due to a great desire to minimize the taxes that go to the government to spend in its discretion, virtually all clients with taxable estates will opt to give some assets to charities of their own choice as opposed to paying taxes to the IRS. Without specifically providing so, Prince's plan will not have provided to any select charities. That is a great loss to the charitable world, and a big win for the IRS.
9) Uncertainty. The lack of an estate plan creates a lack of certainty. When there is uncertainty around the assets, the individuals, and the manner in which they are to receive the assets, there is a likelihood for unnecessary litigation, inefficiency, waste, and angst for those you leave behind.
And these are just the initial failings of the plan, without knowing more. But if you have a significant estate, and no plan, these failings will be yours as well. In order to avoid the undesirable results that I foresee with the Prince estate, he should have done the following:
1) Have a Will. At a minimum, Prince should have had a Will in which he stated exactly who he wanted to give his assets to and in what amounts. Having a Will prevents the state from dictating what one intended in this regard, and minimizes the likelihood of a lawsuit among competing beneficiaries.
2) Better Yet, Have a Trust. Better than a Will, however, is establishing a Living Trust. If Prince were to own all of his assets in the name of a Living Trust, rather than in his individual name, then none of his estate would be administered through the probate court system at all. Living Trusts avoid probate altogether. By using a Living Trust, you can achieve the following benefits at the time of administration:
a) PRIVACY. The Living Trust is not a public document, and its terms, the assets it controls, and the beneficiaries, can all remain private. In short, the Living Trust offers a confidential way to dictate who gets what.
b) Expediency. For those seeking a quick estate administration, the Living Trust is the answer. Unlike going through the probate process, which can take years in a complicated estate, a Living Trust administration can often be completed in 30-60 days, depending on the assets in the trust.
c) Cost Savings. By removing the intricacies and timelines of the probate court process, you will significantly reduce the amount of the estate that goes to lawyers. In some cases, as no doubt will be the case with Prince, this could be the difference of millions of dollars.
3) Give Assets in Trust, Not Outright. In order to protect the assets to be distributed from the stated outside threats as well as an heir's potential inability to properly handle such wealth, the assets should not be given to them outright. Rather, the assets should be transferred into a separate trust for the benefit of the heir. Even with a fiscally responsible heir, it is best to place the inheritance in a trust to ensure this significant amount of wealth is bullet-proofed from outside attack - namely, potential creditors and spouses. The terms of the trust can be as restrictive or as broad as the drafter would like, so the enjoyment by the heir does not need to be impeded whatsoever. If asset protection is an objective of those who have amassed large estates, which it logically is in virtually all such cases, then a transfer to the next generation via a trust with asset protection provisions is a necessity. In addition, the trust can be created to be excluded from the beneficiaries' estate as well as their subsequent descendants' estates, thereby avoiding both estate and generation skipping taxes into perpetuity. Without such planning, the assets will be included in the estate of each heir at each level, and will be reduced at each generation level by the estate tax in effect at the time (which have ranged from 40%-55% in recent years).
4) Use LLCs to Isolate Risky Assets. Moreover, in order to protect non-risky assets (such as marketable securities) from risky assets (such as real estate), you should use Limited Liability Companies ("LLCs") to serve as holding companies for such assets. In this manner, a lawsuit for a slip-and-fall against the real estate (and its owner) will not jeopardize other assets in the estate. Properly structured and enforced, the lawsuit against the risky asset should be limited to the entity that owns the risky asset itself, with the end result simply being the bankruptcy of the one LLC, without adversely impacting the other assets.
5) Use LLCs to Simplify Administration. With multiple heirs and multiple assets, dividing up estate assets can be a nightmare. Moreover, it can force an otherwise undesirable "fire sale" of estate assets, generally resulting in an unnecessary loss in value. One way to greatly simplify the process is to have the assets owned in an LLC (or LLCs) prior to death. If this is accomplished, then at death the administration is as simple as just preparing an assignment of the appropriate percentage ownership interest in the LLC to each heir - hopefully in trust as stated above. Since the LLC does not die with the decedent, the continuity and asset value is maintained while the ownership is adjusted according to the decedent's wishes.
6) Transfer "Excess" and "Valueless" Assets Outside of Estate Prior to Death. It is rumored that the Prince estate is worth at least $300M, and that he has a music library of hundreds, if not over a thousand, unreleased songs. Given the size of his estate and the fact that the unreleased songs had no meaningful value at the time of creation, he should have transferred these excess assets into a trust or LLC structure to avoid inclusion in his estate at death. He was reportedly aware that he had too many songs, and his intention was that they be released after his death. If that was his intent, then the best time to remove an asset from one's estate is when it has little to no value - especially one with a strong likelihood of subsequent appreciation. The entire library of songs could have easily been transferred into a legacy structure outside of his estate prior to death, and they would have avoided taxation entirely. Now, instead, the library will be included in his estate and the battle will quickly ensue as to how much it is worth. The IRS's first volley will not be a low one...
7) Create a Charitable Remainder Plan. In order to minimize estate tax and to provide for social causes of his liking, Prince should have created an estate plan that gave the bulk, if not the full taxable remainder, of his estate to charity. In particular, he should have given the bulk of his estate to a Private Foundation in his name. Rather than a large transfer to the IRS in the form of taxes, I can envision countless music-related and other causes that Prince would have preferred to support with those dollars. Whether it is a Private Foundation, a Public Charity, a Charitable Trust, or a Donor Advised Fund, there are a variety of planning options available today for a charitable remainder plan.
While I hope I am wrong, and that we will ultimately find out that Prince had a sophisticated trust- and LLC-based planning structure similar to the above, my guess is that I am not wrong in my supposition that most of you other princes out there are sorely lacking in this area. Confronting one's mortality is not enjoyable. Creating and maintaining a planning structure sounds daunting. Dealing with lawyers... well, enough said. But failure to make your comprehensive estate plan a priority now can lead to absolute disaster down the road. Assuming your goal is not to repeat the cycle of the past and create a descendant chain of paupers two generations below, please plan like a prince today.
And when your plan is complete, breathe a deep sigh of relief, and go Party Like it's 1999...