The celebrated singer Prince, who at only 57 years old accidently died in April of an accidental opioid overdose at his Minnesota recording studio, was unquestionably a brilliant musician. Unfortunately, he was not as wise when it came to planning his estate, as he famously died without a will that could have directed where he wanted his sizeable assets to go upon his death.
The bite of estate taxes
We blogged about Prince's estate shortly after his death. This week the Associated Press reported that almost half of his $200 million estate will go toward federal and state estate taxes, with the other half divided among his six siblings.
For anyone who died in 2016, an estate tax return must be filed if the estate (gross assets plus certain taxable gifts made during his or her lifetime) is worth more than $5.45 million for an individual taxpayer. An estate as large as Prince's would be taxed by the IRS at a rate of 40 percent.
The addition of the Minnesota estate tax with its top tax rate of 16 percent pushes the portion of Prince's estate that will go to government tax coffers close to half of the total.
Contrary to Minnesota and some other states, Colorado does not impose a state tax on large estates, but of course Colorado residents are still subject to the federal estate tax.
Lessons learned from Prince
What can we learn from His Royal Badness? Importantly, that thorough estate planning is important because:
- Early or unexpected death can occur before a person has executed estate planning documents.
- Without a valid will or other planning techniques, assets will pass to those beneficiaries named under state law to inherit under those circumstances, which is why Prince's six siblings will inherit. These state-determined beneficiaries may not be the heirs the person would have chosen.
- Estate planning can minimize taxes and leave more assets for named heirs, whether family, friends or charities.
Depending on the circumstances, even someone with a far smaller estate may benefit from the use of techniques like:
- Planned giving during his or her lifetime
- Use of trusts, revocable or irrevocable, created during his or her lifetime or in a will to take effect after death
- Bequests to charity that may reduce taxes in certain situations
- Execution of a will directing disposition of assets after death
- Creation or use of charitable foundations, or of business entities like corporations, limited liability companies and partnerships
- Business succession planning
- And more
Anyone who has not yet executed an estate plan should seek legal counsel to understand what options are available to carry out that person's preferences for asset disposition.