In April, the world was saddened by the loss of Prince, one of music’s geniuses. He was 57 years old, had holdings worth $300 million and apparently left no will. A surge of interest in all things Prince since his unexpected death has pushed estimates of his estate as high as $500 million.
Given his long-standing battle against his record labels for control of his intellectual property rights, as well as a phalanx of managers, lawyers and accountants, the lack of a will is a baffling oversight. This is all but guaranteed to cause complications.
You may not have won seven Grammys and an Academy Award, or sold 100 million albums, but you could still benefit from some estate and financial planning work, including a will. Preparations before your farewell tour will go a long way toward avoiding headaches, confusion and tax complications.
Here are a few basic steps to take, no matter how much your estate may be worth:
Will: You should have one that specifies how your assets are to be distributed among your family, friends and favorite charities. You can pay a lawyer a few thousand dollars to draw one up, or pay much less for a simple online or software will. Services such as Nolo and Legal Zoom or software from Quicken offer a basic will for a nominal fee.
There are, of course, caveats. These online/software services are not legal advice; they only help create a basic document. Sometimes the advice of counsel is especially warranted, for example, if you are in a gay marriage living in a state that refuses to recognize it, or if there are multiple ex-spouses with children and grandchildren. Anything that adds complexity to your financial circumstances means that using a lawyer will help avoid future problems.
One final thought: These services offer a “100 percent money-back guarantee if you are not totally satisfied,” which seems like the most useless warranty ever made – after you die, we promise you will be happy with our product!
Transfer on death: If you signify investment accounts as “transfer on death,” it provides immediate (and cost-free) benefits. Whomever you designate as your survivor (aka beneficiary) with your account custodian (TD, Fidelity, Schwab, etc.) or transfer agent will receive those assets without having to go through probate. It occurs immediately after notification of death. It’s entirely in your control during your lifetime. And it costs nothing. Think of it as a free version of complex legal structures that cost much more.
Note that such accounts are still subject to estate taxes, creditors, etc., but they bypass the probate process, moving assets to the surviving person immediately upon proof of death and survivorship.
Financial plan: It is amazing that some people have a plan for their assets after they die, but not for when they are alive. Important concerns to address include the details of your retirement budget, when to begin drawing on Social Security and how much to draw down savings and investments.
Given increasing life spans, there is a genuine concern that even well-off people are at risk for outliving their money. Life expectancy in the United States is 81 years for women and 76 years for men. However, make it into your 70s and, statistically, your chances of making it to 85 to 90 go up dramatically. (Try the life expectancy calculator at the Society of Actuaries to get a sense of how many years you may need to fund in retirement.)
I know I am at risk of repeating myself, but it’s worth saying once more: Have a financial plan in place, for whatever the future brings.
Family meeting: Have a conversation with loved ones about all of your intentions, not just about your assets. It’s also about other end-of-life issues. You want a “living will” for medical directives (i.e., “do not resuscitate” if you don’t want life-prolonging measures), as well as a durable power of attorney for health care (in case you are incapacitated but ongoing medical decisions must be made). You can also create a power of attorney for financial matters in case you become incapacitated. Determine who will be the executor of your estate, and if you have children under 18, who will become their guardian.
This conversation should include an explanation of all your assets, such as insurance policies, beneficiaries, bank accounts, safety deposit boxes (where important documents are safely stored). All of the contact information for your key counsel – lawyer, accountant and financial adviser – is important as well.
Be proactive to avoid confusion and expense: Without a will, state law takes over. This means that any person with even a wisp of a claim to your estate can petition the court to receive a share.
Without a will, you are deferring to a probate court the right to distribute your assets. This is not how you want your final encore to end. If you have a substantial estate and die without a will, you are inviting a costly, time-consuming legal battle between your rightful heirs and people you never intended to benefit from your good fortune and hard work. The Prince estate already has a “kooky lawsuit” claiming all of Prince’s music belongs to a guy in California. It’s doubtful he wins, but I have no doubt it is going to cost the estate time and money to fight.
Perhaps a will may yet turn up via one of Prince’s many advisers. If not, this lack of planning is going to be an extremely expensive, and wholly avoidable, oversight. If the high end of estate estimates are correct, proper planning could have saved the purple one about $200 million in federal estate taxes and $50 million in state taxes. That’s enough to make doves cry.
A few words about the so-called death tax: For most Americans who exit, stage left, there are little or no tax consequences. Fewer than 1 percent of the deaths in America each year result in an estate tax being paid. For 2016, the estate and gift tax exemption is $5.45 million per person, or $10.9 million per couple. That exemption covers all but 5,400 of the 2,596,993 Americans who took their final bow last year.
My Washington Post colleague E.J. Dionne described attempts to repeal the estate tax as the “Paris Hilton Tax Cut.” With a little planning, even those 5,400 could avoid estate taxes.
Barry Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, The Big Picture.