Estate Planning Mistakes by Famous People

Many estate planning mistakes by famous people illustrate on a grand scale what applies to all of us; the need for an up-to-date, quality estate plan.

The instructions for the disposition and management of one’s estate at death through the use of wills, trusts, and other devices can cover almost about any topic you can think of. While the majority of instructions in estate planning concern finances, wills and trusts frequently guide decisions regarding health care, guardianships, business, education and even which heir gets the entire Barry Manilow record collection.

Born2Invest’s recent article entitled “The biggest estate planning blunders of all time” looks at a few colossal estate planning mistakes by the rich and famous.  Estate planning mistakes by famous people show you what can go wrong in the worst of ways.

Estate planning usually conjures up thoughts of drafting a will by an attorney. Although the cost of drafting an estate plan varies significantly based on location and complexity, it can range from a few hundred dollars to several thousand. Regardless of the cost, hiring an experienced estate planning attorney will save your family time, money and anguish after your death.

With that said, let’s take a look at some estate planning mistakes by famous people who simply didn’t get around to this very important task.

Ted Williams (Baseball Legend). When Ted died in 2002, he had one will that said his body should be cremated, and another that instructed he should be cryogenically frozen. As you can imagine, there was a fight among his children. This resulted in Ted’s decapitation (postmortem). Therefore, the Splendid Splinter, the greatest baseball hitter of all time, had his body and head frozen in Arizona at Alcor Life Extension Foundation.

Sonny Bono (Singer and Congressman). Sonny didn’t create a will. As a result, he passed away intestate. A lawsuit was initiated by ex-wife and singing star, Cher, to collect $1.6 million in unpaid alimony, along with a fraudulent claim by an illegitimate child (disproven by DNA testing), and Sonny’s widow, Mary.

Heath Ledger (Actor). Heath failed to revise his will after the birth of his daughter. At his death in 2003, his entire estate was split between his parents and sisters, but they agreed to give all the money to his daughter.

Philip Seymour Hoffman (Actor). The Oscar-winning actor also never updated his will after the birth of his two daughters. Since he wasn’t married to his then girlfriend, there was an approximate $12 million estate tax that was owed.

Joe Robbie (the owner of the NFL Miami Dolphins). Robbie had a substandard estate plan that contained a pour-over will and revocable inter vivos trust. This was designed to defer estate taxes until after the death of his wife. However, it didn’t work as planned. She demanded her “elective share” as spouse, 30% of the husband’s illiquid estate, which created a $47 million tax bill that could only be settled by selling off his football team. His 11 children also went to court to fight over his estate.

James Brown (Singer). The “Godfather of Soul” wasn’t around to witness the 12-year epic legal battle among several blended families over his estate.

Barry White (Singer). White died in 2003 in the middle of divorce proceedings. Legally speaking, he was still only separated from his wife. As a result, she got it all, instead of his current girlfriend and mother of nine kids.

There are many more famous people who posthumously became members of this dubious club. Their eligibility for membership was poor estate planning that resulted in unintended—and in some cases, tragic—consequences. Although many Americans can’t really identify with these mega-wealthy or public icons, they do have assets and families and friends, and everyone should expect to need an estate plan.  See here for ideas on how to do it properly https://www.galliganmanning.com/a-will-is-the-way-to-have-your-wishes-followed/

The club of estate planning mistakes by famous people shows the rest of us the need for proactive professional planning. Be certain that you work with a qualified estate planning attorney, so that your estate plan doesn’t end up like the ones above.

Reference: Born2Invest (January 27, 2020) “The biggest estate planning blunders of all time”

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What Exactly Is the Estate Tax?

Most people ignore the estate tax due to its high exemptions, but as some candidates may lower the exemption, it is good to familiarize yourself with it.

In the U.S., we treat the estate tax and gift tax as a single tax system with unified limits and tax rates—but it is not very well understood by many people.  Plus, the estate tax exemption is currently as high as it’s ever been, so many people ignore it assuming it doesn’t and never will apply to them.

However, the estate and gift tax has always been a political football, so it is a good idea to familiarize yourself with it in an election year.  The Motley Fool’s recent article entitled “What Is the Estate Tax in the United States?” gives us an overview of the U.S. estate and gift tax, including what assets are included, tax rates and exemptions in 2020.  As an overriding point, this blog covers federal estate and gift tax.  Some states have their own estate, gift and/or inheritance tax (tax on all transfers to beneficiaries at a lower rate) which may work differently then the federal tax.

The U.S. estate tax only impacts the wealthiest households. Let’s look at why that’s the case. Americans can exempt a certain amount of assets from their taxable estate—the lifetime exemption. This amount is modified every year to keep pace with inflation and according to policy modifications. This year, the lifetime exemption is $11.58 million per person. Therefore, if you’re married, you and your spouse can collectively exclude twice this amount from taxation ($23.16 million). To say it another way, if you’re single and die in 2020 with assets worth a total of $13 million, just $1.42 million of your estate would be taxable.

However, most Americans don’t have more than $11.58 million worth of assets when they pass away. This is why the tax only impacts the wealthiest households in the country. It is estimated that less than 0.1% of all estates are taxable. Therefore, 99.9% of us don’t owe any federal estate taxes whatsoever at death. You should also be aware that the lifetime exemption includes taxable gifts as well. If you give $1 million to your children, for example, that counts toward your lifetime exemption. As a result, the amount of assets that could be excluded from estate taxes would be then decreased by this amount at your death.

You don’t have to pay any estate or gift tax until after your death, or until you’ve used up your entire lifetime exemption. However, if you give any major gifts throughout the year, you might have to file a gift tax return with the IRS to monitor your giving. There’s also an annual gift exclusion that lets you give up to $15,000 in gifts each year without touching your lifetime exemption. There are two key points to remember:

  • The exclusion amount is per recipient. Therefore, you can give $15,000 to as many people as you want every year, and they don’t even need to be a relative; and
  • The exclusion is per donor. This means that you and your spouse (if applicable) can give $15,000 apiece to as many people as you want. If you give $30,000 to your child to help her buy their first home and you’re married, you can consider half of the gift from each spouse.

The annual gift exclusion might be an effective way for you to reduce or even eliminate estate tax liability. The tax rate is effectively 40% on all taxable estate assets.

It is also worth noting that a lot of clients want to give away assets during their life time through annual gift exclusions because they are worried about the estate tax.  However, with such a high exemption, it is often better to keep assets in your estate.  This is because generally appreciable assets in your estate receive a “step-up” in basis at your death.  This point is outside the scope of this blog, but see here for why keeping assets in your estate is probably a good thing.  https://www.galliganmanning.com/higher-estate-tax-exemption-means-you-could-save-income-taxes-by-updating-your-estate-plan/

Finally, the following kinds of assets aren’t considered part of your taxable estate:

  • Anything left to a surviving spouse, called “the unlimited marital deduction”;
  • Any amount of money or property you leave to a charity;
  • Gifts you’ve given that are less than the annual exclusion for the year in which they were given; and
  • Some types of trust assets.

Some candidates seeks to greatly lower the estate and gift tax exemption, which may lead to many more taxable estates.  If you are concerned about this tax, or are after the election, please contact our office to discuss how the estate and gift tax impacts you.

Reference: The Motley Fool (Jan. 25, 2020) “What Is the Estate Tax in the United States?”

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