In 2016 the musician Prince died at the age of 57, leaving behind a legacy of musical genius. Unfortunately, he also left behind an ongoing financial and legal mess. The issue: For reasons no one understands, Prince neglected to prepare even the most basic estate plan. The result has been years of squabbling among potential heirs to his fortune.
Under the newly-revised tax laws, only those with more than $11.2 million in assets ($22.4 million for a married couple) are subject to estate taxes. Still, you don’t need to be a wealthy rock star to need an estate plan. I believe that every adult — regardless of net worth — should have at least some plan. Below are ten reasons why:
State-level estate taxes: Even if your estate won’t top the $11.2 million Federal threshold, your state might impose its own estate tax. Eighteen states, in fact, have some type of estate or inheritance tax. In some states, the limit is harmonized with the Federal limit, meaning that you would only face a state-level tax if your estate met the Federal threshold. But in some states the limit is far lower. In Massachusetts, for example, the limit is just $1 million.
Protection from an ever-changing tax regime: While today’s $11.2 million Federal estate tax exemption is extremely generous, there’s no guarantee this generosity will last. While estate tax revenue is virtually meaningless to the Federal budget, it’s politically symbolic and has seen frequent changes. As recently as 2000, in fact, the limit was less than $1 million, and the top rate was a hefty 55% (vs. today’s 40%). In 2010, on the other hand, there was no estate tax at all. The lesson: Don’t conclude that today’s estate tax regime is the one that will apply to you.
Choice of custodian: Should something happen to both you and your spouse, perhaps the single most important function of an estate plan would be to appoint a custodian for your children. This is even more critical if you are a single parent. While your loved ones may have the best of intentions, it is not unusual for custody disagreements to arise when parents pass away. Should children live with their grandparents, or perhaps with an aunt or uncle? If so, which ones? Should priority be given to those who live locally? To those who share your values? To those in a more comfortable position financially? It’s unlikely that everyone will see it the same way. That’s why it’s so important to document your preference.
Choice of healthcare proxy: Another critical function of an estate plan is to name a healthcare proxy. If you were to become incapacitated, a written healthcare proxy would ensure that a designated loved-one would have authority to make medical decisions on your behalf. This need not be complicated — in fact, free proxy forms are available on the Internet — but it is important. If you became incapacitated, that would be bad enough. You certainly wouldn’t want your family sparring with each other, or with hospital staff, as a result.
Choice of executor: The executor’s role is largely administrative and often falls to the spouse or to a child. However, if you have children from more than one marriage, you should consider appointing an impartial executor, one who does not have a stake in the outcome. While this impartial individual will want to be paid, it will be well worth the cost if that impartiality helps your heirs avoid a costly dispute.
Equity among children: If you died without a will, a court would probably divide your assets equally among your children, but that may not make the most sense in all cases. Suppose your children are in different situations financially. Should everyone receive equal shares under all circumstances? The answer, of course, is that it depends. But since you’re in the best position to make that determination, take the time to think it through now.
Charitable intentions: If you have substantial assets, perhaps you wouldn’t want everything to go to your children. Maybe there are charities or schools that are important to your legacy. If you don’t put it on paper, no one will ever know.
Personal possessions: If you’re like most people, you have items of sentimental value — jewelry, for example. Wouldn’t you want some say over how it is allocated? Vacation homes are similarly tricky, often holding great sentimental value to children. But how would they share a home among themselves? And how would they share the maintenance burden, especially if they are in different positions financially? Or, what if one of your children wanted to sell the house and one wanted to hold it? A thoughtful estate plan would include mechanisms to handle these questions amicably.
Efficiency: In Prince’s case, it has been more than two years, and none of his heirs has yet to receive a penny. In the meantime, though, because it’s such a tangled mess, attorneys and other advisors have collected nearly $6 million in fees. No question, this is an unusual case, but the point remains: It’s hard enough to suffer a loss; don’t compound the pain by leaving your family guessing about — or fighting about — what you would have wanted.
Creditor protection: In the event that one of your children has a legal dispute, a well-written estate plan could help protect your assets. If there is a divorce, for example, a trust structure could help ensure that more of your assets stay with your child.