Everybody has an estate plan, or so the saying goes. What does that mean? It means that if you have not taken the time to prepare a will or trust, the laws of intestacy will dictate how your assets should be distributed upon your death.
The recent news about Prince's unexpected death and his estate demonstrates how the laws of intestate succession work. According to his sister, Prince had no will. See the Star Tribune article: here. In Prince's case, any assets that are subject to probate will be divided among his heirs according to Minnesota law. Since his parents are both deceased, the estate passes to his siblings (half-siblings included). One of Prince's half-sisters did predecease him, but without children. If any of his siblings had predeceased him with children, their children would have taken by right of representation. Valuation and estate tax issues aside, intestacy complicates matters for his estate.
In situations of intestate succession there can be several problems. A common problem is when minors stand to inherit property. In that case a custodian will need to be appointed to manage the assets for the minor until he or she reaches the age of majority which is the age of 18 if there was no will. Most people are not comfortable leaving an 18 year old any sizable sum of money, let alone a lottery-prize-sized inheritance. Another problem is that the estate can pass to individuals that you would not want to inherit or would have left a smaller gift. This sometimes is the case with siblings. The trouble is that once the person has the right to inherit, it is in their total discretion to use, exhaust, or leave the asset in whatever way he or she decides.
What some people also do not realize is that Minnesota has an estate tax. Individuals dying in 2016 have an exemption of $1.6 million. This means that if the value of your taxable estate (which includes your retirement accounts, life insurance death benefit, house, etc.) is over the exemption amount of $1.6 million, your estate could owe an estate tax. The top rate bracket for Minnesota is 16% for estates over $10,100,000. The federal estate is an even higher rate of 40% for estates over $5.45 million. Large estates could end up paying both Minnesota and federal estate tax. 2016 tax rates.
Some advance planning can help minimize and even eliminate the estate tax. One simple way is to leave part of your estate to charity and deducting the amounts given from the taxable estate. If you have charitable goals and want to leave some funds to charity, you must take action to do so. You can leave gifts to charity in your will or through beneficiary designations. The people that end up inheriting under the laws of intestacy have no obligation to use their unexpected inheritance for your charitable intents. Even if they did use it for charity, it does not help the estate tax problem. There are many ways to reduce the size of your taxable estate. Charitable giving is just one way, but not having an estate plan leaves your estate totally exposed to the estate tax.
Finally, an estate plan can remove all of these proceedings from public view. In Prince's case, there will be a public probate proceeding to administer his estate. Since probate is public record, the value of a decedent's assets and liabilities, the identity and contact information of the heirs, and distributions of the estate will all be subject to public scrutiny. Recent changes in the accessibility of court records also allows more people than ever to have access to that information with ease. An estate plan that includes a revocable trust can effectively divert that whole process. Our blog post about trusts covers them in more detail.
While we mourn the loss of Minnesota's own, Prince's estate offers an illuminating example of the importance of drafting an estate plan before you need one. Ensuring your estate passes according to your wishes must be done through thoughtful and deliberate planning with a qualified attorney.
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