As financial planners, we support individuals on all kinds of planning. We believe most people think of a financial planner as a stock picker, however, we provide a much more important service than just investment selections. A financial planner spends years working for a client in order to help them achieve their personal and family goals. It’s our obligation to understand our clients and provide them with solutions that meet all their needs. Therefore, it amazes us when we read stories about the estates of Aretha Franklin, Prince or James Gandolfini.
We will make a few broad assumptions about the previously mentioned individuals regarding their estates. First, each of the individuals worked with a financial planner due to their success and amount of accumulated wealth. Secondly, each had an idea of what they wanted to happen with their estate upon their passing. It is in the realm of possibilities that Aretha, Prince and James did not have financial planners. It is also possible that Aretha had planned to have a $35,000,000 estate tax bill and Prince wanted approximately 30 individuals fighting over his estate. It is worth mentioning that Prince died close to two years ago and the heirs have still not received any financial gains from his estate. It is also possible that James Gandolfini wanted 80% of his estate subject to estate tax and made public record.
So, what went wrong? And what does any of this have to do with financial planning? Part of the financial planner’s responsibility is to bring recommendations that could improve a client’s situation. We talk regularly with our clients about topics outside the realm of finances. It is imperative for a planner to understand how estate processes work, both Federally and for the client’s resident state. In each of the cases mentioned above, a financial planner would have been able to offer recommendations that would have saved each estate millions of dollars and cost well under 0.1% of the client’s accumulated wealth. Keep in mind, the financial planner would not have been able to provide a solution or have been compensated for it, as an attorney would be needed to complete the estate/trust planning documents needed.
Let’s briefly review these cases and what could have been done to not only save money from tax implications, but also ensure that the decedent’s wishes were carried out.
Aretha Franklin and Prince made the same choice: they had not executed a will. This leaves their estate in the hands of the state of occupancy and Federal tax rules. Likewise, if you do not have an estate plan, you are planning on using the state’s default plan and it is your state of residency that decides what will happen to your estate.
Since our home office is in New York, I will focus on New York State’s rules. Note that each state’s rules could vary greatly, and it is imperative to understand your local rules when planning. Below is an article referencing what will happen to a person’s estate if they pass without a will in New York.
https://www.thebalance.com/dying-without-a-will-in-new-york-3505050
The link below provides Intestate information for all states.
https://www.nolo.com/legal-encyclopedia/intestate-succession
At the very least, Aretha and Prince should have had a basic will stating what they wanted to happen with their assets and who would be their heirs. This basic will encompasses any property or accumulated wealth that is not dictated by beneficiary designation. Any accounts with beneficiary designation supersede what is stated in a will. For example, if you have an old IRA with your ex-spouse as the primary beneficiary, that ex-spouse is entitled to receive everything in the IRA account, even if your will gives everything to your current spouse.
Therefore, a properly executed will and proper beneficiary planning is the starting point for all estate plans. Most families do not need more planning than a properly executed will. There are a few reasons a will can fall short for families:
- If a family, or individual, wish to keep their estate private, a will does not accomplish this goal, however the use of a properly funded revocable trust can allow the estate of an individual to remain private. For more information on revocable trusts click here.
- From a Federal viewpoint If a family, or individual, has a net-worth of more than $22.4 million or $11.2 million, a basic will can leave a very high estate tax liability, each state has their own exemption amount. It would be advisable to use techniques with irrevocable trusts, charitable planning, and gifting to lower an estate below the taxable exemption.
James Gandolfini made a different choice; he had created a will. He left $1.6 million to various friends and relatives. He also made provisions for his personal property, home and land. The remainder of the estate was split as follows: 30% each to his two sisters, 20% to his daughter, and 20% to his wife. James was a resident of New Jersey. The New Jersey estate tax is decoupled from the Federal estate tax. However, there is a lifetime exemption for funds that transfer between spouses. Since James only left 20% of his estate to his wife, the remaining 80% of his approximate $70 million-dollar estate was left unprotected from state and federal estate tax.
In his situation, it would have been imperative to create trusts that work within the confines of the state and federal tax laws while distributing his wealth to the individuals he wanted to benefit. Though trusts can be complicated, a good estate attorney will make the process easily understandable. It is the financial planner and client’s job to define the goals and what the ideal situation would be. With a bit of planning during life, an individual can save their heirs from significant headaches and tax liabilities.
After working with clients for years, a financial planner will understand a client’s goals and wants. It is our obligation to bring ideas to the table that will benefit the client and their wishes. With moderate planning, the three cases reviewed above could have had significantly different outcomes, such as:
- The three estates would not have become public record.
- There would not have been a delay in the payment of benefits.
- The wills would not have been challenged by individuals who do not have a right to the money.
- Millions of dollars in estate tax liability could have been avoided or mitigated.
Though the cases reviewed above are unique in their publicity and net worth, it is important to understand that this type of lack of planning is not uncommon and happens daily on a smaller scale.