R.E.S.P.E.C.T the Estate Planning Process
By now, many of you have heard that the late, great queen of soul, Aretha Franklin, joined the list of wealthy celebrities (like Prince) who’ve passed away without a will. Not only did they not have a will, but they also had no estate planning documents whatsoever (no trusts, powers of attorney, etc.). Dying without any kind of estate plan is almost always problematic. Usually, it leads to unnecessary costs, time, and logistics. An estate such as Aretha Franklin’s (which is very complex compared to the average individual) with an approximate size of around $80m, will be nothing short of a nightmare. The saddest thing about all is this could have been avoided. Especially with someone who was 76, this should have been addressed years ago. Let me attempt my version of “shock therapy.” This way, those of you who don’t have proper documents in order can be motivated to get them. Disclaimer the principals below hold true whether you have an $80 million-dollar estate, a $800,000 estate, or an $80,000 estate.
Really big estates are riddled with complexities. Ms. Franklin’s will be no exception. She has four children, several properties, a massive estate, and royalties from the ownership of many of her songs. Handling these items requires a personal and intimate understanding of Ms. Franklin’s affairs that unfortunately is now out of her hands. There will be lawsuits and lien holders coming out of the woodwork claiming money is owed. Some may be legitimate, I’m sure. Others, however, will be weasels looking for a payday. Regardless of the validity, each will have their day in court. All will need to be handled individually before any assets are liquidated from the estate.
Executor(s) will now be decided by the courts. This means instead of having someone Aretha knows and trusts to handle her estate, the court will appoint someone. This stranger might be completely unfamiliar with her assets, debts, and income. But, they will be in charge of valuing and handling her financial affairs until the estate is settled (which on a common estate will take about 9 months). This ends up extremely costly for the estate. Not only will it add tons of extra expenses, it almost always significantly draws out the probate process. This person must understand the debts, liens, and lawsuits which might be pending. All of this will be handled by an outsider, since the executor will literally be starting from scratch.
Sticking with the court making huge decisions, the judge will also handle the distribution of the estate. Shouldn’t it be easy, since she has four children and no spouse? Would they not simply divide the assets equally and each receive a 25% share? Not so fast!!!! For starters, who knows if that was her wish. Did she speak to all of her children and want each to receive a quarter of her assets? Are there other important people she cared for or wants to take care of now that she is gone? Was she charitably inclined? Did she want to leave a legacy in her honor? We already know she was publicly involved in 11 charities; all which will receive nothing. These decisions are now stripped from her and put into a judge’s hands in her hometown of Oakland County, Michigan. Furthermore, this judge will decide who gets what and why. The judge will listen to tons of testimony. Then, balance that with the law to determine how her estate is divided. Pause for a moment. Think how you’d want your heirs to receive your assets and how you want your estate divided. Now, go ask your closest friend, or better yet your spouse, and see if they get it right. Did they? Now, go ask a random stranger (the judge in this case) and see if they have better luck than your spouse. You get the point — it’s about to get ugly!
Privacy is a big benefit of implementing trusts in estate planning and very appealing to someone in the public eye. Celebrities usually go to great lengths to protect their personal financial affairs. Dying without a trust means this case will be assigned to a probate judge in her home district. Probate cases are of public record; therefore, everything and anything involving her estate will be available to the public. Any disputes, debts, and financials will be published in public records for the world to see. Her children are likely about to get a whole lot of new “friends and family” who are looking to capitalize. I can assure you that my estate (which is not to the same level) has these provisions in it. I suspect no one likely will care too much to inspect my estate once I am gone (assuming I don’t become the next world famous financial planning blogger, guess I’ll keep my day job). Thus, if trusts owned Aretha’s assets, distribution would not flow through the probate courts and everything would remain completely private.
Ease of accessing funds. Once the probate courts determine what is owed, those taxmen and creditors will demand payment. Aretha Franklin’s reported $80 million dollar net worth is almost certainly not all sitting in cash. Likely, it will be a blend of real estate, personal property, record and song rights, and other fairly illiquid assets. Now those who are owed dollars are generally not willing to wait. They and the courts will demand payment in short order. Where there’s smoke, there’s fire. Instead of Ms. Franklin’s heirs deciding how and when to liquidate many of her assets, there will be a fire sale (which almost never leads to generating top dollar for these assets). They’ll be negotiating with a gun to their head (never a good position to be in) and will have to take what they can get to pay the debt.
Creditors, as I mentioned above, are often an issue in large celebrity estates. Since there is no will and everything is open to the public, there is likely to be even more creditor claims. Some will fall through the cracks. However, the massive cost the estate (and her children) will likely have in lawyer’s fees will be immense. Each of her children will likely have their own counsel defending their interests. Those dollar signs will just keep piling up and up. If things were handled appropriately, administration of her estate could have come to a much quicker and unified resolution.
Taxes. There will be taxes. Lots and lots of taxes. I’ll put it this way, if her estate is worth $80 million and she gets the new very favorable $11.2 exclusion, she’ll owe Federal estate taxes on roughly $68,800,000. Considering the federal estate tax is roughly 40%, that means there will be approximately $27,520,000 owed in federal estate taxes. Fortunately, Michigan is one of the states that doesn’t impose a State estate tax. Remember above when I mentioned liquidity? Well, now think about having to come up with almost $30,000,000 in taxes… yikes! It’s sad. If trusts, insurances, and other savvy strategies were utilized, much of the taxes could have been avoided.
R-E-S-P-E-C-T Aretha Franklin in her famous song, RESPECT, sang the words, “find out what it means to me.” Sadly though, without the estate planning – no one will know what her estate meant to her. Instead, her family will be fighting a long and contentious court battle during an extremely difficult time in their lives. It is hard enough to lose a mother, let alone an icon who did so much good for the world. She is a person I’ve always admired and find it such a shame that she did not implement an estate plan prior to her passing. At Diversified, LLC, estate planning is one of the key focal points of creating lifelong wealth. We pride ourselves on being catalyst in our clients lives so they don’t end up in a unfavorable position such as this. Estate planning is one of the big three focal points (along with financial and tax planning) that helps our clients achieve financial success.