If anyone ever needed convincing that they needed to develop – and keep updated – a good estate plan, all they need to do is read the headlines when a famous celebrity dies without proper estate planning in place. Not only do these cases wreak emotional havoc on the heirs left behind, they are also a testimony to how much time and expense could have been avoided with proper planning. It’s true that significant wealth opens the door to any potential claims that could be made against an estate, and it certainly puts every good estate plan “to the test,” but these days, there is no good reason for bad planning.
So what are some of the most common estate plan mistakes celebrities have made that should serve as a lesson to us all?
1. Not having a will (or plan at all)
While Prince Rogers Nelson’s death on April 21st of this year shocked the world, it shocked the estate planning world even more with the news that he may have died without a will. With an estimated estate worth as much as $300 million (considering his musical output, trademarks to his brand and physical assets), if no will is found, it could take years to settle his estate. Prince’s closest family members include one sister and several half-siblings, who stand to inherit what is left of this fortune, after the IRS, court system and lawyers are all done with it, which means it could be substantially less than this estimated figure.
When NFL quarterback Steve McNair was found shot to death by his girlfriend in 2009, this was just the beginning of several humiliations for the wife he left behind. Even though McNair had an estate worth close to $20 million and several potential heirs, he had neglected to draft a will. That meant that eventually, McNair’s widow had to beg a probate judge to release some money from the estate, which had been frozen pending a partial payment of $3.7 million in federal and state estate taxes. Several years later, the estate was still frozen. Between taxes, legal fees and court costs, no one really knows how much of the $20 million will make it into the hands of his heirs. The worst part is that most, if not all, of this could be avoided with proper planning.
Another celebrity who should have done better planning was John Denver. When he died in a plane crash in 1997, he did not leave a will. His family had to wait six years to get his estate settled through probate court.
Some celebrities, like Redd Foxx may believe they don’t need a will. When he died in 1991, his estate had significant debt – not to mention the IRS chasing him for back taxes. Since we all know death doesn’t stop the IRS from trying to collect, 20 years after the star died, they were still waiting to be paid $3.6 million. His lack of planning reduced the likelihood that his estate will ever be right side up.
2. Not updating a will (or other estate documents) after a significant life change
When he died in 2008, Australian actor Heath Ledger had a will: it left everything to his parents and sisters. Problem is, he also had a young daughter, and had not updated his estate documents to include her. While his family eventually did the right thing and decided to give her the entire inheritance, legally, they didn’t have to, and she could have been left with nothing from her father’s estate.
After actor Gary Coleman died in 2010 of a head injury from a fall, three wills were found. The first one dated in 1999 left everything to his manager. The second dated in 2005 left everything to a woman he lived with at the time. The last one was handwritten in 2007 leaving everything to his then wife, Shannon Price. When the couple divorced the following year, Coleman never bothered to update this will. Worse yet, he also did not update his other estate documents, such as his medical power of attorney, which gave his ex-wife the authority to “pull the plug” after he slipped into a coma after his fall – and she did. Most people would not be comfortable knowing their ex-spouse still held the power of life and death over them, so it’s best not to overlook this need to update when “life” happens.
3. Not making use of a trust in the estate plan
Singer and songwriter Lou Reed had a simple estate plan: he had no children; just a wife and sister. And he did have a will, bequesting his entire $30 million fortune to both of them. However, because he had a will and not a trust, when his will was filed in probate court, all the details of his estate became public, including how much money he had and who received it. It’s likely he would not have chosen this kind of fame, if he had known better.
When people don’t have time to set up and fund (e.g. title assets in the name of that trust) a trust during their lifetime, they can do so upon their death through their will. This type of will is called a “pourover will,” which transfers estate assets into a trust after someone dies. This can be very handy tool for making sure assets eventually land where you want them to, but it has one significant drawback, as Michael Jackson’s family learned all too well: if the assets are not titled in the name of the trust before death (which helps to ensure privacy), they must be funneled through the probate court first before being “poured over” into a trust. Effectively, this means that all the family “dirty laundry” may still be “aired out” for the public to see, which is also what happened with Walter Cronkite’s family when he died back in 2009 with a will, and no trust.
Even if you have a very modest estate, establishing and funding a trust during one’s lifetime can help avoid family fights down the road. If you want to disinherit a child, if you’re in a second marriage and you want to protect assets for children from a prior marriage, or if there’s a sibling rivalry that you want to avoid, a trust helps protect against the likelihood of court battles, and increases the chances that estate assets will pass where they are intended to go much more smoothly.
4. Not considering the impact of estate taxes on the estate
Actor and Oscar-winner Philip Seymour Hoffman had the goal of not making his three kids “trust fund babies.” So against the advice of his attorneys, he left his entire estate to his girlfriend, believing she would take good financial care of his children. However, because they weren’t married, his estate got hit with a big estate tax upon his death, leaving less for the girlfriend and his kids. Not using trusts and other estate tax avoidance strategies was a huge cost, and while he obviously trusted his girlfriend, without funding trusts for his kids, he had no assurances his children would be taken care of in the same way he would have.
Best-selling author Tom Clancy died in 2013 leaving an estate valued at $86 million as well as a complex family situation. Some of his wealth went to his current wife and their minor daughter, while the rest went to four adult kids from a previous marriage. But because his estate documents were not clear enough, there was a big dispute over who should have to pay taxes on the estate.
Life insurance funded inside a trust is often a key strategy for dealing with estate taxes. Not providing for this can be especially painful for estates of owners of large assets, such as a business. The family of Robert H. Brooks, founder of Hooters restaurants, was not so fortunate to have such a plan in place. Brooks’ family ended up having to sell the restaurant chain and let go of its $1 billion a year in sales, partly because of estate taxes. The chain was reportedly worth up to $250 million when he died, and the estate tax rate was 46% at the time, meaning the family could have owed as much as $115 million in estate taxes back in 2006. Ouch!
At SRQ Wealth Management, our goal is to provide meticulous (and comprehensive) financial planning strategies to all our clients, which includes a periodic look at their estate plan, to make sure each plan is still reflective of their goals and circumstances – so no “tales from the crypt” can occur. If you feel your estate plan may need a “refresh” or “second opinion” in relation to your entire financial picture, we invite you to give us a call!
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.