Death and Taxes: Hard Lessons from Prince’s Lack of Estate Planning

Prince Died in 2016 Without a Will or Estate Plan

Initially, his estate was valued at $82.3 million, including 12 properties, fine art, a secret “vault” of unreleased music, rights to his published music, and financial interests in four companies.

After six years, the IRS and the estate’s administrators finally agreed to an estate value of $156.4 million.

Just over $5 million will be exempted from federal taxes, and after that, the tax rate is 40 percent. There is an additional 16% estate tax in Minnesota at death.

An estate the size of Prince’s could incur up to $84.9 million in estate taxes, due within nine months of the final valuation.1

Paying Large Estate Taxes

If there are sufficient liquid assets and cash in the estate, they can be used to pay the taxes. If not, the resulting distressed “fire sale” of assets could result in discounted prices and destruction of value for the heirs.

Life insurance is a cost-effective and efficient way to fund estate tax obligations for pennies on the dollar.If properly structured, the life insurance death benefit will not be subject to income tax or estate tax.2

Leveraging an Irrevocable Life Insurance Trust

One very effective strategy to reduce the cost of meeting estate tax obligations is the use of an Irrevocable Life Insurance Trust (ILIT) to purchase life insurance outside of the estate.

Here’s how it works:

1)   Life insurance is purchased with the ILIT as owner and beneficiary.
2)   At death, the ILIT receives the death benefit and pays the estate taxes.

By using this technique, the insured not only removes the gifted assets from the estate but creates a plan for their heirs that provides an income- and estate-tax free pool of money to pay the estate taxes.

Find out how we can help you develop a plan to pursue your financial goals for this generation and the next. Email or call us directly at (813) 273-9416.
1. Assumes 2016 federal and state exemptions, 40% federal estate tax rate, and 16% Minnesota estate tax rate.
Federal estate taxes are estimated to be $59.4 million and state death taxes are estimated to be $24.2 million.
2. Whether the proceeds of a life insurance contract are included in the gross estate of the insured depends on if at the time of death (or within the three-year period prior to death) the insured held any “incidents of ownership” with respect to the policy. IRC §§2042 and 2035(d)(2).
Securities and Investment Advisory Services Offered Through M Holdings Securities, Inc. A Registered Broker/Dealer and Investment Advisor, Member FINRA/SIPC. Thomas Financial is independently owned and operated. File #4301645.1