By Kent Phelps, Attorney & CEO of Trajan Estate
On August 29th, Michael Jackson would have turned 64 years old. His children are now 25 (Prince), 24 (Paris) and 20 (Blanket).
Some years ago, I read Michael Jackson’s estate planning documents. As an estate planning attorney, it’s fun to become acquainted with estate planning mistakes of the rich and famous – James Brown, Elvis, Howard Hughes, Marilyn Monroe, and even former Chief Justice of the Supreme Court Warren Burger.
On June 1st, 2010, Michael Jackson’s estate planning documents were made public. The controlling document is a revocable living trust. Despite news of his financial woes during life, his estate was very much in the black, estimated at $300 million and growing exponentially since his death in June, 2009.
The trust provides for the following beneficiaries after taxes: 20% to charities that benefit children’s causes; 40% to his mother; and the remaining 40% to his children equally. His children will receive income as needed for their support until age 30. At age 30, his children will receive a distribution of one-third of their share. At age 35, half of what’s left, and at age 40, everything remaining. His mother was entitled to receive her share immediately.
So where did the King of Pop go wrong?
Age-based, mandatory distributions
There is nothing about having a birthday that magically qualifies our children to handle money. At the rate of post-death sales of Michael Jackson recordings, some estimate Prince, Paris and Blanket Jackson will become billionaires.
Now imagine a check for that kind of money, or even a fraction of that kind of money, being handed over to a 30, 35, or 40 year old with no protection, conditions, or strings attached!
Drug addiction? No problem, take the money and sniff it up your nose. Lawsuit? Oh well. Easy come, easy go.
Divorce? If the children are not careful, they stand to lose half of Michael Jackson’s wealth to an ex-spouse. We call the drug dealer, plaintiff, and ex-spouse in these situations the “unintended beneficiaries” of Michael Jackson’s estate.
We can do better than Michael Jackson. Make sure you tell your attorney to include “discretionary distribution” language in your trust that gives the trustee discretion to withhold distributions and keep the money in trust if your beneficiaries are facing a crisis event such as an addiction, lawsuit, or divorce. The money can sit safely inside the trust out of the reach of the unintended beneficiaries until the smoke clears.
$135 Million in Voluntary Taxes
Michael failed to realize the impact of the oft ignored but hefty estate tax. For those who died in 2009, everything over $3.5 million that did not go to charity was taxed at a rate of about 45%. That equates to about a $135 million tax bill for Michael Jackson’s estate, depending on the valuation of assets, including royalty, copyright, and intellectual property interests at the time of his death. (Visit with one of our attorneys to determine if you have estate tax exposure under current law.)
We can do better and be like Sam Walton, whose net worth eclipsed Michael Jackson’s by many times. Yet Sam (and his astute attorneys) understood the “own nothing, control everything” concept and structured his business and assets accordingly, resulting in zero estate taxes on his death.
We call the estate tax a “voluntary tax.” Your heirs pay it only if you don’t plan.
The Golden Goose is Dead
Michael and his attorneys missed a golden opportunity to perpetuate wealth for multiple generations administered according to a solid set of values. The trust will go away after the last child reaches 40-years old.
By requiring outright distributions of trust assets to the children at ages 30, 35, and 40, with nothing to be left to future generations. Michael killed the golden goose.
You can do better by asking your attorney to include provisions in your trust that permit the trust to continue on in perpetuity. These provisions, sometimes referred to as “dynasty provisions”, perpetuate your values through your bloodline, as well as your wealth, allowing you to truly leave a legacy.
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