On estate planning even celebrities fail to plan.
You may never walk a red carpet, but you can plan for the future.
The “lifestyles of the rich and famous”enthrall and repel us. But beyond their over-the-top behaviors, these people have the same concerns as family business owners when it comes to estate planning. They want to provide for their loved ones and avoid giving a whopping percentage of their assets to the government.
But what they want and what transpires are often two different things. There are lessons to be learned from what celebrities do and fail to do in their planning practices. Let’s look at some.
Marilyn Monroe. Monroe left 75 percent of her estate to her acting coach, Lee Strasburg, instead of putting her assets into trust. Following Strasburg’s death, his third wife, a woman who didn’t even know Monroe, auctioned off what was left of her estate for somewhere between $20 million and $30 million. A trust could have provided for Strasburg during his lifetime with the assets then being directed to other worthy persons or causes at his death rather than to a stranger.
James Gandolfini. “Tony Soprano” was worth $70 million when he died. He divided his estate among his wife, daughter, and two sisters, but he failed to take advantage of the unlimited marital deduction and paid more than half his estate to the government.
Michael Crichton. Crichton, the author of countless bestsellers, created a family feud when he died. His fifth wife, Sherri, was pregnant at the time, but he left out any provision for their future son to be a beneficiary of his estate. When Sherri sued to have their son included, Crichton’s daughter from his fourth wife, Taylor, countersued and set off a well-publicized court battle.
Elvis Presley. Elvis was worth $55 million when he died, but because he didn’t have a proper estate plan, taxes and fees consumed about three-quarters of his assets.
Celebrities can also provide some positive models for family-owned business leaders. When Joan Rivers died, it gave family business owners a rare window into a thoughtful planning process. First, she planned for the unexpected; she underwent routine outpatient surgery; however, things didn’t go well, and complications led to a coma and eventual death.
Rivers had briefed her daughter Melissa on her estate plan prior to the surgery; this is an example of effective family communication resulting in a clear understanding about senior generation hopes and wishes. Rivers had her assets titled properly so that she avoided capital gains taxation via a stepped-up basis at death. Rivers’ estate has been valued at $290 million.
Probably the best example of estate planning from a noted personality comes from Jacqueline Kennedy Onassis. The main feature of Jackie’s estate plan was the creative use of a Charitable Lead Trust (CLT). In a CLT, assets are transferred into the trust, and a set amount of money is distributed to charity each year. Once the period of the trust expires, in Jackie’s case 24 years, the assets revert to the beneficiaries named. That means that next year, the assets of her trust will pass to her grandchildren, the oldest of whom will be about 30. A CLT provides for a way to do some social good, pass assets efficiently, and potentially avoid all estate taxation. Selling furniture might not get you celebrity and a walk down the red carpet, but there’s still a lot to learn from the stars we mentioned. For family business owners, the following is a brief summary of 10 estate planning best practices.
- Review your plans frequently. Recent changes to estate law may actually diminish the necessity for complexity in your estate plan.
- Think about your family business first and estate taxes second. All too often a family business advisor obsesses over avoiding taxation. In the case of family businesses, a common mistake is passing an operating business to a surviving spouse to defer taxes thereby placing the survivor in the awkward, uncomfortable, and even dangerous position of running a company, choosing successors, etc.
- Be careful with ownership succession planning (part one). Some family business owners are adamant they won’t pass business assets to their children who are unlikely to ever work in the business. They rationalize that they could be creating a minefield of conflict between children who work in the company and those who don’t. This could be a valid concern, but it can also be ameliorated by utilizing one of many smart family business succession planning techniques.
- Be careful with ownership succession planning (part two). Other family business owners are adamant that, since they love their children equally, their assets should be distributed equally. This thinking is often discouraged (see No. 3 above), but complications can be ameliorated by including protections for employee heirs relative to non-employee heirs and vice versa. It doesn’t matter if a family-owned business subscribes to philosophy No. 3 or this one.
- Be careful with ownership succession planning (part three). If your children don’t get along well now, just wait until you’re gone!
- Your life insurance arrangement is probably a mess. Life insurance is the most often purchased yet least understood financial product. Owner and beneficiary designations can cause unnecessary taxes or money going to inappropriate people or places.
- If you’re not married to the mother or father of your children, things get really complicated. It’s challenging to plan for both a family-business owner’s children and a spouse who isn’t the biological parent. A client well over 70 years old is still waiting for her inheritance from her father; she only stands to inherit once the stepmother dies.
- If you’re divorced, check everything! A routine analysis revealed that a client still had his ex-wife named as beneficiary of his considerable retirement plan account.
- Be careful when using generation-skipping trusts. Generation-skipping trusts can provide for significant estate tax savings for future family generations, but the structure of the trusts can interrupt the successful growth and logical succession of a family business.
- Utilize buy-sell agreements. Buy-sell agreements can solve a host of potential estate planning issues, but you need to make sure your buy-sell documents are coordinated with your estate documents. If your buy-sell contract says your partner buys you out at your death, but your wish is that your business pass to your son and daughter, both you and your children are going to be disappointed. A buy-sell contract overrides wishes stated in a will or trust.