Revocable Trust

Prince’s Estate Hits the IRS with a Million Dollar Lawsuit

Filing probate documents was just the beginning of process that still hasn’t ended the bad news from the Prince estate. He did not have a spouse or children, but Prince had half-brothers and half-sisters, says a recent article from Forbes titled “Prince’s Estate Sues IRS Over Claimed $135 Million Tax Value.” There were a number of claims against the estate, and claims by the estate as well, including a wrongful death action that was eventually dismissed. Prince Sues IRS

However, just like anyone else who dies without a will, probate takes a long time and is expensive. Things also get complicated quickly, especially with an estate of this size.

One of Prince’s half-sisters, Tyka Nelson, sold a portion of her share of the estate to Primary Wave, a music publisher. So did another sibling. And then the tax troubles began. Cash poor or not, estates must pay a federal estate tax of 40%. A federal estate tax return needs to be filed, and while audits are rare, almost every estate of this magnitude is audited by the IRS. The estate reported a taxable value of $82 million, but the IRS isn’t satisfied.

Estate tax fights with the IRS can go on for a long time. Michael Jackson’s estate battle with the IRS is still going on—and he died in 2009.

Papers filed by Prince’s estate in the U.S. Tax Court show that the estate reported a taxable value of $82 million, but the IRS claims that the value is really $163 million and wants an additional $38.7 million. In every case, Prince’s estate has obtained appraisals to support its reported values, but the IRS has its own appraisers who disagree.

Even if Prince had a will, there still could have been problems. Heath Ledger had a will, but it was five years old when he died and there was no provision made for his daughter. James Gandolfini had a will, but his estate gave the IRS $30 million of his $70 million. These stories make estate planning attorneys cringe. Seymour Hoffman, Heath Ledger, and James Gandolfini’s estates all ended up with wills in probate, which is public, expensive, time-consuming and unnecessary. A will does have to go through the court process, but the use of a revocable trust could have disposed of their assets outside of probate. A simple pour-over will would have given everything to the revocable trust, simply, and privately in terms of the ultimate inheritance disposition.

Estate planning attorneys advise clients to update wills and trusts every time there is a birth, marriage, divorce, etc. It is good advice for both celebrities and regular people.

You can give an unlimited amount to your spouse during life or on death. Prince’s estate may face a 40% estate tax, but if he had been married and left his estate to his spouse, there would not have been any federal estate tax until the death of the spouse.

A lesson for the rest of us: have an estate plan, including a will and make sure that it includes tax planning.

Reference: Forbes (Oct. 7, 2020) “Prince’s Estate Sues IRS Over Claimed $135 Million Tax Value”

Having a Will Is Not The Same As Having An Estate Plan

A last will and testament is an important part of an estate plan, and every adult should have one. But, there is only so much that a will can do, according to the article “Estate planning involves more than a will” from The News-Enterprise.

estate plan
Having a Will and having an Estate Plan are as different as apples and oranges.

First, let’s look at what a will does. During your lifetime, you have the right to transfer property. If you have a Power of Attorney it gives someone you name the authority to transfer your property or manage your affairs, while you are alive. In most states, this document expires upon your death.

When you die, a will is one piece of your estate plan that is used to transfer your property, according to your wishes. If you do not have a will, the court must determine who receives the property, as determined by your state’s law. However, only certain property passes through a will.

Individually owned property that does not have a beneficiary designation must be transferred though the process of probate. This includes real property, like house or a land, if there is no right of survivorship provision within the deed. The deed to the property determines the type of ownership each person has.

Couples who purchase property after they are married, usually own the property with the right of survivorship. This means that the surviving owner continues to own the property without it going through probate.

However, when deeds do not have this provision, each owner owns only a portion of the property. When one owner dies, the remaining owner’s portion must be passed through probate to the beneficiaries of the decedent.

Assets that have a designated beneficiary do not pass through probate, but are paid directly to the beneficiary. These are usually life insurance policies, retirement accounts, investment and/or bank accounts. Your will does not control these assets.

Beneficiaries through the will only receive whatever property is left over, after all reasonable expenses and debts are paid.

If you wish to ensure that beneficiaries receive assets over time through your estate plan, that can be done through a trust. The trust can be the beneficiary of a payable-on-death account. A revocable trust avoids property going through the probate process and can be established with your directions for distribution.

A will is a good start to an estate plan, but it is not the whole plan. Speak with an estate planning attorney about your situation and they will be able to create a plan that addresses distribution of your assets, as well as protect you from incapacity.

Reference: The News-Enterprise (September 30, 2019) “Estate planning involves more than a will”

What’s the Difference Between a Quitclaim and a Warranty Deed?

When you buy, sell, or transfer ownership of a property to another, you need to be aware of what type of deed a property has, and what type of deed to use when you transfer your interest in a property to someone else. It’s most helpful to know the difference between a quitclaim and a warranty deed.

the difference between a quitclaim and a warranty deed
Two of the most commonly used deeds in property transfers are the quitclaim deed and the warranty deed.

Bankrate explains in its recent article, “Quitclaim vs. warranty deed: What you need to know,” that a quitclaim deed is a deed that transfers the actual legal rights to a property that the grantor has to another person. That is without any representation, warranty, or guarantee. A quitclaim deed gives no guarantee of the title status of a property, any liens against it or any encumbrances. It really means that you get only what a grantor may have—nothing more. Therefore, if the grantor has nothing, you get nothing.

A quitclaim deed may work well, if the grantor indeed has the legal rights to a property, and there are no liens.

Quitclaim deeds are used in safer situations where there’s little question about the ownership interest in a property. They can be used when a person is transferring ownership of real estate to family members. However, a warranty deed is generally used in more complex situations, including when someone is getting a mortgage to buy a home.

With a warranty deed, the seller is guaranteeing that she has a defensible ownership interest in the property being transferred and can legally transfer her ownership interest to the buyer.

Warranty deeds are the better option, when you’re purchasing property. Buyers want to be certain that you own the property, so they want you to sign a warranty deed. If you don’t actually own the property, the buyer can sue for a breach of warranty.

If you’re transferring property to your child or your revocable trust agreement as part of an estate plan, a quitclaim deed would be just fine because it accomplishes the change of ownership, but you’re not providing any warranty for the transaction.

All real estate transactions that are arm’s length transactions, use warranty deeds.

You should be aware and understand the type of transaction into which you’re entering and the difference between a quitclaim and a warranty deed.

Reference: Bankrate (September 4, 2019) “Quitclaim vs. warranty deed: What you need to know”

Your Will Isn’t the End of Your Estate Planning

Even if your financial life is pretty simple, you should have a will. And once you have a will, that’s not the end of your estate planning.  There’s still some work to be done to make sure your family isn’t left with an expensive mess to clean up.  Assets must be properly titled, so that assets are distributed as intended upon death.

Your Will is only one piece of your estate planning.

Forbes’ recent article, “For Estate Plan To Work As Intended, Assets Must Be Properly Titled” notes that with the exception of the choice of potential guardians for children, the most important function of a will is to make certain that the transfer of assets to beneficiaries is the way you intended.

However, not all assets are disposed of by a will—they pass to beneficiaries regardless of the intentions stated in the will. Your will only controls the disposition of assets that fall within your probated estate.

An example of when a designated beneficiary controls the disposition of a financial asset is life insurance. Other examples are retirement accounts, such as a 401(k) or an IRA. When there’s a named beneficiary, assets will be distributed accordingly, which may be different than the intentions stated in a will.

The title of real estate controls its disposition. When property is jointly owned, how it is titled determines if the decedent’s interest in the property passes to the surviving partner, becomes part of the decedent’s estate, or passes to a third party. Titling of jointly owned property can be complicated in community property states.

In the same light, a revocable trust is an inter vivos or living trust that’s created during the grantor’s life, as part of an estate plan.

Such a trust can be used to ensure privacy, avoid the expenses and delays in the probate process and provide for continuity of asset management. A critical part of the planning is that the grantor must transfer (or retitle) assets to the trust.

Wills are very important in estate planning. To ensure that your estate plan fulfills your intentions, talk to an estate planning attorney about the proper titling of your assets.

Reference: Forbes (May 20, 2019) “For Estate Plan To Work As Intended, Assets Must Be Properly Titled”

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