Prince Rogers Nelson “Prince” died in April 2016 at the age of 57 leaving behind an estate with an appraised value obtained by the estate’s administrators of $82.3 million vs. a $163.2 million appraisal by the Internal Revenue Service (IRS). Now, not quite six years later, the estate has finally settled a long running dispute with the IRS over date of death values, compromising a total fair market value of $156.4 million. Finally, Prince’s Estate can be wound up and its assets distributed to Prince’s rightful heirs.
At the time of Prince’s death, almost thirty parties claimed a relationship to him and his fortune. When the “dust settled,” after considerable litigation and with help of DNA comparisons, the Judge determined that only six siblings were entitled to be the rightful heirs to his estate – Prince’s sister, Tyka Nelson, and five half-siblings (three half-brothers and two half-sisters). Two of his half-brothers have since died – Alfred Jackson in 2019 and John Nelson in 2021.
While six years seems like a long time (especially for the heirs awaiting their inheritances), there have been several other cases involving famous celebrities who died intestate (without a will) with huge fortunes that have taken even longer to settle. Several are named below:
Jimi Hendrix, the famous guitarist, died in September 1970 at the age of 27 in a London hotel. His estate has been one of the most litigated in history. It has been mired in family disputes and a myriad of legal battles related to royalties and copyrights that has lasted over 5 decades. With the passage of time, his estate is now estimated to be worth over $175 million.
Howard Hughes died in April 1976 at the age of 70. His estate’s assets were then valued at more than $2 billion. An unsigned carbon copy of a 1954 will was found, and later several documents also turned up purporting to contain his last wishes; however, none of those were ever accepted as being legitimate. The legal battles following his death lasted over 34 years.
The amount of time it takes to complete the administration of an Estate can vary widely but should never last the lengthy time periods previously mentioned. The obvious question is what is reasonable to expect? A “simple estate” with easy-to-value assets not subject to state or federal estate taxes and with easy to ascertain heirs can usually be closed within 12-18 months.
A “complex” estate, such as Prince’s, containing hard to locate or value assets, and lacking a will or trust, coupled with multiple claimants, difficult or complicated litigation, plus tax issues, may well take several years to complete.
An Executor or Personal Representative (PR) of an Estate serves in a “fiduciary” role. As a fiduciary, the PR needs to act in the best interests of the beneficiaries. This includes ensuring that all confirmed liabilities of the estate have been satisfied and that all income, gift, and estate taxes have been paid prior to complete distribution of estate assets. If the estate is subject to federal or state estate taxes, a “closing letter” must be obtained from each respective tax authority before the estate can be closed.1
There are many circumstances where estate liabilities are certain, and the estate has sufficient liquidity to allow partial distributions to beneficiaries in advance of a final settlement and closure of the estate. A common best practice is to prepare a written “Plan or Partial Plan of Distribution” agreed to by all interested parties. The point in time for partial distributions to be first considered is at least 4 months after the probate has commenced (after creditor period has run), 6 months after date of death (the estate tax “alternate valuation date”), or perhaps a bit later, 9 months after date of death when estate taxes are due to be paid.2 A Final Plan of Distribution to transfer the remaining assets to the beneficiaries is prepared at the conclusion of the estate.
With the above in mind, what are some takeaways and how might they affect you personally?
1. Know your assets and their value. This can be relatively simple when dealing with cash and/or marketable securities, but considerably more difficult with real estate, closely-held business interests (partnerships, joint ventures, corporations), patents and royalties, jewelry, fine art, and other valuable or unusual collectibles.
2. Take advantage of tax planning/saving opportunities. For 2022 the Federal lifetime gift, estate and generation-skipping tax exemption is $12.06 million.3 Provided the portability election is utilized, a married couple will have a combined $24.12 million of available exemption.4 The top Federal estate tax rate is 40%. One “fly in the ointment” for Minnesota residents is that the Minnesota tax exemption amount continues to be $3 million and state estate tax rates range from 13 – 16%.5
3. Consider lifetime gifts together with other techniques. The 2022 annual exclusion amount for gifts is $16,000, an increase from $15,000 in 2021.6 This means that an individual can gift up to $16,000 ($32,000 for a married couple) to each person without having to report the gift on a gift tax return.7 Please note that payments for education on behalf of another made directly to an institution is not considered a reportable gift. Paying for the private school or university tuition is a way to make gifts without reducing the available Federal lifetime exemption.
4. Consider charitable donations. Donations to a favorite charity either during lifetime or upon death can be an effective way to receive income tax deductions or reduce a taxable estate. Gifts may be given outright or through a variety of charitable gift planning arrangements such as trusts or endowments.
5. Consideration of your own family’s needs. Every family is of course different, and a “cookie cutter” approach to estate planning should never be used. A good estate plan should be carefully thought out and take into account the unique aspects of your family. Thoughtful communication within your family regarding your goals, desires, and the reasoning behind your decisions can avoid family fights, misunderstandings, and future litigation.
6. After a plan is implemented. It is a good practice to periodically review your estate plan (every 3 to 5 years) or sooner if there is a significant change in your life circumstances to ensure that your goals are still being met.
7. Choose the right people and/or entity to administer your estate or trust. We suggest not naming any individual as a fiduciary without informing them of the responsibilities that are entailed and obtaining their consent. Being appointed to a fiduciary role entails a great deal of work and responsibility. In many cases, it is advisable to involve a corporate trustee to act with an individual, or to act alone or as backup if need be, because they have professional experience in dealing with the relevant issues. In addition to your own personal contacts, it is a good idea to get recommendations from your attorney regarding professional fiduciaries and to perform other due diligence such as determining their capabilities to deal with the assets involved and the fees that will be incurred.
The purpose of this article is merely to provide general information and should not be construed as legal advice.
1For example, for estates required to file a federal estate tax return, Form 706, the Minnesota Department of Revenue will not issue a closing letter until it receives a copy of the federal closing letter issued by the IRS.
2The above time periods apply in Minnesota. Different time periods may apply to estates outside of Minnesota.
3Unless changed by legislation, the current Federal exemption amount is scheduled to sunset back to $5 million (adjusted for inflation) on January 1, 2026.
4 Portability applies only to the Federal exemption amount and allows a surviving spouse the ability to transfer the deceased spouse’s unused exemption amount for estate and gift taxes to the surviving spouse provided the election is made on a timely filed Federal estate tax return (Form 706).
5The State of Minnesota does not allow portability of the Minnesota exemption amount between spouses.
6This amount has been steadily climbing. In 2001 the annual exemption was $10,000.
7Gifts above $16,000 are classified as reportable gifts and require the filing of a gift tax return (Form 709).