The iconic pop-star, Prince, died unexpectedly last Thursday at the age of 57. There are a lot of “unknowns” right now, including how he died and what’s to come of his estate. Regarding the latter, unfortunately, if he did not have a trust (or a series of trusts) in place, or even a will, there are a lot of things we can already surmise. And these don’t bode well for Prince or his financial legacy.
What we know so far is Prince’s sister, Tyka Nelson, 55, filed probate documents with the Carver County District Court in Minnesota on April 26, 2016, asserting that her brother died without a will (intestate). Ms. Nelson’s petition also listed five half-siblings as heirs. Since, for inheritance purposes, Minnesota law treats surviving half-siblings the same as full siblings, it appears that six heirs may have a drawn-out family battle.[i] Today, it appears a special administrator has been appointed by the Court.[ii]
1. From Private to Public
Prince’s kept his life off-stage a mystery. “He was a private person,” Prince’s former fiancée and music collaborator Sheila E. said on “Good Morning America.”[iii] And if Prince had an estate plan in place at the time of death, he could have kept it that way. Trusts are private contracts, and never really have to be shared publicly. But considering the court documents recently filed by Prince’s sister, it appears that Prince didn’t plan for his eventual demise. Thus, a very public and lengthy probate will ensue, ensuring TMZ and the like will have gossip fodder for years to come.
2. From Control Freak to Total Lack of Control
The New York Times reported that Prince often preferred to deal personally with record companies, concert promoters and even digital music services. “But that history of self-sufficiency could have severe consequences if Prince did not leave an orderly estate — a strong possibility if no will turns up, several music-industry lawyers and executives said.”[iv]
Prince, who fought hard to retain as much control as possible, now has absolutely no control over the state of his affairs. Prince’s estate includes control of his image, likeness, name and recordings, potential licensing rights for film, TV, commercials and videogames, – all that he rarely exploited – plus his voluminous collection or “vault” of unreleased recordings. Monica McCabe, an entertainment and intellectual property lawyer who previously represented Prince commented on this conundrum, stating “he sought a lot of control over his works. His whole dispute with his record company years ago was just about that—control over his musical creations. It could be any number of things. A lot of people don’t want to deal with the fact that they’re going to die some day, so they just put it off or don’t deal with it all. It’s interesting, because he had so much unpublished work that you would think he would have wanted to have some kind of control over that.”[v]
Considering Prince’s need for control during his life, it’s even more unfortunate that he didn’t seize the opportunity to plan for his legacy after his death. Through estate planning, he could have at least appointed his own personal representative(s)/executor(s) or successor trustees to control every aspect of his assets and legacy.
3. Charity Loses, the Tax Collector (and Lawyers) Win
Besides being talented, Prince was also benevolent. Details about his charity work have been flooding out since his death. Here are some highlights:
One of Prince’s charities, Love 4 Another Charities, has donated millions of dollars to schools, shelters and community programs in Los Angeles, New York, Chicago, his native Minneapolis and Iowa. Contributions also were given to organizations, schools and facilities in Georgia, Texas, Wisconsin and Ohio. [vi] In 2011, Prince donated $1.5 million to local charitiesin New York, with $1 million going to Harlem Children’s Zone and another $250,000 each going to Uptown Dance Academy and American Ballet Theatre.[vii] He helped to create ‘Yes We Code’, aimed at helping low-income youth get into technology and promoting diversity in the tech industry. It now has 15 major technology companies working with kids in the ‘hood, getting them ready to have jobs in Silicon Valley.[viii] Prince worked with Green for All, an organization which creates green jobs in disadvantaged communities. If you have solar panels in Oakland, Prince may have paid for them.[ix] Prince also supported numerous other charities, including City of Hope, the Elton John AIDS Foundation, the Jazz Foundation of America, The Bridge, Urban Farming, H.A.L.O., the Edith Couey Memorial Scholarship Trust Fund, the Elevate Hope Foundation, and the Goss-Michael Foundation.[x] With such humanitarian acts during his life, it’s almost inconceivable that he wouldn’t have wanted to pledge some of his wealth to charity upon his death. Besides losing a musical genius, philanthropy lost out as well.
Instead, much of this money will go to pay an enormous tax bill. Minnesota residents are subject to an estate tax for estates of more than $1.6 million. But there is also a federal estate tax for anything above the lifetime exemption. The federal exemption rate of $5 million is indexed to inflation and currently sits at $5,450,000, meaning citizens are subject to an estate tax for estates valued over this amount. Unfortunately for Prince’s heirs, with no estate planning in place, his behemoth estate is surely going to be taxed at the maximum Minnesota estate tax rate of 16% and the federal maximum rate of 40%.
If managed responsibly, the value of Prince’s estate should grow substantially since his death due to skyrocketing record sales and the eventual release of countless unknown treasures in his music vault. But for the purposes of valuing Prince’s estate for estate taxes, the approximate value at the date of his death will be used. There has been rampant speculation through the news media, ranging as high as $500 million, though the number I’ve seen quoted most often is $300 million.
If this valuation turns out to be remotely true, Prince’s estate will owe a lot of taxes. $100 million to $150 million in estate taxes is great for the government, but bad for someone who held such strong philanthropic beliefs. Charitable deductions are unlimited, meaning Prince could have given away 100s of million to charity, thus increasing his philanthropic legacy and significantly reducing his tax bill.
In addition to the heavy tax bill, Prince’s estate will rack up sizeable attorneys’ fees to administer the estate. Probate cost varies from state to state, and from estate to estate. Minnesota no longer uses a statutory fee schedule for probates. Instead, the fees that attorneys charge must be “just and reasonable” for services rendered to the personal representative. This standard encompasses several factors, but “the value of the estate shall not be the controlling factor.” The factors for determining if the fee is “just and reasonable” include: (1) the time and labor required; (2) the experience and knowledge of the attorney; (3) the complexity and novelty of the problems involved; (4) the extent of the responsibilities assumed and the results obtained; and (5) the sufficiency of the assets properly available to pay for services. An often-quoted average for administration costs in Minnesota is between 3% to 7% of the total estate at the time of death. Although this probate is sure to be complex, the attorneys will be more than adequately compensated. Another loss for charity since an estate plan could have greatly simplified the process and significantly cut down on costs.
4. What’s the Take Away?
What do you have in common with Prince? Setting aside the publicity, every other aspect of Prince’s estate is a magnified example of what happens when everyone dies intestate (without a will or trust in place). Generally, the Courts are forced to step in, appoint someone to take charge, collect your assets, pay your debts and distribute your remaining assets. Although the majority of Americans will not be liable for estate taxes (much less a $100m+ bill), all the other problems remain: (1) it’s public and lengthy; (2) you have no control over what happens to your assets; and (3) in almost all cases you’ll pay more in the end (to the courts, administrators, attorneys, etc.) than if you set up an estate plan in advance. So, the big question is — where do you want your money to go?