Learning from Celebrity Estate Planning Mistakes

Many people assume that estate planning is only for the wealthy. This couldn’t be further from the truth. An estate is simply everything you own at the time of your death, be it a car, a house, or even your social media accounts. Having a well-crafted estate plan is crucial for anyone who wishes to have control over what happens to their assets after they’re gone.

The importance of a solid estate plan becomes glaringly apparent when examining the cases of various celebrities who, despite their immense resources and access to top-tier financial advisors, ended up with failed or problematic estate plans. The ensuing legal battles, family feuds, and lost fortunes serve as cautionary tales for the rest of us.

In this article, we delve into the world of wills, trusts, and beneficiary designations to understand the common mistakes made in estate planning, using celebrities as our case studies.

• What Is an Estate?
• Understanding Estate Plans and Their Importance
• Lifestyles of the Rich and Famous: Estate Fails

What Is an Estate?

An estate refers to everything you own at the time of your death. This includes both tangible and intangible property.

Tangible Property Examples:

• Cars, furniture, livestock
• Collectibles like artwork, antiques, and coins
• Real estate properties

Intangible Property Examples:

• Checking and savings accounts
• Investments like stocks, bonds, and mutual funds
• Pension accounts
• Life insurance policies
• Business ownership

When someone passes away, their estate goes through a legal process known as probate. During this process, their assets are inventoried, debts are paid off, and the remaining assets are distributed to heirs or beneficiaries according to the deceased person’s will, or by law if there is no will.

Understanding Estate Plans and Their Importance

An estate plan is a comprehensive strategy designed to manage and distribute your assets after you die. An estate plan can cover various aspects of a person’s financial life, including how their assets are controlled, who inherits them, and what happens if they become incapacitated and can’t make decisions for themselves.

Each person’s estate plan will be unique to their situation, but the underlying reasons for having one are generally the same.

Four main reasons for having an estate plan:

1. Cutting Costs: Reducing the expenses and taxes linked to probate and will settlement.
2. Legacy Planning: Ensuring your wishes are known to loved ones.
3. Asset Management: Controlling how your assets are distributed.
4. Family Harmony: Minimizing disputes among family members after your passing.

Check out our useful guide and checklist for estate planning.

Common components of an estate plan can include:

• Will: A legal document outlining how you want your assets distributed after your death.
• Trust: Legal entities that hold and manage assets for the benefit of specific people or purposes.
• Power of Attorney: Grants someone you trust the legal authority to make financial and other decisions on your behalf, especially if you’re unable to do so yourself.
• Health Care Proxy: Also known as a Medical Power of Attorney, this document designates someone to make healthcare decisions for you if you’re unable to do so.
• Living Will: Specifies your preferences for medical treatment if you’re unable to communicate your wishes.
• Beneficiary Designations: Specifies who will receive assets from retirement accounts, insurance policies, and other accounts that allow you to name a beneficiary.
• Guardianship Designations: For those with minor children, this involves specifying who will take care of them should both parents become incapacitated or pass away.

In this article, we will be focusing on three key elements of estate planning: wills, trusts, and naming beneficiaries for your assets. To plan for situations where you might be unable to make decisions for yourself, check out our guide on powers of attorney.

What Is a Will?

A will, often referred to as a “last will and testament,” is a legal document that specifies your final wishes. It covers important details like how you want your property to be distributed after your passing and who you designate as guardians for dependent children. It’s a fundamental component of estate planning, and most people should have one.

If you die without a will, this is called dying intestate, the state takes over and decides how to distribute your assets. This can lead to several complications for your family, such as:

• Incurring legal expenses to resolve your estate.
• Losing the ability to redirect an inheritance (for example, your family can’t choose to pass an inheritance to someone else in lieu of receiving it themselves).
• Experiencing conflict or disappointment because verbal agreements or promises about asset distribution are not honored during the probate process.
• Remaining uncertain about how you intended to divide your assets, causing potential strife among family members.

Recent surveys reveal that 2 out of 3 U.S. adults don’t have a will in place. Common reasons for this include:

• Procrastination—simply not getting around to creating one.
• Believing it’s not urgent or necessary.
• A reluctance to confront the topic of death.

Don’t postpone this important document. Drafting a will doesn’t have to be expensive. Hiring an estate lawyer is the best way to ensure everything is correctly done and valid, but if you do not have a sizable or complicated estate this isn’t necessary.

What Is a Trust?

A trust is a legal document directing the management and distribution of your assets. While wills and trusts can overlap, they serve different functions. Having a will doesn’t eliminate the need for a trust, and having a trust doesn’t mean you can forego a will.

In a trust, the person creating it, known as the grantor, sets the rules and appoints a trustee to enforce them. The people or entities benefiting from the trust are called beneficiaries.

There are two main types of trusts: revocable and irrevocable.

• A revocable trust can be changed or canceled by the grantor, but its assets may be subject to creditors and estate taxes.
• An irrevocable trust, once set up, can’t be changed and its assets are generally shielded from estate taxes.

Unlike wills, trusts usually skip the lengthy and public probate process. Because they’re more complex, it’s advisable to consult an estate planning attorney when creating a trust.

Learn more about the differences between wills and trusts.

Designating Beneficiaries

Estate planning focuses on ensuring that your assets go to the people you intend after you pass away. Don’t overlook proper beneficiary designations.

Assets Subject to Beneficiary Designations:

• Retirement Accounts: IRAs, 401(k)s, and other retirement plans often allow you to designate beneficiaries. This ensures a seamless transfer of these funds directly to the named individuals, bypassing probate.
• Life Insurance Policies: Naming beneficiaries in your life insurance policy determines who will receive the death benefit. This can be a spouse, child, or any other person you designate.
• Other Financial Accounts: Certain financial accounts, such as payable-on-death (POD) bank accounts or transfer-on-death (TOD) brokerage accounts, also allow for beneficiary designations.

Life brings many changes. It’s important to regularly review and update your beneficiary designations to reflect your current wishes. Failing to do so could result in unintended consequences, such as an ex-spouse receiving assets you intended for your children.

Common Pitfalls to Avoid:

• Outdated Designations: Failing to update beneficiary designations after major life events like marriage, divorce, or the birth of children can lead to unintended consequences.
• Per Stirpes vs. Per Capita: Understanding the difference between per stirpes and per capita is vital. Per stirpes distributes assets among a deceased beneficiary’s descendants, while per capita divides assets equally among living beneficiaries.
• Overlooking Contingent Beneficiaries: Always designate contingent beneficiaries. If your primary beneficiary predeceases you, a contingent beneficiary ensures a smooth transition of assets.
• Designating Minors: Minors should not be listed as beneficiaries. If you wish for your children to inherit assets, review our guide: Can a Minor Be a Beneficiary?

Lifestyles of the Rich and Famous: Estate Fails

You would think that with all their money and success that celebrities would have the best of the best when it came to financial planners and making sure their affairs are order. This isn’t always the case. Let’s delve into some cautionary tales to learn valuable lessons about estate planning.

Prince

Quotacy is headquartered in Minnesota, so we’re particularly interested in the case of the Artist Formerly Known as Prince. His sudden death at age 57 in April of 2016 shocked many people.

Prince did not leave behind a will or trust, leading to a lengthy six-year process to settle his estate. In the end, his estate, valued at $156 million, was divided between two LLCs, each controlled by three of Prince’s six half-siblings. During this period, the estate incurred nearly $9 million in administration fees and tax penalties, not including attorney and consultation expenses.

Sonny Bono

Sonny Bono, known for his singing and political career, died in a skiing accident at 62. Lacking a will or trust, his wife, Mary, fought for years to be the estate’s executor. She also faced multiple lawsuits from claimants to his $2 million estate. The lack of a clear estate plan led to costly legal battles and court expenses.

Marlon Brando

Legendary actor Marlon Brando had a will but faced numerous lawsuits claiming he had verbally promised assets to various individuals. His estate, valued at $20 million, got ensnared in over two dozen lawsuits. One lawsuit from his housekeeper resulted in a $125,000 settlement.

Heath Ledger

Heath Ledger died far too soon at the age of 28. He left behind a will drafted before the birth of his daughter and failed to update it to include her.

U.S. law determined that his will was valid, and its instructions needed to be carried out. The will stated his assets were to go to Ledger’s parents and sisters, leaving his daughter and her mother no rights to make a claim on his $20 million estate.

However, Ledger did have a $10 million life insurance policy, which had its own legal issues, to which his daughter was the named beneficiary. This then brought up questions as to Ledger’s wishes. Did he want his estate to go to his parents and sisters since he purchased this policy for his daughter? Or did he really just forget to update his will?

Ledger’s family eventually agreed to give his daughter the majority of the estate, believing that is what he would have wanted.

Philip Seymour Hoffman

Philip Seymour Hoffman died at age 46. He wrote a will after his first child was born but failed to update it to account for his two other children who were born later. In his will, he designated his long-time girlfriend as the sole heir to his $35 million estate. However, since they were not married and he didn’t have a comprehensive estate plan, about $15 million was lost to taxes.

Princess Diana

When Princess Diana passed away at the age of 36, she left behind two sons and 17 godchildren. She wrote a “letter of wishes” stating that she wanted a quarter of her possessions to be shared among her godchildren, with each getting roughly $160,000. However, as it was not formally included in her will or trust, the letter was not executed by her estate.

Marilyn Monroe

Marilyn Monroe’s estate ran into numerous complications, mainly due to ambiguities in her will, as well as licensing issues related to her image and likeness. A well-thought-out estate plan could have clearly outlined how her image and likeness should be managed, thereby eliminating a major source of complication.

Michael Jackson

Michael Jackson did have a will, but it led to prolonged legal disputes over the valuation of his estate, particularly concerning his image and likeness. A comprehensive estate plan, with a detailed appraisal of the value of his image and likeness, could have reduced disagreements with the IRS, sparing the estate from long legal battles and considerable legal expenses.

Howard Hughes

Billionaire businessman Howard Hughes died in 1976 with no formal will. His estate was estimated to be worth $2.5 billion, and it took more than three decades to finally settle matters.

Aretha Franklin

The Queen of Soul, Aretha Franklin, also died without a formal will in 2018. Later, however, multiple handwritten wills were discovered, throwing the distribution of her estate into confusion. Legal battles among her heirs in probate court continue today.

James Brown

The Godfather of Soul, James Brown, died in 2006 with a will, however, it was contested immediately. Five of Brown’s children and other potential heirs to his estate battled amongst each other for years trying to gain control of the estate and its assets. It took 15 years to settle his estate.

Estate Planning Mistakes: Dos and Don’ts

Here’s what we’ve learned from these very public mistakes.

Dos:

• Create a Will and Trust:
  • Do have a legally sound will and trust in place to clearly outline your wishes.
  • Do update your will and trust regularly, especially after major life events such as marriage, divorce, or the birth of children.
• Specify Beneficiaries Clearly:
  • Do designate beneficiaries for all applicable accounts, including retirement funds and life insurance policies.
  • Do regularly review and update beneficiary designations to align with your current circumstances.
• Clarify Intentions in Writing:
  • Do clearly document any verbal promises or intentions related to your estate in writing to avoid posthumous legal battles.
• Comprehensive Estate Planning:
  • Do have a comprehensive estate plan that considers all aspects of your financial life, including potential taxes and unforeseen circumstances.
• Professional Guidance:
  • Do seek professional legal advice when creating and updating your estate plan, especially if your financial situation is complex.

Don’ts:

• Neglect a Will or Trust:
  • Don’t neglect creating a will or trust, assuming it’s unnecessary or can be sorted out later. Prince’s case illustrates the complications that can arise in the absence of these documents.
• Overlook Beneficiary Designations:
  • Don’t overlook updating beneficiary designations. Heath Ledger’s oversight led to legal complications regarding his life insurance policy.
• Rely Solely on Verbal Agreements:
  • Don’t rely solely on verbal promises. Marlon Brando’s estate faced numerous lawsuits due to unfulfilled verbal commitments.
• Ignore Tax Implications:
  • Don’t ignore potential tax implications. Philip Seymour Hoffman’s estate lost a significant amount to taxes due to outdated planning.
• Depend on Informal Letters:
  • Don’t depend solely on informal letters or wishes not formally included in your will or trust, as seen in Princess Diana’s case.
• Ambiguous Language in Wills:
  • Don’t leave ambiguities in your will. Marilyn Monroe’s estate faced complications due to unclear language.
• Underestimate the Value of Professional Appraisals:
  • Don’t underestimate the importance of professional appraisals, especially for valuable assets like image and likeness rights, as seen in Michael Jackson’s case.
• Delay Estate Planning:
  • Don’t procrastinate on estate planning. Howard Hughes’ lack of a formal will led to decades of legal battles.
• Rely on Handwritten Wills:
  • Don’t solely rely on handwritten wills. Aretha Franklin’s multiple handwritten wills complicated the distribution of her estate.
• Contested Wills:
  • Don’t assume a will is immune to contestation. James Brown’s contested will resulted in a prolonged 15-year legal battle.

The importance of estate planning cannot be overstated, and a life insurance policy plays a critical role within a well-crafted estate plan. If you don’t yet have a life insurance policy, you can get an instant term quote now.

Keep in mind that life insurance beneficiary designations take priority over any instructions in your will. So, if your will says your daughter should receive your life insurance payout but your ex-spouse is the named beneficiary on the policy, the money will go to your ex. This highlights the importance of regularly updating your policy to reflect your current intentions.

In short, life insurance and estate planning are deeply interconnected. To learn more, take a look at our guide.

Don’t procrastinate. Start your estate planning today to protect your loved ones from unnecessary legal and financial complications in the future.