3 Key Takeaways from Prince's Estate-Planning Mistakes

Prince may have sung that "Money Don't Matter 2 Night," but it's clear that the $300 million estate he left behind matters quite a bit. Since Prince didn't plan his estate, his family and loved ones are stuck with the headache of probate proceedings. Between the current federal estate tax rate of 40% and an additional 16% from the state of Minnesota, the majority of Prince's estate is going to the Tax Man. Needless to say, there is much that could have been done to avoid probate and minimize estate tax.

Prince's situation is in the news because of his fame and large estate, but anyone could have made the same estate-planning mistakes, regardless of wealth. So what can you do to prevent the same thing from happening to your family? Consider these three strategies:

1. Think About Your Legacy Now

Minimizing tax is a significant benefit of estate planning, but that's not its only purpose. Estate planning is also a way to show proof of a life well lived and help family and friends achieve their dreams. The real tragedy in Prince's situation is that we'll never know the legacy he wanted to leave behind.

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Prince certainly left behind an unforgettable musical legacy. But were there any goals he had not yet fulfilled? Are there loved ones that he wished to provide for? Is there a cause or purpose that Prince would have wanted to promote? What would he have liked to change in the world around him? All of these questions will be left unanswered because he didn't provide any estate planning guidance.

Before planning your estate, think about the mark you want to make on the world. Use your goals, desires and values to guide the planning process. A competent estate-planning professional can help you create a plan that leaves your legacy behind and protects your loved ones.

2. Reduce Estate Taxes with a Trust

Prince had many long-term friends and reportedly remained close to both of his former wives. Unfortunately for them, none will get any of his estate. Instead, his estate is now subject to claims from a variety of relatives with whom Prince shared little, if any, connection. A claim has even been filed by a previously unknown son who is now in prison. (At least that can be resolved by a paternity test.)

Prince could have avoided this situation by creating a trust to benefit those close to him. With proper planning, a trust could have helped him reduce his estate taxes and avoid probate. A trust is particularly important for single people because they typically do not have a statutory scheme to give assets to the people truly important in their lives. Unmarried life partners are often excluded in the absence of a trust or will.

The best estate-planning tool to avoid probate and provide greater benefits to your loved ones is a revocable trust. If beneficiaries are too young to manage wealth, or you're concerned about their money management skills, specialized provisions may be included to provide control over distributions. Three good options to look into are incentive provisions, spend-thrift provisions and provisions for a discretionary lifetime trust. Special needs provisions may also be used for beneficiaries receiving or expected to receive needs-based government benefits.

For all beneficiaries, specialized provisions should be considered to protect the estate from lawsuits, divorce, creditor claims, bankruptcy and even estate tax that may be incurred by your loved ones after you are gone.

3. Form a Charitable Trust or Foundation

In life, Prince was known to be very generous in his support and mentorship of new artists. Perhaps he would have wanted to continue providing assistance to young artists through a charitable foundation. Or as a devout Jehovah's Witness, maybe he would have wanted to designate funds for specific causes within his church.

Prince could have formed his own charitable organization, either as a public charity or a private foundation. Public charities have higher tax-deductible limits for contributions, as well as the ability to receive financial support from other public charities and private foundations; however, there are strict guidelines on activities and governance. Private foundations have fewer qualifying restrictions and can be a fallback option for organizations that do not qualify as a public charity, although deductions are lower.

Charitable trusts are another good option, as they can provide a tax deduction and income to your beneficiary. An often-overlooked giving alternative is a pooled income fund (PIF), a charitable structure established and maintained by the charity. Donors receive a "share" of the fund and income tax deductions each year they make a gift, allowing PIFs to provide greater deductions and economic returns than other alternatives.

You do not have to be as wealthy as Prince to establish a charitable-giving program. You can work with a regional donor-advised fund to obtain many of the advantages of your own charitable organization without formation or administrative costs. Another alternative is an endowment fund, established and maintained by the charity itself. Finally, you can simply make a charitable gift in your trust or estate plan. This is an easy, accessible way to give without the cost, time and complication of an endowment fund.

We all want to make a difference in the world and ensure that our loved ones are taken care of, even after we're gone. What would you like to change in the world? What would you like to preserve for future generations? Estate planning can help you answer these questions and rest easy knowing that your legacy will be maintained.

John M. Goralka is the founder of The Goralka Law Firm, an estate planning, trust administration, business and tax firm.