Most people will agree that Prince could write great pop music, but regrettably, he couldn’t even write a simple Will. Because of this major oversight, his estate has been an ongoing mess for over 5 years and there’s no sign it’s ending any time soon. Thus, everyone whether rich or poor can learn from Prince and what NOT to do when planning their own estate.
For any of you that grew up in the ’80s, or are a self-professed ’80s fan, you should be familiar with the singer known as ‘Prince’. If so, you probably also know he regrettably died in April of 2016 at the age of 57 from an accidental fentanyl overdose. Now, as one can imagine there’s been a lot of discussion and questions regarding the circumstances of his death, but nothing compared to the resolution of the estate and were still far from over.
After 5 years of Probate Court hearings and filings, in what is arguably one of the most complicated probate cases in the history of Minnesota, there’s now a new twist in the saga…the IRS is joining the fight for what they think is their fair share.
The IRS believes that Prince’s estate was worth close to $163 million at the time of his death and that leaves his estate on the hook for $32.4 million in back taxes and another $6.4 million in penalties.
His real name was Prince Rogers Nelson (a.k.a. “Prince”). He was generally a recluse, kept to himself, was never married, and retained ownership over most of his work, including his music publishing rights…and you guessed it, he died with no estate plan, not even a Will. Welcome to Court!!
Prince, who liked to keep his private life very private, however, has now had to look down from heaven on the disposition of his estate as it has played out on in open court, splashed all over TMZ, and on other media outlets.
Why Probate and Open Court?
While the IRS was deciding what their plan behind the scenes, the fight began for the Estate. Prince left no will or trust, thus, the probate laws of the State of Minnesota had to decide who inherits his massive estate, and in what percentages.
Prince left no surviving spouse or living children, and his parents and grandparents are all deceased. In the absence of any such relations, Minnesota law requires that his estate be split equally among his parents’ other children. This means that Prince’s one full sibling and five surviving half-siblings are all out at the courthouse (with their attorneys in tow) making sure to claim and protect their windfall.
Even if you don’t have much of an estate, without a Will and Trust, the decision of who will raise your children and receive any of the equity in your home will play out in a fight in open court.
But they’re not the only ones. A Probate action gives other people an opportunity to claim that they are entitled to some or all of the estate’s assets. And (surprise!) when an estate is valued north of $100 million, there is no shortage of people ready to come out of the woodwork. Below is a few of those that stepped forward after roughly three weeks of his death:
- Kimberly Felecia Potts – A Minnesota woman who was actually arrested for trespassing at Prince’s Paisley Park compound in January 2016. She claims she is due $500,000 because she “created” Prince’s 2004 album “Musicology” and Prince had promised to “reward” her for doing so.
- Rodney Dixon – A California man who claims he should be considered the “sole and exclusive owner of all intellectual properties after the death of Prince Rogers Nelson.” The basis for his claim is that he had an “implied agreement” with Prince, valued at $1 billion. Dixon claims he met Prince in Maryland in the early 1980’s and became close with him to the point that Prince wanted him to take control of his music and legacy. In speaking with the New York Daily News about why he is entitled to the estate, Dixon said: “He chose me because I’m the only one who gets it – spiritually, musically and legally. I’m the only one inside who got it all. That’s why I got it all.”
- Carlin Q. Williams – A Colorado prison inmate who claims to be Prince’s son, and as such, the sole heir of Prince’s fortune. If DNA tests confirm Mr. Williams’ claim (and if no one else is confirmed by DNA to be Prince’s biological child), then after claims like those above are either dismissed or settled, the entire remainder of the estate of the man who once wrote a pro gun control anthem with the lyrics “we’re tired of cryin’ and people dyin’ – let’s take all the guns away” will go to Mr. Williams, a man Prince apparently never met, and who is currently serving 92 months in a Colorado federal prison for possession of a firearm by a felon!
These claims (and others) are going to keep Prince’s estate in limbo for years, and will likely cost hundreds of thousands in attorney’s fees to litigate. To boot, while
Who are the Real Heirs of his Multi-Million Dollar Estate?
After all of the chaos, confusion, and the circus of people claiming to be an ‘heir’ of Prince, or promised money in some sort or fashion by the late superstar, the Probate Court decided on six (6) family members who were the legitimate heirs to Prince’s estate.
Prince’s heirs are his sister Tyka Nelson, his half-sisters Norrine and Sharon Nelson, and his half-brothers John Nelson, Alfred Jackson, and Omarr Baker. Alfred Jackson died in 2019, and based on Minnesota law, some of his heirs may still have a claim on his behalf. More to come on that issue.
How did the IRS get into the Mix in Prince’s Estate
First, a few basics… The United States imposes an estate tax on the value of a deceased individual’s assets at the time he or she passes.the IRS will ‘take a picture’ of your net worth. This includes the value of your home, IRAs, 401k, any rental property, a business, and even term life insurance, less any debts or mortgages. For example, if you have a 1M life insurance policy with no cash value, and named your kids as the beneficiary (not a good move by the way- hence the purpose of a trust), the 1M is still included in your estate ‘picture’ and could be taxed.
The IRS will charge this tax, ranging from 18% to 40%, on estates whose values exceed $11.58 million in 2021. If the value of an estate exceeds these amounts, the estate tax is due with 9 months of the date of death and is reported on Form 706. As an aside, President Biden thinks the exemption amount (of $11.58 million) is way too high and wants to bring it down to a more reasonable level. What that amount is, we don’t know yet, but for example, 10 years ago, in 2011, estates over 5M were taxed upwards of 40% or more.
Well, back to the Estate of Prince. When the Executor, Comerica Bank & Trust, filed the 706 Estate Tax Return for Prince, they claimed his estate was worth $82.3 million and paid what they thought was their fair share of tax. The IRS disagreed.
Instead, the IRS believes that Prince’s estate was worth closer to $163 million at the time of his death (163.2M to be exact). That means Prince’s estate still owes an additional $32.4 million in back taxes and another $6.4 million in penalties for not valuing it properly in the first place- ouch!
The discrepancy in value between Prince’s estate, according to the Executor versus that of the IRS’s valuation, comes down to the following items:
- The initial value of Prince’s songwriting copyrights was set at $21.2 million. The IRS believes those copyrights are worth $36.9 million.
- The Executor placed the “writer’s” share of the songwriting copyrights at $11 million. The IRS believes those are worth $22 million.
- The Executor claims Prince’s record label, NPG Records was worth $19.4 million at his time of death. The IRS says it was worth $46.5 million.
- Moreover, the Executor hired an independent appraiser that valued the real estate holdings of Prince, including 149 acres of undeveloped land in Chanhassen, a suburb of Minneapolis where his Paisley Park is located, at $11 million. The IRS says the fair market value of the land at time of death was actually $15 million.
What If Prince Had a Will?
If Prince had a valid Will (but no trust), then a Probate action would still have to be filed in Carver County. However, instead of a “Special Administrator” being appointed by the court to facilitate the process, in this case, an expensive alternative: Comerica Bank & Trust, Prince could have named his own Executor (also known as a Personal Representative). Typically this person would be a trusted advisor, friend or relative, to serve in that capacity.
The terms of the Will would also control who was to get what assets from his estate. If not otherwise named in the will, Prince’s siblings would have to file and prove claims that Prince had promised to take care of them in some way in order to recover any assets. Ms. Potts and Mr. Dixon could still file their dubious claims, but their legal path to prevailing on those claims would be even more difficult because they would have to overcome the fact that Prince left them out of his will.
Mr. Williams, who claimed to be Prince’s son, would also be in a tough position. Merely proving that he is Prince’s biological son would entitle him to nothing from the estate, unless the Will provided for him in some way. He would have to prove that Prince left him out of the will on accident.
Bottom-line, a Will would have saved a ton of time and money, BUT all of this would still play out publically – in open court.
What If Prince Owned Substantially All of His Assets In a Trust?
If Prince had established a revocable living trust and owned substantially all his assets in the name of that trust, then the courthouse in Carver County would be a lot less hectic than it is right now. This is because no probate action would have been necessary. In large measure, Probate is simply the legal process by which assets are transferred from the name of a deceased person to their heirs.
When assets are held in the name of a living trust and the trust grantor/trustee/beneficiary (in this case, Prince) dies, there is no deceased person on title to assets because the trust didn’t (and doesn’t) die. The trust would designate a successor trustee (again, probably one of Prince’s trusted advisors, friends, or relatives) who is vested with the authority to distribute the trust’s assets as Prince directed in the trust, and without the need of filing a Probate action.
The ability to avoid probate would likely save Prince’s heirs months of time and thousands in legal fees. In addition, the administration of a trust is private – no court filings are necessary. The lack of an existing and ongoing Probate action also means that claims like those made by Ms. Potts and Mr. Dixon would have to be brought independently. When hundreds of millions of dollars are at stake, such lawsuits would still likely take place.
However, a standard revocable living trust in Prince’s situation would NOT have saved any Estate Taxes. More advanced estate tax planning would have needed to be undertaken before he passed.
What Can You Do to Avoid this type of Saga?
The takeaway is that you don’t have to be worth $150 million (or even $150,000) for an Estate Plan to make sense. If you own real estate or an interest in an LLC or corporation, or even if you just have minor children or other dependents who would need to be taken care of if something happened to you, then estate planning is vitally important.
It is an investment that will pay huge dividends in saved time, money, and headaches for your loved ones when you are gone. Oftentimes, a Trust can be a simple and affordable addition to your overall Business and Asset Protection plan that merges into your Estate Plan.
Here’s a video discussing the difference between a Will and Trust:
Procrastination is easy – especially when it comes to something where the benefits won’t be apparent until you are either incapacitated or have passed away. However, if you care about saving your loved ones thousands in legal fees, months of time, and a mountain of headaches and worries, then completing your estate plan is truly a caring act of charitable service that you should consider completing before it becomes everlastingly too late.
Ironically, during the months of May and June each year, we offer an “Estate Planning Special” at the law firm of KKOS Lawyers. We complete Estate Plans in all 50 States with an Attorney in our office walking you through all of the details every step of the way- AND tailoring it to your situation. If interested, learn more about our Special here.
* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.
Mark J. Kohler is a CPA, Attorney, co-host of the PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firm K&E CPAs, LLP.