Why Assets Should Be Left in Trust -The Estate Tax
In my previous post, I speculated that the published reports stating that Michael Jackson left 40% of his estate to his mother Katherine Jackson, 40% to his children and 20% to charities was not, could not be entirely accurate. Although I have not seen it the Michael Jackson Family Trust document, I am sure of the fact that instead of having the trustee distribute his assets to his mother and his children outright, that instead, the property was kept in trust. The three reasons I set forth were (1) the estate tax, (2) creditor protection, and (3) control.
In this post, I will discuss why anyone who has significant assets should leave their property to their relatives in trust, and the potential tax disaster that awaits them if they do not.
For the sake of simplicity, assume that Michael Jackson had a taxable estate, of two hundred million dollars ($200,000,000) and that he left half to his mother outright and half to be divided among his three children outright. I removed the charity to make the math more simple. Also, while there are issues legal involved when significant assets are left outright to minor children, this post is only about the estate tax aspects, so ignore that for now.
| Taxable Estate |
$200,000,000 |
| Tax Rate |
45% |
| Tax Owed |
$90,000,000 |
| Amount Available for Distribution to heirs |
$110,000,000 |
Michael Jackson Estate Tax — Al numbers are hypothetical and are used for example purposes only.
Notice that the estate is confiscatory. If Michael Jackson’s taxable estate is $200,000,000, then the federal government will receive ninety million dollars in taxes! The distribution to his mother and children are as follows:
| Name |
Percentage |
Amount Received |
| Katherine Jackson |
50% |
$55,000,000 |
| Prince Michael Jackson |
16.67% |
$18,333,333 |
| Paris Jackson |
16.67% |
$18,333,333 |
| Blanket Jackson |
16.67% |
$18,333,333 |
| Total |
100% |
$110,000,000 |
Remember however, that Katherine Jackson is 79 years old. When she dies, all of those assets will be subject to the estate tax again! Anything she left to her husband Joe Jackson would not be subject to the estate tax because of the marital deduction. But then when he died it there would be an estate tax. If her taxable estate is $55,000,000, then that’s another $24,750,000 to the IRS. However, if instead of leaving the assets to his mother directly, he left them in trust for her, a trust with specific rules, then upon her death the assets will not be subject to the estate tax.
I will explain how this is done, and what the rules are in my next post.
David: Your math graphically indicates the need for the utilization of trusts for tax purposes. This is great to help clients understand the real impact of planning or lack thereof. For other estate planning implications (that I am sure will be touching on with your readers in the future) raised by the deaths of Michael Jackson and Farrah Fawcett your readers may be interested in reading Michael Jackson & Farrah Fawcett: Estate Plan Wake Up Call by visiting http://frommtaxes.wordpress.com/
I hope this is value to your clients and friends