The circus surrounding Michael Jackson’s death and estate will, no doubt, continue for months, possibly years. No matter what you may think of Michael Jackson personally, we can all learn some lessons from the way that Michael set up his affairs.
For starters, Michael took the time to consider the matter of guardianship for his children. Some believe that his choice is unwise - naming his 79 year-old mother, Katherine, as guardian and 65 year-old singer Diana Ross as contingent guardian. The important thing to remember is that Michael obviously gave this considerable thought and wanted to make sure that his wishes were known. It’s very important that all parents of minors do the same thing and take the responsible step of putting their wishes in their will.
Michael’s will was relatively straightforward — have a look for yourself - http://www.docstoc.com/docs/8016703/Michael-Jacksons-Will. The will is a pour-over will which basically says that all money or property that has not already been transferred into a trust should be transferred into a trust at the time of death. For medium or large estates, a pour-over will with a family trust is an excellent way to avoid probate and to maintain some privacy since details of a trust are, in most states, not a matter of public record.
Sorting out the details of Michael’s financial situation will take quite some time. One of the reasons is that much of Michael’s estate was not liquid. The value placed on his main asset, a 50 percent interest in the Sony/ATV music catalog, has been reported to be worth anywhere from $500 million to $1.5 billion. In addition, the estate is burdened by personal debt in the neighborhood of $500 million.
One lesson to be learned from this example is that if you have assets that are hard to value and not terribly liquid, you should consider life insurance. If set up correctly, the life insurance proceeds would be tax-free and could be used to pay debts of the estate and taxes on the estate.
Finally, a piece of advice in the event that you leave behind a 401(k) plan. While little is known about Michael Jackson’s estate planning, let’s assume that he got good advice and had set up a 401(k) plan. If the 401(k) plan was left to Michael’s children, they could make a Roth IRA conversion of that plan in 2010. They would pay income tax on the plan now, but all future growth of the plan would be income tax-free. Considering the ages of Michael’s children, the difference would be measured in millions of dollars over their lifetime.
One interesting side note - if Michael had put his money into an IRA instead of a 401(k), his children would not have the option of making a Roth IRA conversion of the inherited IRA. The ability of heirs to make a Roth IRA conversion is just one of the potential benefits of keeping your money in an existing 401(k) plan instead of doing a rollover to an IRA.
These lessons taken from Michael Jackson’s estate just scratch the surface. There is much to be learned in the way Michael dealt with his estate while alive and we have put together a more in-depth article which you can access through our homepage by clicking on articles. We will also be including this piece in our next newsletter. If you aren’t receiving our newsletter, it’s easy to sign-up. Go to the homepage of this website and click on e-newsletter sign-up on the left-hand side.