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Prince's lack of planning leads to large tax bill

Since Prince passed away last year, the pop superstar's estate has gone through various legal woes. Ohio residents may have heard that Prince left behind assets estimated at $200 million. However, his six heirs will receive much less than this amount due to taxes and other fees.

After federal estate taxes, Minnesota state taxes and other probate costs, only about $88 million will remain for heirs. While this is still a large amount, it is less than half of the late star's total estate. Prince had no estate planning documents that established how his fortune should be divided. Therefore, the remainder of his estate will pass equally to his six surviving siblings.

To reduce estate taxes, one can transfer assets to a trust. For example, a Grantor Retained Annuity Trust gives the grantor income for a designated period of time before passing to beneficiaries without incurring gift or estate taxes. One could also transfer assets to legal entities, and minority, non-controlling interests could then be passed to trusts and finally beneficiaries. When entities are not publicly traded, non-controlling minority interests are taxed less as they are valued at a discount.

Someone could also use charitable deduction strategies to reduce taxes. One could start a foundation or otherwise make donations to charity while alive or upon death. There are also trusts one might establish to pass assets to charities and beneficiaries. This allows for a tax deduction on the amount given to charity while the rest of a trust goes to heirs.

Aside from taxes, there are other reasons that one might consider using a trust for estate planning purposes. For example, assets in a trust could allow beneficiaries to avoid probate. One may seek advice from a lawyer when setting up estate planning documents.

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