We have previously discussed how important it is to set up a Family Trust to protect your assets and legacy for your heirs. However, choosing the type of trust to create is equally as important, as the heirs to pop superstar Michael Jackson’s estate are finding out.

As with other deceased celebrities, such as Jimi Hendrix, Kurt Cobain, and Philip Seymour Hoffman, revenue continues to be generated, which gets added to the trust(s) based on the rules established when it was created. In fact, Jackson’s estate currently generates about $1 billion a year, and may even increase with the upcoming release of his new album, “Xscape,” and about nine other albums planned to be released over the next few years. The estate also earns income from other profitable sources, such as the popular Cirque Du Soliel show based on his music, “This is It,” as well as record and music publishing royalties. His image and likeness alone is estimated by the IRS to be worth more than $400 million.

Unfortunately, when Jackson established his family trust, he had it set up as a Revocable Trust rather than an Irrevocable Trust, which could end up costing the estate millions of dollars in taxes. According to an article published on Ultratrust.com, “Mr. Jackson’s poor estate planning has put his family through years of high-cost litigation and caused $200M in estimated estate taxes.”

Prior to his death, Jackson had crafted a “pour-over” will and revocable trusts for each of his children and Katherine, his mother and the guardian of the children. As a result, the trust funds for Jackson’s children, Prince (15), Paris (14), and Blanket (10), had to yet be dispersed more than three years after his death.

[Note: A pour-over will is a testamentary device wherein the writer of a will creates a trust, and decrees in the will that the property in his or her estate at the time of his or her death shall be distributed to the Trustee of the trust.*]

With a revocable trust, the trust-maker (grantor,) or his estate, maintains ownership of the assets, so there’s always the potential to lose them to creditors or lawsuits. With an irrevocable trust, assets can be moved out of the trust-maker or designated trustee’s hands, in which case the estate is no longer considered to own them. An independent trustee is designated to make all decisions regarding investments on behalf of all the trustees, which may or may not include the grantor.

As the assets of a revocable trust remain in the grantor’s estate, in the case of a large estate like Jackson’s, those assets could qualify the trust for federal estate taxes. Conversely, assets moved into an irrevocable trust are no longer part of the grantor’s estate.

Additionally, with an irrevocable trust, there are ways to move assets into the trust so they won’t incur capital gains taxes. That’s not possible with a revocable trust; the assets remain in the grantor’s estate, so if they’re close to qualifying for the federal estate tax, those assets could easily push them over the limit.

In the article, Michael Jackson’s Probate Reveals Secrets and an Estate of $600M, Rocco Beatrice, Managing Director of Estate Street Partners, a CPA firm that specializes in irrevocable trusts and estate planning, stated that “because of poor estate planning, Michael’s family will have to still wait years until his probate, estate taxes, creditors’ claims, and other legal battles are finalized.”

“A will is only good for stating who the guardian of the children will be. Other than that, it’s a poor way to pass on assets, especially significant ones like Mr. Jackson had,” Mr. Beatrice stated.

For more details, read the Ultratrust.com report: Michael Jackson’s Probate Reveals Secrets and an Estate of $600M.

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* Reference: Pour-over will; Wikipedia