IMGCAP(1)]One good thing that might come from all the attention on Michael Jackson's estate is that it may motivate people to get their own affairs in order. In addition, there are lessons to be learned that readers can apply to their own situation.
Michael's will, dated March 22, 2002, was probated in California on July 1, 2009. The will was actually relatively straightforward and devoid of the weirdness that we have come to expect from Michael Jackson. The will is a pour-over will, which many estate attorneys, including me, often recommend for medium or large estates. The pour-over will basically says all money or property that had not already been transferred to the Michael Jackson Family Trust while Michael was alive should be transferred to the trust after his death.
The Michael Jackson Family Trust is a trust that Michael Jackson formed during his lifetime. If his attorneys were crossing their t's and dotting their i's, Michael most likely transferred the majority of his assets to this trust. The simplified terms (put in my words) of the trust are likely as follows.
Michael named himself as the first trustee, and while he was alive, he could do anything he wanted with the property in the trust. He could spend the money, burn the money, buy property, buy an interest in royalties of the Beatles' music, buy art, incur debt, whatever he wanted.
Note that Michael's will, like virtually all wills, became a matter of public record. The exact terms of the Michael Jackson Family Trust, however, are not a matter of public record. That is an additional advantage of the trust for those preferring to keep their affairs private. In the state of California, though, some details of the trust become a matter of public record, so we know that the beneficiaries of the Michael Jackson Family Trust include Michael's mother, Katherine, the singer's children and a charitable trust.
Three co-executors of the will were named in 2002, including long-time Jackson attorney John Branca, music executive John McClain, and Jackson's accountant Barry Siegel. However, Siegel resigned from his role as executor in 2003. It is now the responsibility of Branca and McClain to transfer any assets that were not already transferred to the Michael Jackson Family Trust to the trust. In addition, Branca and McClain will serve as successor trustees of the Michael Jackson Family Trust.
So, one lesson is that someone even as screwy as Michael Jackson had a will. The pour-over will is an excellent method of keeping your affairs private. A bigger advantage for most readers, however, is that the configuration of a pour-over will with a family trust avoids probate. For most people, avoiding probate, though not critical, is usually a good thing. Avoiding probate reduces fees that the state charges, reduces attorney's fees and keeps the court out as much as possible.
The most interesting thing to me about Michael's will is the contingent guardian of his minor children. His first choice was Katherine Jackson, his mother, a choice many parents make. In the event Katherine either isn't able to serve as a guardian or declines to serve as a guardian, Michael's next choice is singer, Diana Ross!
Another lesson that parents of young children can learn is that Michael did the responsible thing of making a will and stating who he wanted to be the guardian of his children in the event of his death. Even if a parent of a young child or children has no money or no life insurance, they should still do a will to make known their choice of guardian in the event of their death.
You may question whether leaving his children to the care of his 79-year-old mother, Katherine Jackson, was wise. Another thing you may question is whether his contingent guardian (in case his mother could or would not serve as guardian), 65-year-old singer, Diana Ross, was wise. For one thing, the will was dated July 7, 2002, when they were five years younger. The important thing, however, is that Michael presumably considered the matter and made his wishes known when he prepared his will. I wish all parents of young children would do the same.
If you are interested in reading Michael Jackson's will, please click on the following link:
Taking Things a Little Deeper: A Life Insurance Lesson
Certainly we will hear many things regarding Michael's estate in the coming weeks, months and possibly years. Assets like Michael's 50 percent interest in the Sony/ATV music catalog (including rights to thousands of hit songs by everyone from the Beatles to the Jonas Brothers) valued between $500 million to $1.5 billion certainly pique our attention. The fact that the estate is also burdened by his personal debts of an estimated $500 million will most likely also receive a lot of attention.
One lesson is that if you have assets that are hard to value and are not terribly liquid, you should consider life insurance. The life insurance proceeds, if set up correctly, would be free of income taxes and estate taxes. The proceeds could be used to pay debts of the estate and taxes on the estate. If Michael had sufficient life insurance, his interest in the royalties would not have to be sold in a fire sale to pay the taxes on that same asset something that may happen now.
There is another lesson that will probably not be talked about by anyone except me. So, here is some unique wisdom. This advice is terribly relevant for millions of IRA and retirement plan owners today.
A 401(k) Lesson
Though not much is known about Michael Jackson's estate planning, if he got good advice, it is a good bet that Michael had either a 401(k) plan or some type of retirement plan. Since he made a lot of money, he may have been limited in how much he was allowed to deduct on his federal and California taxes for the contribution to his 401(k). Even if he wasn't allowed to deduct it, it still would have been wise for him to make the highest contribution allowed. After-tax dollars inside a retirement plan, incidentally, are conceptually the same as a nondeductible IRA. He may have had other retirement plans and possibly an IRA. For our discussion, let us assume that he had a 401(k) plan and the ultimate beneficiary of his 401(k) plan is a trust for the benefit of his children, the oldest of which is 12 years old. Because his children are likely to be taxed at the highest rates for the rest of their lives and because trusts in general have the highest tax rates of any entity, it is a good bet that the IRS will collect a lot of taxes on that money. The IRS will likely collect both estate taxes within nine months of his death and income taxes on those retirement funds, though hopefully they will have to wait for the income taxes.
It is a reasonable bet that the advisors involved will know enough to ensure that the distributions from the inherited 401(k) plan should be distributed over the children's lifetimes. The impact of making small distributions over many years is to defer the payment of income tax due when the 401(k) plan or a portion of the 401(k) plan is distributed to the children.
It is an important lesson to IRA and retirement plan owners as well as beneficiaries to plan for the deferral (or putting off) of the income taxes on the inherited 401(k) or IRA as long as possible.
What the advisors to Michael's family likely don't know is that Michael's children could make a Roth IRA conversion of the inherited 401(k) plan. Just like individuals making a Roth IRA conversion, his children could pay income tax on the inherited 401(k) plan now and have all future growth of the plan income tax-free.
In effect what they would be doing is paying tax on the seed and reaping the harvest tax-free. Interestingly enough, if Michael had made a trustee-to-trustee transfer (more commonly known as a rollover) from his 401(k) plan to an IRA, his children would not have the option of making a Roth IRA conversion of the inherited IRA.
Though he probably had a bigger balance, to make it more relevant to more readers, let's assume Michael had $1 million in his 401(k) plan. The benefits to the children of making a conversion of the inherited 401(k) to an inherited Roth IRA could be measured in tens of millions of dollars over their lifetime.
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One of the lessons here is that beneficiaries of 401(k) plans have options upon the death of their loved one. They should not blindly follow the advice of the person at the bank or even their attorney or financial advisor. I would bet that the big shot attorneys Michael was dealing with do not know about making a Roth IRA conversion of an inherited 401(k). True, this is a relatively new law, but it is so important, it pays for consumers to keep up.
A more relevant lesson for many more people is to question the old wisdom of automatically rolling over (technically doing a trustee-to-trustee transfer) of your 401(k) plan to an IRA. Several potential benefits of keeping your money in your existing 401(k) plan or even creating your own one-person 401(k) plan include:
1. Possibility of a good fixed-income account in your existing 401(k), often referred to as a GIC (guaranteed income contract). This would only apply to keeping money in your existing 401(k) plan.
2. The ability for the 401(k) owner to make a Roth IRA conversion of after-tax dollars inside the 401(k) to a Roth IRA without having to pay the tax.
3. The protection of ERISA (Employee Retirement Income Security Act), meaning a higher level of creditor protection than just an IRA.
4. As mentioned above, the ability of the heirs to make a Roth IRA conversion of the inherited 401(k) that they could not do with an inherited IRA.
Remember, if you already have the bulk of your retirement plan dollars in an IRA and still have earned income, you may be able to create your own one-person 401(k) plan and make a Roth IRA conversion of the after-tax dollars inside of your 401(k) or IRA tax-free.
I hope readers will learn from Michael's estate and some of the weirdness will be overlooked by the lessons to be learned.
James Lange is a nationally recognized IRA, Roth IRA, 401(k) and retirement plan distribution expert. He is the author of two best-selling editions of the book, Retire Secure! Pay Taxes Later (the 2nd edition was released in February 2009 by Wiley). Mr. Lange has been quoted 30 times in The Wall Street Journal and is a frequent contributor to numerous media outlets including Newsweek, Bottom Line, and Kiplinger's Retirement Report. He also founded the Roth IRA Institute this year to advise advisors and launched his own radio show on KQV am 1410 in Pittsburgh. Audio archives are available at
