Aretha Franklin

Introduction: Aretha Franklin, renowned as the “Queen of Soul,” passed away without a will or trust in place. Her estate, valued at approximately $80 million, faced significant federal estate taxes, leading to a substantial financial burden on her heirs.

Challenge: Aretha Franklin’s estate was subjected to a 40% federal estate tax, resulting in a $27.5 million tax payment. This substantial tax liability could have been mitigated with appropriate estate planning.

Solution: To avoid sizeable estate taxes, Aretha Franklin could have established a trust and transferred assets into it. Specifically, setting up an Irrevocable Life Insurance Trust (ILIT) could have been a highly effective strategy. An ILIT is a type of irrevocable trust designed to own a life insurance policy. Assets held in an ILIT, if structured correctly, are excluded from the estate for federal estate tax purposes.

Establishment of ILIT: Aretha could have created an ILIT and purchased a life insurance policy through this trust, naming her loved ones as beneficiaries.
Transfer of Assets: By transferring assets into the ILIT, these would not be considered part of her estate.
Death Benefit: Upon her death, the ILIT would receive the death benefit from the life insurance policy.
Distribution of Assets: The trustee of the ILIT would then distribute the trust assets to the designated beneficiaries.

Outcome:

By utilizing an ILIT, the proceeds from the life insurance policy would have been estate tax-free. This strategy could have saved Aretha Franklin’s estate millions of dollars in taxes, ensuring a more secure financial future for her beneficiaries and preserving a larger portion of her estate for her loved ones.