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, Barry 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 also 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.

http://www.docstoc.com/docs/8016703/Michael-Jacksons-Will

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 for 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 (details available).

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 www.retiresecure.com.

James Lange is a tax attorney and CPA with a thriving retirement and estate planning practice in Pittsburgh, Pennsylvania.  He focuses on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation, and intricate beneficiary designations for IRAs and other retirement plans.  Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, and his articles are frequently published in Financial Planning, Kiplinger’s Retirement Report and The Tax Adviser.

It’s a few short weeks until cap and gown season begins, and for grandparents hoping to do something nice for their grandkids and something sensible for their estate, there are several options to explore.

Roth IRAs: The Roth option is a good one if you want to help them start a retirement fund of their own or if you want them to inherit a Roth where they can make tax-free withdrawals after your death.

Roth IRAs aren’t a useful alternative for very young kids because the rules state that all Roth holders have to have earned income to be able to make contributions. If they fit that description – as many kids working in high school do – either their parents or guardians can open the account and grandparents can make contributions to match the percentage of earnings kids put in their Roth IRA. Grandparents simply match that contribution.

Also, if you have a Roth IRA, you can benefit your grandchildren by naming them as your primary beneficiaries, and when they inherit it, they’ll be able to make tax-free withdrawals for a home, an education or any other purpose.

Parents or grandparents may want to consider setting up and funding a Roth IRA for their children or grandchildren as soon as the children or grandchildren have enough earned income from part-time or summer jobs. This will ensure that the five-year requirement is met when the individual for whom the Roth IRA is established is ready to make a withdrawal to buy a home, for example.

529 Plans: Another great tool for grandparents is the 529 college savings plan. Grandparents can fill out a plan enrollment form designating a grandchild as beneficiary, select the investments from the plan’s options, and make future contributions either by check or by automatic contribution.  It’s also fine for grandparents to make their contributions directly to a 529 account already owned by the grandchild’s parents.

As a refresher, 529 college savings plans – named for the federal law that created them in 1996 – allows a parent to open a tax-deferred college savings plan with as little as $25 to start in some states.  A 529 college savings plan is not the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that – tax-deferred savings plans that allow you to save for tuition for in-state schools (though some plans allow you to transfer out a portion of those assets to out-of-state schools). Also, it’s important to note that prepaid tuition plans are not an automatic guarantee a student will get into that college.

Since 2006, withdrawals from 529 plans have been permanently tax-free. In some states, contributions may also be deductible on state tax returns. All 50 states now have 529 plans college savings plans, and a majority of them provides additional incentives, such as a state-tax deduction to in-state residents who invest in their respective plan.

It’s a good idea to have your financial adviser or your CERTIFIED FINANCIAL PLANNER (TM) professional help you sort through the details of various state plans. There are various services – including Morningstar Inc. – that now rank the offerings of each state’s plan.  www.SavingforCollege.com and www.FinAid.org are leading sites to help educate you in how these plans work.

Grandparents can treat their contribution as complete gifts, which means they can apply the $12,000 per year gift tax annual exclusion or an accelerated contribution of up to $60,000, with a special five-year, gift-spreading election. Check with your tax adviser first.

Another great benefit is that a 529 plan owned by grandparents should not affect the grandchild’s eligibility to receive federal financial aid because a grandparent’s assets are not reportable on the free application for federal student aid, or FAFSA, and the tax-free withdrawals from a grandparent-owned 529 plan are not counted as student income or student resources.

Coverdell Education Savings Accounts: For grandchildren heading to private school who are under the age of 18, most grandparents – check your eligibility with a tax professional first – can contribute up to 2,000 dollars annually per grandchild to a Coverdale Educational Savings Account.  Coverdell earnings accumulate free of federal income taxes, and can be taken to pay for private elementary, secondary or college. Yet, your income is a factor. You can make a Coverdell contribution as long as your modified adjusted gross income is between 95,000 and 110,000 dollars if you’re single or between 190,000 and 220,000 dollars if you’re a married and filing jointly.  Yet, if you exceed either of these requirements, you can ask the parent of the adult child to open up the account and make the contribution, though you will have to give up control over the account.

Make a direct gift of your grandchild’s tuition: Under current tax law, you can make gifts of any amount to cover your grandchild’s tuition. Yet, you’re going to need to pay the college directly and you need to be aware that it won’t dent your federal estate tax exemption (3.5 million dollars in 2009), but it will cut the overall amount of your taxable estate.  You can, however, go ahead and make additional gifts per grandchild of $13,000 to help with other college expenses.

April 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins,CFP , a local member of FPA.