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Prince's estate may owe more than it's worth

Estate planning is more than just determining who gets what. This legal process can also be used to help reduce the taxes imposed on your estate. A failure to put together a plan leaves your estate at the mercy of the government - which can lead to steep tax bills.

How steep? In short, the answer is pretty steep. Prince's estate provides one example of just how steep these bills can be. The music icon was not lacking in funds. He had a massive estate in Paisley Park, valuable memorabilia and other assets that have yet to be publicly identified. Even with such a large estate the taxes due upon his death could be more than it's worth.

How could that be? The estate tax takes into account the entire estate. This means savings accounts and checking accounts are just one piece of the giant estate puzzle. The overall value taxed by the government includes real estate, personal property, vehicles, retirement accounts and other investments as well as business interests.

In this specific case, a report by ABC News notes that Prince's estate may not have enough in liquid funds to pay the tax bill. Liquid funds refer to those that are readily available. This means the estate cannot simply write a check to pay off the tax bill. If this is the case, the estate may have to sell of other assets to meet this obligation. That could lead to the sale of previously unreleased songs and memorabilia simply to pay off the tax man.

How can this be avoided? Various tools are available in the estate planning toolbox. These tools are legal instruments that can be crafted to meet a number of needs, including reducing tax obligations. The most common tool to meet this need is referred to as a trust.

Trusts are complicated legal entities. In order to get one that is tailored to meet your needs and that could likely withstand a potential courtroom challenge, it is best to have the trust crafted by an estate planning attorney.

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