It’s past time for millennial multi-millionaires to think about building legal structures around their assets to minimize personal liability.
Taylor Swift is only 27 and according to the most recent estimates she’s worth north of $250 million. As she’s already discovered, that wealth makes her a big target.
A disgruntled radio personality just dragged her into a Denver federal court over claims that she falsely accused him of groping her at a photo shoot four years ago.
Even though the judge threw out the piece of the $3 million suit that affects Taylor personally, the experience still pierced her pop star privacy by forcing her to show up and testify to the intimate details.
It’s the kind of attention most ultra-high-net-worth people work hard to avoid. Their advisors earn their paychecks making the grievances vanish before they turn into lawsuits.
And this isn’t the first legal bullet she’s dodged in her relatively short career.
She needs to move a lot of the money she’s amassed out of her personal estate and into trusts.
After all, the poorer she looks on paper, the less incentive everyone else has to try to turn a petty grudge into a multi-million-dollar settlement.
“Tailored” for asset protection
Taylor is young, famous and rich. She’s a magnet for lawsuits. About once a year, she goes to court to protect her song catalog from claims she borrowed lyrics or simply failed to give all would-be writing partners enough attention.
The little claims are really just nuisances. The ambitious ones have asked for as much as $42 million in damages.
Since they’re Taylor’s songs, she’s the one who has to defend the rights and, theoretically, pay the plaintiff if a judge ever rules against her.
At a minimum, the intellectual property needs to be transferred to a trust in order to create a little legal separation between her and industry opportunists.
The right trust set up in the right state erects just that kind of wall between the star and her assets. Technically any lawsuit against Swift can’t target anything transferred into an asset protection trust. If that’s a big enough chunk of her net wealth, there’s not much point to sue her at all.
Given the choice of suing her or going up against the trust where the money is, they’re more likely to leave her out of the loop. In that scenario, the trustee will have to deal with it much as her mother is having to deal with the radio lawsuit now.
Another thing that’s nice about moving the songs into a trust is that the royalties build up there, where they can one day go to enrich her heirs. She doesn’t need that money now. After all, if she needs cash at this stage in her career, she can always squeeze in a few more tour dates or maybe do a TV special.
As older people with extreme wealth have discovered, money you don’t need today works harder when held in a trust structure that minimizes year-to-year tax drag as well as, ultimately, estate tax when it’s time for the heirs to inherit.
Swift doesn’t even have heirs yet. But it’s unlikely that she’s going to spend down her existing fortune — much less what she has left to earn in her career — in her lifetime without outside help.
Sooner or later she might get married. In that scenario, she’ll definitely want the assets locked up where a divorce court can’t even think about sharing it with a hypothetical spouse.
We look at star splits all the time and can only hope that they had a prenuptial contract guaranteeing that property that was separate going into the union leaves it under the same ownership. A trust eliminates the need to hope or wonder because there’s no question of “marital” division there: a trust can’t get married so the assets are never commingled.
Father should know best
Taylor should have access to the best asset protection around because her father is a lifetime advisor at Merrill Lynch.
Granted, most UHNW wirehouse clients are a whole lot older and already have estate planning needs, but the same broad tool kit applies.
Taylor already keeps dad pretty busy. He lists about 20 Taylor-driven entities in the “other business activities” section of his IAPD: power of attorney, investment direction, account oversight.
A scan of those entities reveals private jets, investment properties and a whole lot of limited liability companies, but no trusts. While the LLC structure is nice for protecting the family from any claims against the companies, the shield doesn’t work the other way around.
Furthermore, an LLC strategy at best clouds the lines of ownership to provide a little privacy. It would be tough but not impossible for the gossip columnists to figure out, for example, that “NYC Strategic Realty” or “Leo Ventures” point back to Taylor.
A well-drafted trust would be virtually impenetrable, ensuring that those LLC membership stakes point at an anonymous brick wall.
And in the meantime, of course, those ventures would pour their returns into the trust without income tax drag — provided the trust itself is set up in the right state.
For Taylor, that’s a bit of a dilemma. Tennessee allows asset protection trusts, which is what she needs, so dad could get one set up close to home. However, the state only waives income tax for cross-border beneficiaries, so as long as she lives in Nashville, that down-home decision would cost her 6% on interest and dividends.
A trip to Delaware, Nevada or South Dakota may leave her descendants in a significantly better financial position decades from now. Speaking of those decades, that’s where her age can be both a blessing and a curse in planning terms: compounding the assets over 40-50 years adds up to big money, but that 6% drag also piles up in its own right.
If dad’s thinking of the grandkids, he probably wants to get maximum compounding on the family’s side while eliminating the compound drag. That means tax efficiency here and now.
Think of it as a young entrepreneur or venture capitalist parking the start-up shares in an IRA or other tax-advantaged vehicle. In Taylor’s case, it’s probably too late to sell the ventures to an IRA without blowing out all the contribution limits — but the trust rules are more forgiving.
If she doesn’t do it, the next generation of Silicon Valley wunderkinds will. Mark Zuckerberg is only 6 years older than Taylor Swift. He moved a big chunk of Facebook stock into an estate planning vehicle. One day Evan Spiegel of Snapchat may do the same.
Taylor deserves at least that level of forethought. And in the meantime, a little relief from legal drama will probably be its own reward.
