Top 5 Celebrity Financial Traps You Need to Avoid
While some celebrities are known for having a golden touch when it comes to investments, in general entertainers and other famous personalities are more noted for their personal finance mistakes. Living the high life may be glamorous, but if it causes a celebrity to neglect the basic tenets of investing the results are not likely to be pretty.
The examples cited below demonstrate a variety of financial missteps that celebrities have engaged in. Learning from these mistakes can help you make the right financial moves in your own life, whether you’re a celebrity or not.
Whatever your income may be, the old maxim applies: Spending more than you make on a regular basis can lead to financial trouble. This is demonstrated by a number of celebrities who have declared bankruptcy after their finances deteriorated to the point where they were unable to pay their bills.
For example, actor Stephen Baldwin, from the reality show I’m a Celebrity…Get Me Out of Here, along with his wife filed for Chapter 11 bankruptcy citing debt exceeding $2.3 million, primarily due to a couple of overdue mortgages. The couple also reported $70,000 in credit card debt and owing the feds approximately $1 million in back taxes. The Baldwins can take solace in the fact that they are not alone when it comes to celebrities declaring bankruptcy. Tom Petty, Kim Basinger, who at one time was married to another Baldwin brother, Alec), and MC Hammer also declared bankruptcy at one point. Pro baseball player Lenny Dykstra is another famous name who found himself forced to declare bankruptcy.
Employing a financial advisor should not be done lightly, but this has not always been appreciated by the Hollywood set. In one well-documented account, a dishonest money manager managed to scam a variety of celebrities before he was finally brought to justice. The advisor, Dana Giacchetto, made off with approximately $10 million from clients including Cameron Diaz, Matt Damon and Leonardo DiCaprio who had invested in his Cassandra Group.
The mother of all scams in recent years was, of course, perpetrated by Bernie Madoff, who swindled $50 billion from clients including a number of celebrities, among them wedded actors Kevin Bacon and Kyra Sedgwick.Celebrities declaring bankruptcy. Tom Petty, Kim Basinger, who at one time was married to another Baldwin brother, Alec), and MC Hammer also declared bankruptcy at one point. Pro baseball player Lenny Dykstra is another famous name who found himself forced to declare bankruptcy.
Making loans to friends and family
Whether one is a celebrity or not, helping friends and family out with money can be a dangerous financial proposition – assuming you want to get your money back. This is not to say making such loans is never warranted, just that you should be aware when doing so that collecting may be difficult.
An example of what can go wrong in such a situation was demonstrated after a court filing by Richard Dreyfus revealed that he had made a $4 million loan to his father and uncle in the 1980s which they had not repaid. Dreyfus subsequently dismissed the lawsuit, but its filing reveals the trouble that can be caused when combining money and family matters.
Skipping the Prenup
Love is blind, it is said, and when it comes to some celebrities it can also be very expensive. When a tremendous disparity in wealth exists between potential partners, most financial and legal advisors would counsel at least considering writing up a prenup to help protect that wealth if the marriage fails. The cost of not doing so can be extensive, as demonstrated by the case of Roseanne Barr’s marriage to Tom Arnold. The comedian and Arnold divorced in 1994 after 4 years of marriage. The cost to Barr? A cool $50 million.
Don’t forget the taxman
It may be a bit disappointing to consider how much of your income is consumed by taxes, but it's far worse to go one step further and fail to file and pay your taxes. If the tax evasion is egregious enough, the result may not just be financial penalties but also jail time. Such was the case with movie star Wesley Snipes, who found himself in prison after doing just that.
Another celebrity tax evader, Willie Nelson, found himself on the receiving end of a tax bill from the IRS for more than $16 million in back taxes. Diligent effort enabled the singer to pay off the tax debt by 1993.