Earlier this year, Phillip Seymour Hoffman made headlines when he unexpectedly passed away from drug-related issues. His death also generated some raised eyebrows in financial circles because his estate plan turned out to be very costly for his heirs, both financially and emotionally.
Few of us will ever have estates as large or complex as Philip Seymour Hoffman’s, but we can all learn from the mistakes made by others, including mistakes made by the rich and famous.
According to an article written in February 2014 by Dan Caplinger of the Associated Press, Mr. Hoffman executed his Will back in 2004. The Will established a trust for his oldest child with a portion of his $35 million estate, and the rest of the estate passed to his longtime partner, Mimi O’Donnell, who was also the mother of all three of his children. While this plan seems reasonable on its face, consider the actual consequences.
Marry Your Sweetheart
For individuals passing away in 2014, federal estate tax law provides an exemption for the first $5.34 million that is distributed to anyone other than a U.S. citizen spouse. Everything over $5.34 million is taxed at a 40% rate. That means that Mr. Hoffman’s heirs are faced with a federal tax bill of $12 million. If Mr. Hoffman had married Ms. O’Donnell, there would have been no taxes due to the federal government.
Estate and gift tax laws are generally more favorable to married couples than to unmarried domestic partners. Even if the combined estate of a couple is under $5 million, the administration of an estate and subsequent tax planning for the surviving partner can be more advantageous if the couple were married. This fact is also true now for same-sex partnerships, based upon a United States Supreme Court Decision from 2013 that struck down the Federal Defense of Marriage Act (DOMA) and found that same-sex partners who were married under the law of any state were entitled to the same tax advantages as any married couple.
Update Your Plan
When Mr. Hoffman signed his Will, he had only one child. He and Ms. O’Donnell had two more children
after the Will was signed who were not mentioned in the Will. This created an ambiguity in the Will that
makes it uncertain whether the younger children will share in any of the distributions enjoyed by the older child.
Many Wills expressly provide for afterborn or adopted children and some states have laws that will expressly include new children in the plan. But it is a good idea to review and update your plan when there are births, deaths, divorces, or other changes in your family that would result in a change of your desires regarding your intended heirs.
Keep Things Confidential
Using a Will as your primary document means that your estate plan will become public at the time of your death. This means that for the rich and famous Mr. Hoffman, the media has had a field day reporting on the problems facing his partner and children. If Mr. Hoffman had used a revocable living trust as his primary planning tool, his financial affairs would have remained confidential. You are probably not a movie star or a public figure, but you might still like to have your financial affairs remain private at the time of your death.
Take the Time and Effort
Establishing and maintaining a good estate plan takes time and effort. It appears that estate planning wasn’t a very high priority for Mr. Hoffman, and his family will pay the price. It is easy to ignore, postpone, and procrastinate on estate planning. Foley, Foley & Pearson takes great pride in helping and encouraging our clients to establish and maintain quality estate plans. Our bi-monthly workshop, streamlined planning process, and Generations maintenance program are designed to make it as easy as possible for people to set up and maintain their plans. If you are one of our Generations clients, take a minute to congratulate yourself. If this article has reminded you that your plan needs to be changed or updated, give us a call.