1st Mar 2014
Actor Phillip Seymour Hoffman was found dead in his Manhattan home on February 2nd from an apparent drug overdose. Hoffman was 46 years old and was not married but had three minor children with his girlfriend, Marianne O’Donnell. He left behind a Will which was signed in 2004.
Over the past year, we have seen three high-risk celebrities (Hoffman – addiction, Paul Walker1 – high-speed driving, James Gandolfini – poor health) pass away and leave behind questionable estate plans. While it is clear that these individuals had the means and the need to obtain proper estate planning advice (in addition to being public figures, all three had taxable estates and had minor children), it is unclear why they were not motivated or advised to put a proper estate plan in place.
Hoffman’s Will leaves his entire estate to his “friend and companion,” Marianne O’Donnell, but if she had not survived him, then to his son, Cooper, and if he did not survive Hoffman, then to Cooper’s descendants. O’Donnell did survive Hoffman, so she will receive his entire estate, but if she had not, the drafting of this Will would have come under intense scrutiny since Hoffman had two additional children after signing the Will. Under the Will, if O’Donnell renounces or disclaims any portion of the inheritance, that amount will go to a trust for the benefit of Cooper, but again, additional children are not mentioned.
Circumstances often change, but proper drafting can provide for such changes and eliminate the need for frequent updates. The most common changes are additional descendants being born and changes in the tax laws.2 When specific names and numbers are used in documents, those items must be updated with each change in the family or tax laws. If such updates are not made in a timely manner, the inheritance and tax consequences will be significant. An experienced estate planning attorney knows when drafting should be specific and when it should remain flexible.
It is unclear why anyone, especially a celebrity, would choose to have their estate administered in the public eye rather than privately. In addition to being public figures, Hoffman and Walker both had family situations that required advanced planning and Gandolfini left portions of his large estate to several individuals other than his spouse and children. While proper planning advice could have provided several tax and estate administration benefits to the loved ones of all three men, privacy in estate administration would have been an added benefit that their families would certainly value.
When any public figure passes away, the family immediately releases a statement and understandably asks for privacy during a difficult time. It is hard to believe that the estate planning advisor would not have explained that by using a Revocable Living Trust rather than a Simple Will, the administration of the estate would be kept private between the trustee and beneficiaries rather than in the public courts. Avoiding the probate court is a valuable benefit for any family, but would be especially appealing to a public figure.
Since Hoffman was not married at the time of his death, his estate—estimated to be worth approximately $35 million—will incur a sizable federal estate tax bill of almost $12 million. With an unexpected death at a fairly young age, it is difficult to blame Hoffman for having a large taxable estate, but certain steps should have been taken to protect him and his family in such a scenario.
The least Hoffman could have done in terms of tax planning would have been to leave his estate to O’Donnell in trust rather than outright so that the tax exempt portion of his estate would not be taxed again at O’Donnell’s death, effectively saving approximately $2.1 million in federal estate tax. Instead, by leaving the estate to O’Donnell outright, Hoffman failed to maximize the family’s estate tax exemptions.
Additionally, had Hoffman and O’Donnell decided to get married, he could have left his entire estate to her without incurring any estate tax and allowed her to spend or pursue additional tax planning during her life. With a taxable estate, Hoffman should have also been taking advantage of the annual gift tax exclusion ($14,000 in 2014) by making annual gifts to O’Donnell and his children. Advanced planning options for Hoffman and his family should have included gifting appreciating assets to O’Donnell and his children in order to remove them from his taxable estate.
It is surprising that with his health and addiction issues, Hoffman was not alerted to the tax consequences of not having a proper estate plan in place. With a 40% top federal estate tax rate in 2014, Hoffman’s estate will certainly incur a large estate tax bill and depending on the liquidity of his estate, may have to sell off assets quickly in order to satisfy the liability, which will be due nine months after his death.
In addition to tax and estate administration benefits, a proper estate plan would have afforded Hoffman’s beneficiaries significant inheritance protection—a primary concern for anyone leaving an inheritance to their loved ones. By leaving his estate outright to O’Donnell, Hoffman left his estate exposed to O’Donnell and her creditors. If O’Donnell remarries, gets divorced or is sued in the future, Hoffman’s assets could end up in the hands of O’Donnell’s new spouse or creditors.
In addition to the significant tax benefit discussed above, by establishing a proper estate plan and leaving the assets to O’Donnell in trust, Hoffman could have protected the assets from divorce or creditor issues as long as they remained in trust. While doing so, O’Donnell would still have had access to the assets for herself and the children.
Most of us do not have estates that are worth $35 million, but estate planning is not only for the super-wealthy; the lessons learned from these celebrity estates would have applied regardless of whether the individual had a taxable estate. While it is very easy to procrastinate on your estate planning, it is hard to justify procrastination after seeing the mess that so many people leave behind for their loved ones to clean up.
Every estate is different and relationships and assets present unique issues that must be addressed. The key to a proper estate plan is to work with an experienced estate planning attorney who specializes in providing the best planning options that are suitable for you and your family.
1. Although Walker’s Will was not immediately filed and he was presumed to have died intestate, his Will was later filed by his father. The Will names Walker’s father as Executor of his estate, which is left entirely to his 15-year old daughter, Meadow, and names Walker’s mother as Guardian, surpassing Meadow’s mother, Rebecca McBrain. McBrain has not raised the issue of custody with the court.
2. With the advancements in fertilization technology and the possibility of having children even after death, the consideration of every possibility and proper drafting is more important than ever.