Oscar-winning actor, Philip Seymour Hoffman, died on February 2nd from a drug overdose. Recently, his long-time girlfriend and mother of his three children, Marianne O’Donnell, filed to open Philip Seymour Hoffman’s estate and to probate his will. While there are many lessons that can be drawn from his will, there are four main estate planning pitfalls that serve as important lessons:
1. Philip Seymour Hoffman Should Have Created A Revocable Living Trust.
The reason that Hoffman’s will is public and available for anyone to read (you can click here to read it for yourself), is because he relied on a will — and only a will — for his estate plan. For most people with even a modest estate, revocable living trusts are critical.
Why? When properly used, they help families avoid the costs, aggravation, and delays caused by the probate process. Probate court proceedings are public record (meaning anyone can read the will — even your nosy neighbor!), and are expensive, difficult to maneuver without an attorney, and often are breeding grounds for family fights.
It's much better to work with an attorney to prepare a revocable living trust now, than for your loved ones to have to hire a probate lawyer later.
2. Hoffman Thought Outside The Box; But He Could Have Taken Additional Steps To Protect His Creative Wishes.
Many people don’t realize that good estate planning can be as flexible as your imagination! We applaud Hoffman for being creative and trying to pass along more than just his assets. He used his will to promote some of his values, beliefs and goals. Specifically, Philip Seymour Hoffman used his estate and language in his will to express his strong desire that his son, Cooper Hoffman, be raised in Manhattan, Chicago, or San Francisco, or at least visit one of those cities twice each year, to be exposed to the culture, arts and architecture that those cities offer.
This highlights an important reason why do-it-yourself estate planning kits are inferior. They can never address all of the creative and unusual provisions that can be included in good estate documents prepared by experienced estate planning attorneys. In fact, with well-crafted trust documents, important directives like those Hoffman expressed in his will can be made even stronger. With proper drafting, you can literally control your assets from the grave.
Instead of merely goals expressing them as “desires”, assets held in trusts can be restricted and only distributed if certain conditions are met. This means that a “desire” can into a requirement. For example, Hoffman could have restricted his assets so that distributions would only be made each year if his children lived or visited certain areas. He also could have set up separate trust funds for the specific purpose of exposing his heirs to culture, arts and architecture. Given his problems with drugs, he could have used creative estate planning clauses to require his children to be free of drugs or alcohol, be gainfully employed, or even to reach certain education achievements.
When we speak to groups about celebrity estates, we like to remind audience members, “It’s your money; you’ve worked hard for it! Why not use it to enrich your loved ones’ lives?” Philip Seymour Hoffman tried to do so in his will, even though he could have done so better with a creative trust.
3. Hoffman Committed the Critical Error of Failing to Update his Estate Planning Documents.
Much like with Paul Walker’s estate, Philip Seymour Hoffman’s will is dated October 7, 2004 — more than nine years before he passed away. In the interim, he had two more children, yet his will only mentions his oldest child. Wills, trusts, and other estate planning documents have to be updated regularly with life events, such marriages, divorces, births of children, buying or selling businesses, and more.
Did Hoffman only want to benefit his son, not his other children? Of course not! Yet he failed to name a guardian for his two daughters or provide for their inheritances. Because they were born after the will was created, they now have the right under the law to directly inherit their fair shares (unless Hoffman took care of their interests in other ways, such as life insurance).
This means that while his son, Cooper, does not directly inherit (instead the assets all pass to Marianne O’Donnell), his two daughters have the right to do so. Does it matter that Hoffman wanted O’Donnell — their mother — to receive the money? No. He failed to update his will, so the law controls instead of his wishes.
4. Hoffman’s Estate Faces Higher Estate Taxes Than Are Necessary.
Because of the level of Philip Seymour Hoffman’s assets — a reported thirty-five million dollars — his estate faces significant estate taxes. Because Hoffman was unmarried and left his assets to the mother of his children, the entire sum is taxable now, at a rate of up to 40% for the assets over the $5.34 million federal estate-tax exemption, in addition to up to 16% for New York state taxes over $1 million. That’s around $15 million in estate taxes. Plus, there will be taxes again when O’Donnell passes away (assuming the level of assets are still in excess of the estate tax threshold). That’s another $6 million in federal estate taxes alone, if O’Donnell were to pass away this year (not to mention state taxes, depending on what state she lives in).
Had Philip Seymour Hoffman and O’Donnell been married, or if Hoffman had left the funds directly to his children in trust (presumably, with O’Donnell as trustee), the assets would have only been taxed once, not twice. Or, Hoffman could have used other estate planning techniques with more sophisticated types of trusts to minimize the taxes even further.
Instead, more than half of his amassed wealth may be lost to estate taxes.
These are great lessons to share with your clients, friends, family members and loved ones to help encourage them to do their estate planning. Even those without multimillion dollar estates can learn from these estate planning pitfalls. Use Philip Seymour Hoffman’s estate planning mistakes to your benefit.
By Danielle and Andrew Mayoras, co-authors of Trial & Heirs: Famous Fortune Fights! For the latest celebrity and high-profile cases, with tips to protect yourself, your loved ones, and your clients, click here to subscribe to The Trial & Heirs Update. You can “like” them on Facebook and follow them on Twitter and Google+.