He may have been a brilliant actor, but Philip Seymour Hoffman had much to learn when it came to estate planning. Reports surfaced last week that the former Oscar winner said he didn't want his three children to be "trust funds kids."
He turned down the advice of his attorney and accountant, both of whom advised him to create a trust. Instead, he felt their mother -- and his longtime girlfriend -- would take care of his children. He viewed Mimi O'Donnell much like a wife, although he did not believe in marriage.
Mr. Hoffman's $34 million estate faces a huge estate tax bill and other problems that could (and should) have been avoided if he had planned differently. So, courtesy of Philip Seymour Hoffman, we present Trial & Heirs' Top Five Myths about Revocable Living Trusts.
1. Trust funds lead to lazy or spoiled children.
Certainly, a large trust fund can lead to spoiled children. But it doesn't have to! In fact, trusts can help the creator do just the opposite. The best trusts are those used creatively. Mr. Hoffman obviously wanted his children to enjoy culture and fine arts, as he spelled out in his will. Why not set up limited trust funds so that the money would be used for those purposes only? Or, perhaps, he could have created a living trust so that his children would receive a modest allowance, but only if they visited a new museum or other place Mr. Hoffman approved of once each month.
The point is that a good revocable living trust can achieve almost any goal. A person who sets up a trust with a good estate planning attorney can craft special language to tie the distributions to any number of conditions or events, based on that person's values and goals.
2. Only rich people have trusts.
"I don't need a trust; I'm not a millionaire." Estate planning professionals hear this all the time. It's simply not true. Who is a trust for? How about anyone who wants their heirs to avoid the expense, hassle, aggravation and stress of probate court? A properly-funded revocable living trust can avoid probate court entirely. And, maybe even more importantly, allows the creator of the trust to control their legacy from the grave.
Even for those who don't care if their loved ones have to deal with probate court, a living trust also helps in other ways. It can help people by setting up one or more people (or institutions, if they prefer) to manage their assets during their life if they become unable to -- in the manner, and under the conditions they want. This, again, can all be done without the need for a court proceeding, like guardianships and conservatorships (which many families need when the proper planning was not done).
This is why they are called "living" trusts. Once funded with assets, revocable living trusts start working even during the person's life.
3. I will lose control if I use a trust.
This is where the "revocable" part of revocable living trusts comes in. In most cases, trusts are meant to be revocable, meaning they can be changed, amended, canceled altogether, or added to, whenever the person who signed the trust wants to ... as long as they are competent to do so.
Trusts also foster control even after someone passes away. By setting up a detailed, specific, and well-crafted revocable living trust, everyone can control exactly how, when, if, and why their money passes, and of course, to whom. That means more control for the person creating the trust, not less.
4. I have a “last will and testament”, so my estate planning is done.
Wills, unlike trusts, have to pass through probate court to work. That means, they are public record, more expensive and difficult to administer, and more likely to lead to family fighting. Philip Seymour Hoffman's estate provides a great example of this. None of us would know the details of his estate, or to whom or how he wanted to pass his assets, if he used a proper trust instead of relying on a will.
To make matters worse, Mr. Hoffman's will is dated Oct. 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 Mr. 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 may have the right to do so.
Does it matter that Mr. Hoffman wanted Ms. O'Donnell — their mother — to receive the money? Not necessarily. He failed to update his will, so the law controls instead of his wishes.
5. I already have joint accounts, so I don't need a trust.
Reportedly, Mr. Hoffman also left a great deal of his assets in joint accounts with his girlfriend. While this does avoid probate court, it leads to many other problems.
For example, what happens if she has creditor or other debt problems or gets sued? Imagine if she chooses not to use the money the right away, spends it only on herself, or develops a gambling or drinking problem. What happens if she dies or becomes disabled? These common situations can turn reliance on joint accounts into a nightmare.
Plus, there are tax benefits that can sometimes apply with trusts, which wills and joint bank accounts can't achieve. Mr. Hoffman created an extensive tax problem by leaving the money to his girlfriend, who will pay estate taxes, and then the money will be taxed a second time when she dies or gives the money to the kids (depending, of course, on what tax planning she does and what the estate tax laws are when she passes away).
A trust providing money to his children could have avoided the potential double estate taxes that will be incurred.
Danielle and Andy Mayoras are co-authors of Trial & Heirs: Famous Fortune Fights! and attorneys with the Michigan law firm, Barron, Rosenberg, Mayoras & Mayoras, P.C. Click here to subscribe to their e-newsletter, The Trial & Heirs Update and learn more about their book. You can reach them at Contact@TrialAndHeirs.com.