Philip Seymour Hoffman was a talented, Oscar-winning actor and a troubled man. When he died from an apparent heroin overdose in February, he left behind his long-time partner, Mimi O'Donnell, and three pre-teen children they had together.
He also left behind an example of estate planning gone wrong, a cautionary tale of what you should not do when setting up your final affairs.
For despite his wealth - an estimated $35 million - Hoffman provided no direct financial security for son Cooper and daughters Tallulah and Willa. Not wanting to have his children grow up, as he told his lawyer, "trust-fund kids," Hoffman left them nothing in his will, instead leaving his entire estate to O'Donnell.
Despite being long-time partners, Hoffman and O'Donnell were never married, because, as numerous reports state, Hoffman didn't believe in the institution. And therein lies one of the big problems with his estate.
Because they were not wed, O'Donnell does not qualify for the marriage exemption on inherited assets. Instead of the entire $35 million passing to her tax-free, Forbes reports, she only qualifies for the federal estate tax exemption for the first $5.34 million - leaving the other approximately $30 million fully taxable. Clearly, being married is in your clients' best interests.
By federal law, the rest of Hoffman's estate is taxable at up to a 40 percent rate. On top of that, New York has its own estate tax, up to 16 percent for non-spouses with only a $1 million exemption. According to Forbes, that leaves Hoffman's estate owing up to $15 million in taxes. AsDailyFinance says, not being married cost O'Donnell and her children $12 million that will go to the IRS.
From a tax standpoint, Hoffman's case isn't that far removed from the estate mess actor James Gandolfini left when he died. In Gandolfini's case, his poor planning left his estate owning up to $30 million to the IRS.
Finally, because the marital deduction doesn't apply, assets left when O'Donnell dies could get taxed again. A principled stand on marriage is one thing, but being willfully financially irresponsible is another altogether.
Hoffman made out his will in 2004 when son Cooper was then about 1 year old - and then never revised it. Several reports say that the will set up a trust for Cooper, but it was in effect only in the event that O'Donnell died before Hoffman. Daughters Tallulah and Willa are not mentioned in the will.
Clearly, the lesson for our clients is to update your wills and estate planning documents every time a life-altering event occurs, be it marriage, divorce, the birth of a child or a business venture that takes off.
Hoffman's desire that his children not live as trust-fund kids is fine in principle but nearly negligent in practice. We've all heard the tales of trust-fund kids growing up with an unearned sense of entitlement that leads to all manner of personal and legal problems, from drug abuse to flouting the law. But it's not like Hoffman had to set his kids up for life; famously, billionaire Warren Buffett has said he isn't leaving his children his vast wealth, instead giving them the tools to succeed - or fail - on their own.
Hoffman wasn't a billionaire, but making provisions to have his children's college education paid for would seem reasonable at the very least. By not providing for them directly in his will, his children are left potentially financially vulnerable.
Of course, Hoffman could have provided other financial protection for his children, through retirement accounts, custodial bank accounts or life insurance polices - none of which, Forbes says, are covered by a will. Gandolfini left his son a $7 million life insurance policy, which is not subject to taxes.
Clearly, by leaving his estate to O'Donnell, he expected she would provide for their children. And there's no reason to believe she won't. After all, she kicked Hoffman out of their $4.2 million apartment because of his heroin use. However, there's nothing to stop her if she decides to blow through the money, leaving nothing for the kids.
And what happens to the children if she marries someone else? If O'Donnell dies while married, her wealth passes to her spouse, who could cut Hoffman's children out completely. That's surely not what Hoffman would have wanted, but unintended consequences have a way of shaping people's lives - for better or worse.
To learn more about common estate planning issues, check out our free guide, Estate Planning Pitfalls: The 12 Most Common Threats to Your Estate & Your Family's Future, or to discuss your estate planning concerns, please call our office at 919-443-3035 or use our contact form.