Philip Seymour Hoffman: Estate Planning Lessons For Us and Especially Women

Estate Planning For Philip Seymour Hoffman

Attribution: Josh Jensen      CC-By-SA-2.0

The sad and tragic death of Philip Seymour Hoffman at age 46 last month is yet another reminder of the importance of estate planning. Most of us go along each day not thinking or worrying about what would happen to our loved ones if we suddenly died.  Some, in an attempt to be conscientious, draft an estate plan but fail to keep such plan up to date.  But most people die without ever doing any estate planning leaving state laws and the courts to decide who should get their estate. When these matters are neglected, surviving family members can be left with momentous legal, tax and financial problems resulting in uncertainty and expensive attorney fees to sort it all out.

Background

Although Mr. Hoffman drafted his will in 2004, he failed to update it after having two children and even after some significant estate tax law changes.  Such changes and ten years usually triggers a meeting with your estate planning attorney. For more on a checklist of events that should result in a meeting with your estate planning attorney please explore Estate Planning Triggers.

Mr. Hoffman’s 2004 will leaves everything to the mother of his children, Marianne O’Donnell.  He was not married to her and this is where the problems start, at least from an estate tax perspective.

Federal and State Estate Taxes

It is estimated that Mr. Hoffman’s estate was around $35,000,000.  Currently, $5,340,000 is exempt from federal taxes (the so-called unified credit) with amounts above that amount being subject to a federal estate tax rate of 40%.  It would appear then that roughly $30,000,000 of his estate would be subject to estate tax at a 40% rate.  This would generate a whopping $12,000,000 in federal estate taxes!

New York also has an estate tax with an exemption of $1,000,000. This New York estate tax has graduated tax rate that goes as high as 16%.  It is estimated that roughly another $3,000,000 in will be paid in New York estate taxes.

Combined estate taxes: $15,000,000.

(Liquidity Side Bar:  Be aware that estate taxes are due nine (9) months after the date of death so hopefully Mr. Hoffman’s estate has enough liquid assets to avoid a forced sale of assets to meet his tax obligations.  Estate Planning Point:  It is not known if Mr. Hoffman had life insurance but having life insurance to provide for liquidity is sometimes essential.  In certain cases, the use of an irrevocable life insurance trust would allow for excluding the life insurance proceeds from being subject to estate tax.)

The point is that even though a meeting in 2004 may have explored marriage as a simple way to save estate taxes, Mr. Hoffman may, for whatever reason, not wanted to be married at that time.  It also could have been that his wealth was not that great in 2004.

But here is the object lesson:  Things change and so should one’s estate plan.

  • A later meeting to review his estate plan would have explored the huge estate tax benefit to being married.  No one is suggesting that people should get married only for tax reasons, however, under federal estate tax rules, inheritances to a surviving spouse are not subject to estate tax.
  • Double Estate Taxation:  Since they were not married, the amounts Ms. O’Donnell receives will be taxed twice.  First, the amount she receives above the unified credit will be taxed at Mr. Hoffman’s death.  When she dies the balance in her estate above her unified credit will be taxed a second time.  Marriage eliminates this double estate tax.
  • Marriage would have provided possible social security, retirement plan, income tax and other financial benefits.
  • If Mr. Hoffman wanted to get married but did not want his wife to have absolute control of his assets, a qualified terminable interest trust (a QTIP trust) could have been used to obtain the estate tax savings while providing income and principal to her during her lifetime.  The assets in this trust would pass to his children at her death.  This would have been the best of both worlds: saving estate taxes but still providing for his wife and children.
  • Sidebar:  A QTIP trust is often used in second marriages where there are children from a prior marriage.

One Strategy To Eliminate Estate Tax At His Death

In a perfect world, Mr. Hoffman could have created a so-called marital deduction trust and a unified credit or by-pass trust by funding each trust based on a formula clause tied to the unified credit applicable in the year of his death.  (Or he could have used the disclaimer trust discussed below to achieve this same result if he was married.) If he had implemented this estate planning strategy his 35,000,000 would have been split between these two trusts with $5,340,000 (the unified credit amount in 2014) going to the by-pass trust and the balance going to the marital trust.  This would have resulted in not having to pay the $12,000,000 in federal estate tax at his death!

With this estate tax planning strategy there may have been some estate taxes due New York because they do not allow an amount equal to the federal unified credit.  As mentioned above, they only provide for an exemption of $1,000,000 not $5,340,000.  (Certain states like New York and Maryland decided to limit or reduce their estate tax exemption and those states are said to have “decoupled” from the federal estate tax system.  Some states such as Pennsylvania do not have any exemption.) However, there are drafting techniques to minimize or defer any state inheritance taxes in decoupled states. The important point is that it may have been possible for Mr. Hoffman to cut or decrease most of the $15,000,000 in estate taxes that his family now faces.

Marital Deduction Is A Powerful Deferral Technique

It is important to understand that the marital deduction is subject to tax at the surviving spouse’s later death.  The $30,000,000 or so that would have been placed in the marital trust would be included in Ms. O’Donnell’s estate at her death.  But if she survives for a long time, then the power of deferral and the time value of money will allow the assets in the marital deduction trust to grow very large, leaving a lot more money available to her and for her family’s benefit.

When Ms. O’Donnell dies, she would have her own $5,340,000 unified credit or exemption, as adjusted for inflation, that will be used to reduce her estate taxes.

If I have lost anyone here, the point is that deferral of taxes on the marital share will result in leaving more assets available to the surviving spouse during her lifetime and to the children and grandchildren at her death.

Disclaimer Trust

Mr. Hoffman’s will provided that Ms. O’Donnell could disclaim a portion or all of her bequest.  Whatever amounts she disclaimed would go into a trust.  This estate planning tool is used to give a spouse maximum flexibility to either take her inheritance or disclaim it for the benefit of her children based upon the circumstances of the family and tax laws at the time of death.  It is similar in effect to the marital deduction and by-pass trust with the formula clause discussed above, except that it provides more control to the surviving spouse or in this case Ms. O’Donnell. In Mr. Hoffman’s situation, two problems exist under his 2004 estate plan:

  • First, as discussed, since Ms. O’Donnell is not married, then anything she keeps above the federal estate tax exemption is subject to federal estate tax. As we saw above, this results in a huge estate tax bill.
  • Second, the disclaimer trust that Mr. Hoffman drafted in 2004 only provides for one of his children.
    • It is somewhat surprising that the language in the document did not include a provision for children born after the will or trust was drafted.  A simple well drafted sentence or two would have solved this problem.
    • Once again, had Mr. Hoffman met with his estate attorney to review his estate plan periodically this problem would have been prevented and corrected very inexpensively.
    • Since he failed to update his legal documents to include his later born children in his estate plan, now a guardian ad litem may need to be appointed for each of the unnamed children by petitioning the court.  This may require attorneys for both children (or perhaps one attorney) and obvious additional legal costs.
    • Anxiety, uncertainty and expense will occur with petitioning the court to have a determination made as to whether the other children should share equally in this disclaimer trust. States have different rules and case law on this issue.  It is possible that a New York court may find that the after-born children who were not named in the will or trust (called pretermitted children) are not entitled to share in the estate.
    • This is a far more expensive and uncertain situation than simply meeting with an estate planning attorney to periodically revise and update one’s estate plan and the related documentation.
    • Keeping these matters private, especially for a celebrity, should be a priority.
    • The whole idea of estate planning is to leave your family with a workable and streamlined estate plan with minimal involvement from the courts.

Will Substitutes

It should also be pointed out that will substitutes can distort any estate plan.  If Mr. Hoffman had set up custodial accounts or payable-on-death (POD) accounts in the name of his one son and failed to revisit and re-balance his assets, he may have unwittingly given his son a disproportionately larger share of his estate.  This would also be the case with any retirement plan and life insurance beneficiary designations.  This is yet another reason to have a periodic estate planning review to make sure the prior estate plan has not been compromised by unwitting or unknowing actions such as changing the title of assets, form of ownership, change in beneficiary designations, and the like.

It is unfair to make any value judgments about what was done or not done in regards to Mr. Hoffman’s estate plan.  There are, however, some very critical object lessons for the rest of us:

Estate Planning Lessons For Spouses and Unmarried Women With Children

It is so important to learn and know about estate planning matters.  Usually women have a different perspective on these matters.  They should not rely on their husband or significant other to make these critical decisions that can impact them for the rest of their lives.  They need to consider that if their loved one dies everything falls on them.  The gravity of this reality is something that is hard to comprehend and appreciate but prudence and due care should be brought to these important considerations.

In my practice, many times it is the wife who is initiating and in some cases forcing the estate planning discussion.  It is clear from this discussion that women should not rely on their husband or significant other to take care of these essential and critical matters.  The important point here is to get involved in the process and make sure your estate plan is something that will actually work in practice and is something you can live with after your loved one’s death.

Implementing an Estate Plan That Meets Your Specific Family Needs and the Essential Periodic Review

The estate planning process is extremely personal with some really hard choices to be made.   It is important to understand that sometimes these are matters of the heart and taxes and financial issues may be secondary considerations.  This article is not suggesting what Mr. Hoffman’s particular estate plan should have been.  But the important point here is that sound, comprehensive and effective estate planning must address the entire and specific financial, family and tax considerations of each particular client.  Good estate planning should explore all the possibilities and pitfalls while determining which estate planning techniques will work best for the family’s current situation.

Bottom Line: In light of all that has been discussed here, by all means have your estate plan done by an attorney with the expertise and skill to implement your wishes.  Remember to have your estate plan periodically reviewed to avoid problems for your family when you are no longer here.

For those interested in learning more about estate planning the following articles may be worth exploring:

Estate Planning: Now What?  A Must Read For Everyone

Helping Elderly Parents with Their Finances and Estate Plan

Michael Jackson & Farrah Fawcett: Estate Plan Wake Up Call

Estate Planning: 5 Not So Easy Pieces

Gifting Shares of Stock In A Bad Economy

Non Citizen Spouse & The Qualified Domestic Trust

Disclosure and Disclaimer: As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws. This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

Copyright © 2014 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved. 

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29 responses to “Philip Seymour Hoffman: Estate Planning Lessons For Us and Especially Women

  1. Pingback: R. Byan Nace - Attorney at Law » Estate Planning Lessons from Philip Seymour Hoffman’s Estate

  2. Steven:

    Thank you once again for rubbing the potential wound to try to get people to think about “testing all fire extinguishers before the fire”. Discussions like these are always necessary to keep nudging the public, professionals and forward thinking advisors toward a more kindly assertive posture.

    Opinion:
    In some ways, we have evolved toward Three large pitfalls; ONE, as mentioned, the time and reality slip -leading to doing nothing or to not updating wills and documents to reflect current desires, TWO, the complacency that comes with having done something recently and not dynamically re-visiting those goals and the possibility that there are always changes in context, circumstance and intent change, and THREE, letting the protection of assets override legacy planning for the majority of the stakeholders .

    If we assume the end of life can be just around the corner, then we have to assume that our intents for the use of our assets is always in play, spoken or not, day to day. Yet, the age-old scare tactics of “it will be too late some day” and “we could all go in a heartbeat” just don’t generally work. However, legacy planning does work necessarily, per se, move people off of their recalcitrant habits and toward proper planning. Theoretically “proper planning” would be moving from mortality arguments to more lasting and satisfying discussions, which can lead far more easily to revisiting it gladly many times over the course of a lifetime -because it is logical and interesting. Yes, one’s death is logical and frighteningly interesting to some but one’s demise has never been, in our society, a good base component of a conversational about hope and legacy, and early deaths of celebrities will not change that behavior for most.

    One of the great issues is just how fast and furious, for we humans, situations can deteriorate from rational and well meaning to incompetent and irreparable. That of course is true of both sides of the end-of-life fence. Here, you discuss the preemptive merit of that preparation, toward which such insight guides us. Yet, we still tragically lag in the action to get it done. Ironically, life gets in our way.

    As a reoccurring example: Here at our charity, folks, as part of their end-of-life giving, have planned in their estates to help us preserve the voices or our Military and their Families to reduce their brutal stresses of Military life. However, due to all these reasons and more, which everyone has discussed here, when the intent is great but the timely and continued preparation is not followed through, we have seen many end of life scenarios that intended so much more giving that actually procrastinated until they finally played out with no significant legacy giving at all. We have seen this with many fellow charitable entities.

    Sure, as in our case, in these poor planning circumstances, the Military Members and their Families simply receive less than the number of voice preservation recordings they request, when estates do not follow their stated intent of support; however and most importantly, if the partnership with the estate was collaborative and a legacy one, and not simply a transactional one, then the charity and planner should also be concerned that the desired legacy impact intent of the deceased was not followed or even realized. So many times toward the end of life, everyone is so concerned with the distribution of assets that they forget the incremental build toward legacy philanthropic actions that a person thought over but never articulated or realized.

    Like Ann said, “You don’t need to have $35 million in assets to learn from this.” Careful and dynamic estate planning is prudent for every dollar of resource. It also can represent far more than simply a protection and distribution of assets. It can represent a stewardship of legacy intent. Planning is limited to what everyone knows about the owner’s intent, the owner’s intent knowledge about what is possible, and the integrity and dynamics of iteratively building something for that owner that lets their potential grow at the end of life rather than just twilight and fuel others’ dreams. Yet, when poorly done or allowed to stagnate, such poor or non-existent planning and under-skilled and crossed-purpose stewardship can grievously limit the potential good a person’s life assets can leverage in a better future for their relatives and for their altruistic goals.

    So, I am simply suggesting that the approach of more preparation for these discovery and planning issues is far more than a legal issue, and the need to revisit the possibilities and intents of the owner do continually increase, as we move with them toward their last years of life, or indeed any years of life –not to avoid simply a surprise, inconvenience or hardship but rather to laudably preserve potential.

    For one, I believe if there was far better stewardship of a person’s legacy potentials and intents, well before the riskier times brought on by chronic health, chartable entities like ours would be far better funded in perpetuity, not because they got there first and/or had better connections or manipulative practices but rather because the caring stakeholders actively worked with the owners toward their actual deep legacy potentials.

    Again in my opinion, the reason we will always do better in the future is because of the folks like those in your discussion who sense better and look for the path to guide, not manipulate, others and not because of a celebrity on drugs who hit the mat early, without proper planning.

    -Military Family Voices

    • Wow. William, very strong stuff indeed. Your lifetime of experiences in this area are clearly evident in this most provocative post. Yes, estate planning from a legacy standpoint can and is so much more.

      I would say that many clients are more concerned with the basic transfer of wealth to those in their family that they think are deserving. How they transfer this wealth is where things get less clear. Talking about trusts and how the protect and preserve is harder for many to grasp. This is where educating clients and listening to their goals can really make a difference.

      Discussions of combining charity into the equation is always explored with those with some very strong feelings about this way of disposing of wealth. From outright bequests to charitable trusts and foundations the ideas do get challenging and for some very compelling.

      Anyway, your more global and charitable perspective is a very important consideration and should be explored with every client. You have provided so many meaningful points to consider.

      Really appreciate you taking the time to comment here. Bill, one thing. It would be great if you could post your comment at my blog by cutting and pasting parts 1 and 2 together. This would give non-LinkedIn members the chance to read your insights. That would be great if you could do this. All the best to you!

  3. Whoa! Great read and really good information. Not wanting to deal with this stuff is not a good excuse for being stupid. You’ve pointed out some good tips that could have avoided a lot of taxation on his estate.

    • Thanks for stopping by and reading my post. Yes, this inattention to details and vital matters will get a family into deep trouble. It is also very important to use an estate planning attorney who does this stuff all the time. Mr. Hoffman used a real estate attorney, which was not very smart as can be seen by the quality of the documents produced by him.

  4. Great post, detailed and informative. I think this is the time where marriage sometimes makes things easier (less expensive in this case). Thanks for reminding me the importance for estate planning.

  5. Yikes!!! 40% on $30MM is not pretty! If I ever amassed that much, I’d be sure to heed your advice and get the help of a professional!

    • Derek, people do not realize that the estate tax rate starts at 40%. With the large exemptions of today this is a problem for only the richest. But if Congress cuts back on this exemption, more people need to be concerned. Finally, the family aspects of estate planning are still important and makes doing estate planning still important regardless of tax implications.

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  9. Great post. its nice to be reminded how important estate planing really is..
    we all should check that more often and see if everything is in place.
    Thanks!

    • Hey Roy. Yes these type of tragedies and their aftermath is a sober reminder for us to get busy on our financial and estate affairs. Periodic review is often neglected and we see the results of that in Mr. Hoffman’s case. By the way, it has now come out that he had a real estate attorney draft his estate plan.
      Anyway, thanks for your comments, your kind words and stopping by to read my stuff. All the best to you.

  10. For some people talking about life insurance, health insurance, funeral arrangements, health decisions, state planing and death are difficult subjects to approach; especially because they are very delicate and most of them deal with taxes, legal consequences and family matters.
    Thanks Steve for sharing with us your expertise and specially for doing it in a such a clear, extensive and understandable way.

    • It is my pleasure Maria. You are quite right that these are very sensitive and at times emotionally charged matters. It is sometimes difficult to focus on these vital and most critical matters but your family’s financial well being is at stake in many situations.
      Thanks for stopping by and commenting. Be sure to pass on the link to this article to all your girlfriends.

  11. Steven, I am so glad I found YOU! Your expertise is stellar. I cannot emphasize how important it is to have things in place, for a couple, – everyone should know this – and take care of their plan, as I have experienced how bad it can be without. Thank You!

    • Yes Ava, your words reflect on how bad things can go when estate planning is neglected. Hopefully, this will reinforce readers as to how vital it is to get their estate planning done and get it periodically revised. Thanks so much for offering your real life, first-hand experiences to make this issue real.

  12. When I wrote my book I realized that most of us never get ALL the work done to complete our lives. What is left behind is years of family conflict, lots of taxes and often the families are destroyed with all the probate battles.

  13. Susan Daily CFRE

    I like this article a lot. It also makes the importance of access to marriage stand out as a civil right. What do you think people in states like Pennsylvania who are GLBT should do to protect themselves? I believe it was a suit about estate taxes that was heard at the Supreme Court that led to the fall of DOMA on a federal level. As a tax attorney in PA, I am sure you have ideas.

  14. Excellent article, and a cautionary tale that reminds us of the need for thoughtful estate planning – and the need to revisit those plans once in place. You don’t need to have $35 million in assets to learn from this.

  15. Steven–what a detailed helpful account with solid advice for technicians and an important message for the rest of us: plan now, review/revise, revisit and enjoy the peace of knowing that your resources will go where you want! I will share this article widely with professional advisors in my network. Susan Axelrod

  16. Great inspirational post to be shared. Every one must learn this tough lesson from this women that was left behind by her man. Thanks for such an inspirational and thought provoking post….

  17. Pingback: Phillip Seymour Hoffman: Lessons For Us and Esp...

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