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Archive for the ‘Probate’ Category

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 (more…)

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My_parents

Estate Planning For Elderly Parents

As our older parents age it is harder for them to deal with the financial details of their lives. With the complicated financial products out there and the low-interest rate environment it becomes very difficult for them to make sound financial decisions. In addition, dealing with one’s own mortality can prevent parents from focusing on their estate plan. As many know, if they fail to have a will, trust or overall estate plan, the state will decide who gets their wealth via the laws of intestate succession.

The situation becomes even more acute in those many cases where there are second and sometimes third or more marriages. Most of these couples do not appreciate the problems that can occur for the surviving family members. A Russian Roulette situation can arise for the families depending on who dies first. Planning and careful drafting is almost certainly necessary in these situations to avoid family warfare and large and usually inevitable litigation costs. Couple this with the emotional toll that these situations engender, you can readily see why estate planning is so vital.  (For more on the estate planning process readers should explore Estate Planning Mistakes: 5 Not So Easy Pieces)

The point here is that children need to help their parents in getting their financial and estate plan in order. However, they must tread very carefully to avoid having their parents think they are acting in a self-serving way. Additionally, children should carefully deal with and tell their siblings of such involvement to avoid any later challenges of overreaching, duress, fraud and undue influence.

So how does one talk with their elder parents about these important issues? To get some ideas about how to approach parents on these vital issues please read my article entitled Estate Planning for Elderly Parents: Discussing Finances and Estate Planning with Your Aging Parents

Copyright © 2012 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.

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In the wake of the sad and tragic deaths of Michael Jackson and Farrah Fawcett, we are all reminded how fragile our lives can be and how quickly things can change. The death of these two iconic figures should be a call to many to put their estate plan in order. It should be noted that the reality is that most people die without wills in our country. Some really smart and famous people, Abraham Lincoln, Howard Hughes, and Pablo Picasso, die without taking the time to draft a will.

Many of us procrastinate, minimize our personal need or the legal importance of drafting wills, trusts, living wills, and durable powers of attorney. The complexities of combining and coordinating diverse assets such as individual assets, jointly held assets, retirement plans, life insurance, annuities and business interests seem just too daunting for some. For others, they do not realize the importance of looking at all of their assets from an overall perspective; namely, when all is said and done who ends up with what.  Is the division of assets fair and equitable to all concerned after the payment of taxes, debts and estate administration costs?

For many, Michael Jackson’s untimely death has raised these and many other estate planning issues. At this point, no one knows whether he had a will and/or trust for his kids, or whether his estate plan was up to date. But by looking at his situation (and speculating a bit), some important estate planning considerations for the rest of us can be explored:

Guardianship: It is unclear what provisions Mr. Jackson had in his will (assuming there is a valid will) for his children. The early word from the media is that this will be a messy battle in the courts over the issue of guardianship of his children, even if his will indicated his preference for guardian.  Even if  challenged, the designation of guardian in a will would still be a very significant factor in any court challenge and laying out your wishes is always a prudent thing to do in any event.  The object lesson is clear: Parents with young children clearly should see the need for a will that indicates their choice of guardian for their children.

Trusts: No one knows whether Mr. Jackson had set up trusts for his children. Although it appears that his estate is now insolvent, this situation will probably change with post-mortem sales of his music someday providing assets and wealth for his children (think after-death income of the Elvis Presley estate).  Hopefully, he set up trusts that will protect and manage his assets.  To increase the possibilities of becoming competent adults, perhaps he drafted provisions in his trust in a way that develops their sense of personal initiative and responsibility yet still provides for their basic needs.  Experienced estate planning attorneys explore this type of forward looking planning when it comes to dealing with children and their anticipated needs if parents die prematurely.

Specific Bequests: The media has speculated that a very large asset of his estate (his Beatles song rights) was gifted to Paul McCartney. This generosity may be commendable, but from an estate planning perspective this bequest may raise problems. First, if his estate is in fact insolvent, this bequeathed asset would not be available to his estate to be sold and the proceeds used to pay down estate debts and/or benefit his children. Secondly, generally, bequests like these are often times given in a way that they bear no estate taxes. This could distort how the assets are divided between beneficiaries. The point here is that this bequest may have made sense when the will was originally drafted when Mr. Jackson was wealthy, but this bequest could be quite problematic in the current situation. The lesson here is that an estate plan needs to be looked at periodically as the family needs and financial situations change over time.

Special Needs Trusts: Farrah Fawcett died leaving a son who is in jail with addiction problems. The issues for people with children with special needs is often minimized, overlooked or not fully considered. As her only child, did she leave all of her wealth to her son? Did her will provide that he was to get his inheritance at her death or did she provide for a trust for his benefit? If she established a trust, what kind of provisions and conditions did she make in providing benefits to him? These tough questions arise not only for children with addiction issues, but for children with cognitive impairments, physical disabilities and emotional issues.  In addition, special needs trusts may be required where children are receiving public assistance from state and local governments.

The Bottom Line: Protect your family and protect your hard earned wealth. Spend the time to plan your affairs with an experienced estate planning attorney.  Remember, if you die without a will and trust, your state intestacy laws will control who will get your assets and how they get your assets. When young children are involved, courts generally place the children’s inheritances in trust in accordance with what a judge deems appropriate.  In addition, the judge will determine who will be the trustee of any trust they impose on your children and they will determine who should be the guardian of your children. These and other important considerations should be determined by you and not by a court of law, so do it and do it now so you do not leave problems like the ones Michael Jackson and Farrah Fawcett may have left behind.

© Steven J. Fromm, 2009

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