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Imagine what it would be like to be the beneficiary of a multimillion dollar estate. Now imagine what it would be like to have that estate reduced by about a third, or $12 million. Not because that money went to another heir, or to charity, but because it got gobbled up in unnecessary taxes and fees.
If that thought makes you a little sick to your stomach, you can imagine what actor Philip Seymour Hoffman’s heirs are going through. Hoffman died in 2014, leaving behind his girlfriend, Mimi, and their three children, who were aged 5, 7, and 10 at the time of their father’s death.
Hoffman’s estate was valued at around $35 million, but because of choices he made (and didn’t make) regarding his estate plan, about $12 million of that amount will never benefit his family. Now, you may not feel too bad for them; after all, they still have about $23 million to work with. But chances are, the estate you’ll be leaving your family is considerably smaller than Hoffman’s. Can you afford to make similar mistakes? Read on to learn how to avoid them.
Good Intentions, Poor Execution in Estate Planning
Hoffman surely had enough money to hire the best estate planning attorney in town. But for reasons passing understanding, his estate plan consisted largely of a will that had been drafted by his CPA. There is some background on why he chose a will; not wanting his young children to become spoiled trust fund brats, he chose to leave his entire estate to his girlfriend, their mother, with the expectation that she would provide for them. He also stipulated that some estate funds were to be used to expose the children to the arts in major metropolitan areas.
Even if she does just that, however, there were gigantic flaws in Hoffman’s plan. The most costly is that Hoffman was not married to his girlfriend at the time of his death. Had he been, the estate could have passed to her entirely tax free. As it was, the estate had to pay about $12 million in estate tax. Even if the pair preferred not to marry, the use of trusts and other estate planning devices could have significantly minimized, if not eliminated, the tax burden on Hoffman’s estate (and eventually Mimi’s).
And estate tax isn’t the only type of tax to worry about: California, where the couple lived, has one of the highest capital gains taxes in the world, when federal and state capital gains taxes are considered together. Income tax planning would have reduced the tax burden on the sale of estate assets in years to come.
Far from making the kids more spoiled, a trust could also have limited their access to assets at any one time, meaning they would be less likely to have access to large amounts of cash before they had the maturity to manage it.
It’s clear that Hoffman wanted to expose his children to cultural opportunities. Establishing trusts for each of them would have furthered that goal as well. Trusts are commonly designed with incentives to induce certain behavior. Hoffman could have created a trust that specifically provided for distributions to pay for travel to cultural institutions in New York, Chicago, Paris, or wherever, and for tickets to plays, museums, concerts, as well as art, music, or acting lessons.
Furthermore, creating trusts for Mimi and the kids could have provided their assets with protection from creditors and future spouses who might later seek to take some of the assets in a divorce. Far from making the kids more spoiled, a trust could also have limited their access to assets at any one time, meaning they would be less likely to have access to large amounts of cash before they had the maturity to manage it.
Hoffman could also have used a trust for the same reason many people with more modest estates do: to avoid probate. A typical, uncomplicated probate case in California takes between nine and eighteen months to complete; a case with significant assets and complexities like this one is certain to take much longer. Attorney fees and other professional fees relating to the estate are paid out of estate funds, further reducing the amount available to the family.
Avoiding Mistakes and Protecting Your Estate
It’s easy to assume we wouldn’t fall prey to the mistakes Hoffman made, but often, our assumptions are faulty (“trust funds spoil kids”) and they lead us to assume misguided positions (“I’ll avoid a trust at all costs”). The best course of action? Speak with an estate planning attorney (not a CPA, as Hoffman did!) and express your goals for your estate plan. That may mean to protect your heirs from burning through their inheritance, to protect them from creditors, to avoid probate, to minimize taxes, or something else.
Once your estate planning attorney understands your goals, they can help you understand the best way to achieve them, and the tax and legal implications of various options. Think of your estate planning attorney as a cab driver. You tell him where you want to go; he knows the streets like the back of his hand, and he knows the best way to get you there. Whether your estate is $35,000 or $35 million, your estate planning attorney will help make sure as much as possible goes to the people you care about.
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