The tragic death of actor Philip Seymour Hoffman has shaken the entertainment world; the state of his $35 million estate should shake the world of personal finance.
The 46-year-old actor executed his will in late 2004, with a trust providing for his oldest child and leaving the rest of his estimated $35 million estate to Mimi O'Donnell, his longtime partner and the mother of their children. Yet because of decisions that Hoffman and his family made, estate taxes at the federal and state level could easily amount to more than 40 percent of Hoffman's overall net worth.
Most people aren't nearly as wealthy as Hoffman was. But there are still important lessons to learn from the issues Hoffman's family will face -- ones that can help you avoid costly mistakes in your own estate planning.
Marrying Your Honey Can Save Them a Fortune
The most costly issue with large estates involves marital status. Because Hoffman and O'Donnell weren't married, O'Donnell's bequest won't qualify for the unlimited marital deduction under the estate-tax laws. Although Hoffman will get the benefit of a $5.34 million estate-tax exemption, the remainder of roughly $30 million will be subject to tax rates of 40 percent.
If Hoffman and O'Donnell had been married, about $12 million more would have ended up in the hands of O'Donnell and their family rather than going to the IRS. Similar issues will affect the amount that the Hoffman estate will owe for New York estate taxes.
Even if you're not wealthy, estate-planning laws make things much easier for married couples than for unmarried ones. Most state laws provide for a spouse to receive all or part of your estate after you die even if you never execute a valid will. But if you die without a will and aren't married, then your estate will generally go to your children or parents, potentially leaving a longtime companion without the financial support you might have intended.
Obviously, a decision to marry involves more than just tax and estate-planning considerations, but it's worth taking them into account in making decisions about your family's financial future.
Keep Your Plan Up to Date
Another thing Hoffman failed to do was update his estate-planning documents. He and O'Donnell had a son at the time he signed his will, but they later had two daughters. Because he didn't update his will to specifically mention the girls, it's unclear whether all three will be treated equally without extra effort from O'Donnell to even the playing field.
Various estate-planning laws can help protect family members who weren't included in older wills, including children who weren't yet born or spouses who weren't married until after an old will was created. Still, whenever a major life event occurs, such as a marriage, birth, divorce or death, it's much smarter to make deliberate adjustments to your estate planning to ensure your documents incorporate your latest wishes. Otherwise, the consequences can be extremely unpredictable.
Don't Make Your Estate a Circus
Finally, Hoffman put his family through an unnecessary public ordeal by not using trusts more extensively. In most cases involving people with extensive estates, the use of revocable trusts avoids having details of an estate plan released to the general public.
%VIRTUAL-article-sponsoredlinks%Most people draft a simple will directing that all assets not already within the trust be put there after death, so that if someone forgets to transfer all of their property into the trust, it won't go uncovered. Provisions of the trust itself, however, can remain private under those circumstances, protecting family members from having to endure awkward questions from the general public about the implications of specific will provisions.
Be Smart With Whatever Money You Have
Few people have assets as extensive as Hoffman had, and it's easy to imagine that estate planning is something those of more modest means don't need to worry about. But Hoffman's choices show that it's easy to create estate-planning problems without intending do.
The best move is to anticipate potential problems and address them at the easiest possible time: while you're still alive to do something about them.