The tragic death of actor Philip Seymour Hoffman has shaken the entertainment world; His $35 million net worth status should shake up the personal finance world.
The 46-year-old actor executed his will in late 2004, with a trust that took care of his eldest son and left the rest of his estate estimated at $35 million to Mimi O’Donnell, his longtime partner and mother. of their children. However, due to the decisions Hoffman and his family made, estate taxes at the federal and state levels could easily account for more than 40 percent of Hoffman’s total net worth.
Most people are not as rich as Hoffman was. But there are still important lessons to be learned from the problems Hoffman’s family will face—lessons that can help you avoid costly mistakes in your own estate planning.
Marrying your partner can save you a fortune
The most costly issue in the case of large properties is that of marital status. Because Hoffman and O’Donnell were not married, O’Donnell’s estate will not qualify for the unlimited marital deduction under estate tax laws. Although Hoffman will get the benefit of a $5.34 million estate tax exemption, the remainder of approximately $30 million will be subject to 40 percent tax rates.
If Hoffman and O’Donnell had been married, about $12 million more would have ended up in the hands of O’Donnell and his family instead of going to the IRS. Similar issues will affect the amount Hoffman’s estate will owe in New York estate taxes.
(Further: James Gandolfini’s $30 Million Estate Tax Mistake)
Even if you’re not rich, estate planning laws make things much easier for married couples than for single ones. Most state laws provide that the spouse will receive all or part of her estate after her death, even if she never executes a valid will. But if you die without a will and are not married, then your estate will generally go to your children or parents, potentially leaving a long-time partner without the financial support you might have wanted.
Obviously, the decision to get married involves more than just tax and estate planning considerations, but they’re worth keeping in mind when making decisions about your family’s financial future.
Keep your plan up to date
Another thing Hoffman didn’t do was update his estate planning documents. He and O’Donnell had a son when he signed his will, but they later had two daughters. Because he did not update his will to specifically mention the girls, it is unclear whether all three will be treated equally without additional effort on O’Donnell’s part to level the playing field.
Various estate planning laws can help protect family members who were not included in previous wills, including children who were not yet born or spouses who did not marry until a previous will was created. Still, whenever a major life event occurs, such as a marriage, birth, divorce, or death, it is much wiser to make deliberate adjustments to your estate planning to ensure that your documents incorporate your final wishes. Otherwise, the consequences can be extremely unpredictable.
Don’t make your heritage a circus
Finally, Hoffman put his family to unnecessary public ordeal by not using trusts more widely. In most cases involving high net worth individuals, the use of revocable trusts prevents the details of an estate plan from being made public to the general public.
%VIRTUAL-article-sponsoredlinks%Most people write a simple will that directs that all assets not already in the trust be placed there after death, so that if someone forgets to transfer all of their assets to the trust, are not discovered. However, the trust provisions themselves may remain private in those circumstances, protecting family members from having to endure uncomfortable questions from the general public about the implications of specific will provisions.
Be smart with the money you have
Few people have assets as extensive as Hoffman did, and it’s easy to imagine that estate planning is something those with more modest resources need not worry about. But Hoffman’s choices show that it’s easy to create estate planning problems without intending to.
It’s best to anticipate potential problems and address them at the easiest time possible: while you’re still alive to do something about them.
You can follow Motley Fool contributor Dan Caplinger on Twitter. @DanCaplinger or on Google+.
