He needed a script: Actor Philip Seymour Hoffman left a legal mess behind

In leaving estate outright to his partner, star stuck her with a multimillion-dollar tax bill

Feb 20, 2014 @ 11:39 am

By Darla Mercado

Actor Philip Seymour Hoffman may have left his partner and mother of his three children with a multimillion-dollar tax bill.

Such are the findings of estate planning experts who've had a chance to peruse the late actor's will, which was signed on Oct. 7, 2004 in New York — more than nine years before his death. Though the will doesn't outright state the size of Mr. Hoffman's estate, news reports citing CelebrityNetWorth.com are pegging that number at about $35 million. He was found dead Feb. 2 in his Manhattan apartment.

Mr. Hoffman and his partner Marianne O'Donnell were not married, but the actor left his estate to her directly. The couple had three children together.

(Seen this before? Gandolfini's estate may get whacked with $30 million tax bill)

Per the will, if Ms. O'Donnell renounces or disclaims any portion of the inheritance, that amount will go to a trust fund that's held in the name of his son and eldest child, Cooper Hoffman, who was only a year old when Mr. Hoffman signed the will.

Mr. Hoffman and Ms. O'Donnell had two daughters in the years after the will was drafted, one in 2006 and the other in 2008. The document does not account for them.

Though wills are public documents and trusts aren't, it is possible that Mr. Hoffman may have set up trusts since he had signed the will and transferred assets to them to reduce the estate.

But based on public documents, experts agree certain provisions could've been added to the will to better protect the estate from taxes.

“He should've left the assets in trust to Ms. O'Donnell instead of outright because by leaving them to her outright, it'll get taxed at his death and again at her death,” said Steven J. Oshins, an estate planning attorney at Oshins & Associates. “You never want to leave assets outright to someone who is on the same generational level as you.”

A trust would also protect the inheritance from creditors and pass the assets over to descendants after the survivor's death.

A continuing trust established for Mr. Hoffman's children would have also been a better alternative to setting up only one trust for Cooper, Mr. Oshins noted. The trust for Mr. Hoffman's son can be decanted in order to change the terms. “The trust for Cooper pays out half of the money at 25 and the remainder at age 30,” he said. “In a continuing trust, it wouldn't be subject to Cooper's creditors and any divorcing spouses.”

As far as Mr. Hoffman's children, Ronni Davidowitz, head of Katten Muchin's New York trusts and estates practice, noted that the estate should have had language that did not specifically name the one and only child that the couple had at the time. There was no language to consider future children. “The key thing here is the failure to provide for the after-born children,” Ms. Davidowitz said.

Failure to account for future children could potentially lead to a disinheritance if the language of the will doesn't count them. Different states have property rules that consider pretermitted children — those who were born after the will is executed — when deciding what they can inherit under the will.

“There isn't anything that covers pretermitted children in New York,” said Ms. Davidowitz. “The lesson here is to be a little more open when there is a chance that you'll have more children, and when you have life events: children, marriage or a divorce, make sure you update your documents,” said Barry C. Picker, an accountant at Picker & Auerbach CPAs P.C.

Had Mr. Hoffman married Ms. O'Donnell, experts agree that would have brought other benefits to the estate.

“You wouldn't want to get married just for estate planning purposes, but if they were, he could pass the estate to her free of estate taxes,” said Charles Douglas, a financial planner and editor of the National Association of Estate Planners and Councils' Journal of Estate & Tax Planning.

For calculation's sake, if the estate were valued at $35 million, it would qualify for the $5.34 million estate tax exemption. About $30 million would then be taxable at the federal rate of 40%, which adds up to about $12 million in federal estate taxes.

Were they married, Ms. O'Donnell could take advantage of the marital deduction, which would permit the assets to be transferred to her with little to no estate tax. A couple that's legally married also has a combined estate tax exemption of $10.68 million, as opposed to the $5.34 million for singles.

The one thing that is certain now is that Ms. O'Donnell likely has a lot of estate planning work ahead of her to contend with the inheritance. Mr. Oshins suggested forgoing the use of Mr. Hoffman's estate tax exemption, as the inheritance is passing sideways to his partner and not the kids. Ms. O'Donnell can then “make a big gift into a better-drafted multigenerational trust for all three of the kids,” he said.

“As the sole surviving parent, Ms. O'Donnell should have a better will in place if she doesn't have anything that protects all the kids,” said Ms. Davidowitz. “She should minimally get her own house in order.”

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