Hugh Hefner, the media and cultural icon who
died Wednesday at age 91, left behind a sizable estate with an estimated value of more than $40 million, not including the $100 million sale of his home — the Playboy Mansion — last August.
Mr. Hefner, the founder of Playboy magazine, left this fortune to his four children, the University of Southern California film school, and charities, according to various news reports published after his death. The estate had supposedly been worth
upwards of $200 million at the height of his empire in the 1970s (or, more than $1 billion in today's dollars).
His widow, 31-year-old Crystal Harris, isn't inheriting anything from the estate due to an "ironclad" prenuptial agreement signed ahead of their marriage in 2012, but will nonetheless be "looked after," according to news
reports.
How could Mr. Hefner have accomplished this?
Q-TIP TRUST
While it's impossible to tell at this point, estate-planning gurus say the most likely scenario is a stipulation in their prenuptial agreement that Ms. Harris, Mr. Hefner's
third wife, would receive an income stream from various vehicles, perhaps a
trust or annuity, upon their divorce or his death.
That would provide for her without technically bequeathing anything from the Hefner estate.
"That to me seems very likely," said Richard Behrendt, an
estate planning attorney at Behrendt Law and a former estate-tax attorney for the
Internal Revenue Service. "That, to me, fits within common sense and the real world — she trying to protect her interests, he trying to protect his and his kids' interests — and something they could both agree to."
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Mr. Hefner could have, for example, established a Qualified Terminable Interest Property trust, otherwise known as a Q-TIP trust.
This sort of trust would provide Ms. Harris, who was 26 years old when the duo married, with a lifetime income stream, similar to a pension or annuity, derived from the trust's net income. However, she wouldn't have control of the trust, so wouldn't be able to change its beneficiaries.
"However [Mr. Hefner] set it up at his death is set in stone," said Charlie Douglas, director of wealth planning at Cedar Rowe Partners, adding that he often sees this strategy used during second marriages.
These trusts are typically established with stringent conditions, so a beneficiary could tap the trust's principal only in certain circumstances dictated by Mr. Hefner. These conditions are often stipulated as "for health, support, maintenance and education," but could be narrower still, Mr. Douglas said.
Interestingly, the 60-year age gap between the couple poses a rare scenario for Q-TIP trusts. The trust would pass to Mr. Hefner's kids upon Ms. Harris' death if they were listed as the beneficiaries; however, given her age, she may outlive Mr. Hefner's children.
This scenario "hardly ever" happens, Mr. Douglas said.
Two of Mr. Hefner's children, Christie and David, are in their sixties, and the others, Cooper and Marston, are in their mid-twenties.
INSURANCE OPTIONS
Another potential income avenue would be putting life insurance in an
irrevocable trust. The life-insurance proceeds from Mr. Hefner's death would provide an income stream.
However, this scenario is less likely due to the high expense of buying life insurance at Mr. Hefner's age. He was in his mid-eighties when marrying Ms. Harris.
"If they were married 50 years, that might be more likely," Mr. Behrendt said.
A third, yet more unlikely, income option would be the purchase of an annuity by the Hefner estate. Mr. Hefner could have, for example, bought a commercial annuity providing $5,000 per month for his life, and that income would transfer to Ms. Harris upon his death. If annuitized, the principal is considered the insurance company's money.
"I can't imagine Hugh Hefner doing that," Mr. Behrendt said. "I wouldn't think it'd be something high-net-worth people would do. They kind of do the same thing, but through trust planning."
The Hefner estate could also use a combination of the three strategies (annuity, Q-TIP trust or
irrevocable trust funded with life insurance.)
