Occasionally, we will see unique stories of celebrities and how planning, or lack of it, makes a big difference. These stories in the press act as examples of either good or bad real world planning. By putting a proper plan in place, you can achieve your goals and leave what you want, to whom you want, the way you want.
Actor Phillip Seymour Hoffman was recently in the news after he died in New York unexpectedly from a drug overdose. He was fairly young (at age 46), had children, but was not married to their mother who was his life partner,Mimi O’Donnell. At his death, Hoffman left his entire estate to O’Donnell. Many were surprised that Hoffman left nothing to his children. Hoffman reportedly left his $35 million estate to O’Donnell, because he did not want his children to grow up as “trust fund babies.” Some clients use a similar planning strategy where they leave their children only enough money to meet their basic needs. Many parents fear the consequences of leaving their children so much money that they will never have to provide for themselves again. Ultimately, Hoffman knew what he wanted and put a plan in place.
Unfortunately, Hoffman’s plan had estate tax consequences. The first $5.34 million of Hoffman’s estate was exempt from federal estate taxes. However, the $30 million that remained was taxed federally and through New York state inheritance taxes. If Hoffman had been married to O’Donnell instead of merely dating her, he could have passed all his estate to her tax-free. But, whenever you leave your estate to a person other than your spouse (such as a girlfriend or to your children), you will be taxed on any amount over $5.34 million both federally and through state inheritance taxes if they apply in your state (North Carolina does not have an estate or inheritance tax). Therefore, it is estimated that everything over $5.34 million would carry a combined tax rate of 50% in New York.
If Hoffman failed to leave his property in trust, he would have to pay additional costs for his estate to pass through probate. Trusts allow your assets to pass outside of probate and thus save you these significant costs. However, Hoffman would have had to pay his taxes regardless if his assets were in trust. For this reason, marriage to O’Donnell could have saved him lots of money. Marriage may have been part of his plan that he did not get a chance to complete. Because he remained unmarried, it will cost his estate about $15 million in taxes. Mimi should receive about 20 million dollars after taxes, which isn’t so bad compared to the rest of us but it is sad when a better plan would have saved all those taxes. As planners, we want our clients to be able to leave their property to their loved ones and avoid taxes and fees to the highest degree possible. However, we want our client’s tax planning goals to be consistent with their overall plan. Taxes are less important than accomplishing your ultimate plan, but it’s often nice to do both. Hoffman is an example of someone who had a plan that worked– it just didn’t involve tax savings.
For those concerned about the ramifications of taxes, it is especially important to have an attorney regularly review any documents that you have already created. If you created a revocable living trust fifteen years ago or more, it’s very important to return to an experienced Estate Planning attorney to have those trusts reviewed. The exemption amount for federal estate taxes at that time was far less than it is today (around $600,000). Many families faced estate taxes that would not today. Since that time, the estate tax exemption has risen to $5.34 million, which affects far fewer families. In addition, there is no North Carolina estate or inheritance tax. today. Since few of us must worry about estate tax, income tax issues are more important for 99% of us. But, if we have an old trust that has an estate tax formula in it, we can revise that trust to save significant income tax dollars instead.
Finally, the celebrity Donald Sterling has frequently been in the news as of late, most recently for the sale of his basketball team, the Los Angeles Clippers. Last week, Sterling’s wife, Shelly Sterling, entered into an agreement with Steve Ballmer to sell the Clippers for $2 billion. Interestingly, Sterling did not own the Clippers outright. Instead, a trust owned the team, of which Sterling and his wife were co-trustees. Trustees can change if certain conditions are met as stated in the trust agreement. Sterling’s wife followed provisions in the Sterling Family Trust agreement to have her husband considered “disabled” and no longer able to serve in the role of co-trustee (without going to court). Prior to entering into this trust agreement, Sterling agreed that if these conditions ever arose, he could be removed as a Trustee. Sterling’s situation highlights the benefits of trust planning. You don’t have to be a billionaire in order to create a document that has these types of controls in place. Had Sterling lacked this provision in his trust, then his wife would have had to go to court for guardianship to determine whether he was competent instead. Ultimately, trusts are beneficial, because by the terms of the contract, they state when a person should not be in charge of their property anymore. A judge has since ruled that Sterling was properly removed as a Trustee and the contract to sell the basketball team was proper. While Sterling no longer is in control of his trust, he is still the beneficiary and will benefit, along with his family, the good management decisions that were made after he was removed as trustee. Sometimes you must protect someone from themselves.
If you or your loved one need help planning, or if you have questions about trust planning, or government assistance programs such as Medicaid, Veteran’s Benefits, or other Special Needs programs, consider W.G. Alexander & Associates – we offer a unique blend of asset protection, Elder Law and estate planning. You can also attend our free seminars, learn more through our website at www.wgalaw.com, or call us at (919) 256-7000.
Attorney Bill Alexander discusses these issues and more every Tuesday morning on W.G. Alexander & Associates’ radio program, “Asset Protection Today,” on TalkRadio 850 WPTK (AM). Be sure to listen from 9:00-10:00 AM.