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The recent death of popular actor Philip Seymour Hoffman points out some estate planning pitfalls. Although Mr. Hoffman executed a will in 2004, he failed to update it after having two children. And Mr. Hoffman earned some significant income in the following years. Moreover, some significant estate tax law changes went into effect after his will was done. His 2004 will leaves everything to the mother of his children. He was not married to her and this is a big problem, at least from an estate tax perspective.
It has been suggested that Mr. Hoffman’s estate was around $35,000,000. Currently, $5,340,000 is exempt from federal taxes with amounts above that amount being subject to a federal estate tax rate of 40%. It would appear then that roughly $30,000,000 of his estate would be subject to estate tax at a 40% rate. This would generate about $12,000,000 in federal estate taxes! New York also has an estate tax. It has been estimated that roughly another $3,000,000 in will be paid in New York estate taxes. Much of that probably could have been avoided with some careful planning.
Hopefully Mr. Hoffman’s estate has enough liquid assets to avoid a forced sale of assets to meet his tax obligations. If Mr. Hoffman had life insurance that might provide for liquidity to pay the taxes due. And the use of an irrevocable life insurance trust would have allowed for excluding the life insurance proceeds from being subject to estate tax.
A follow-up visit to his attorney could have saved millions for his family. The lesson to be drawn from this is: “things change and so should one’s estate plan.”