Many celebrities accumulate large, diversified fortunes, have complicated family lives, and are greeted at every corner by family, friends and acquaintances looking for some extra dough. While less-than-perfect estate planning is certainly rampant among all socio-economic classes, an affluent celebrity’s failure to create a properly drafted will and an explicitly clear estate plan can result in a legal and emotional uproar after their death.
Julius H. Giarmarco, Esq., partner of Giarmarco, Mullins & Horton of Troy, Mich., says the biggest pitfall he sees among the affluent is a failure to maximize lifetime giving, since the federal estate tax is only vulnerable to lifetime gifts.
“Although the implementation of sophisticated wealth transfer strategies is mostly in the domain of estate planning attorneys,” he says, “the financial advisor can be the driving force to get the plan started.”
As an individual’s estate amasses more wealth, the need for financial advice grows. Yet people often fail to coordinate estate plans with all financial professionals involved — estate planning attorneys, financial advisors, accountants and bankers — according to Giarmarco.
He also notes that failing to communicate one’s estate plan to loved ones “increases the chance of conflict when the plan actually does go into effect, particularly where children from prior marriages are involved, or where beneficiaries include non-family members.”
Lack of liquidity is another common issue with large estates. A life insurance policy can immediately provide capital to pay estate taxes on an income-tax-free basis, but, Giarmarco warns, “life insurance proceeds are subject to estate taxes if the insured owns the policy.” He offers a simple solution: Have the policy owned by an irrevocable life insurance trust for the benefit of the insured’s spouse and family. “With an ILIT, the insurance proceeds will be both income- and estate-tax-free.”
“Like many people, high-net-worth individuals often make the mistake of not realizing their wills and trusts have no control over many of their assets.” Giarmarco notes that, regardless of what the decedent’s will or trust says, jointly titled bank accounts, brokerage accounts and real estate pass on to the surviving joint tenant, while retirement plans, IRAs, annuities and life insurance all pass to the designated beneficiary.
“Failing to update and review one’s estate plan periodically can produce unnecessary estate taxes and possible will contests,” he adds. Life changes such as births, divorces, and change in the size of the estate are all cause for an estate plan update.
While most estate planning mishaps are avoidable, the following six celebrities weren’t able to correct their mistakes in time — often costing their loved ones large amounts of money and anguish, and in other cases, benefiting individuals who might not have been in good standing with the deceased.
Philip Seymour Hoffman, actor
Death: In February 2014, Philip Seymour Hoffman was found dead in his Manhattan apartment. The investigation ruled that his death was caused by an accidental “acute mixed drug intoxication.”
Estate worth: An estimated $35 million
Estate plan mistake: Hoffman wrote his will in 2004 after the birth of his first child with long-time companion Mimi O’Donnell, whom he never married. He and O’Donnell had two more children in the next 10 years, but Hoffman never updated his will to include them. Hoffman also did not have a revocable trust, which would have kept the details of his estate plan from becoming available to the general public.
Outcome: Though his estate will benefit from the $5.34 million estate tax exemption, the rest of his estate — around $30 million — will be taxed at 40 percent. Since Hoffman and O’Donnell were not married, O’Donnell’s inheritance doesn’t qualify for the unlimited marital deduction under estate tax law, which means an additional $12 million will go to the IRS.
Giarmarco weighs in: Had Mr. Hoffman married his long-time companion, Mimi O’Donnell, the estate tax (40 percent) on the portion of his estate that he left to Ms. O’Donnell (in excess of his $5.34 million estate tax exemption) could have been deferred until her subsequent death. Thus, Mr. Hoffman violated the three principals of taxation: Defer, defer and then defer.
Jimi Hendrix, legendary guitarist and musician
Death: In September 1970, Jimi Hendrix passed away at the age of 27 of accidental barbiturate-related asphyxia, although the details surrounding his death have been widely disputed.
Estate worth: An estimated $80 million in 2002
Estate plan mistake: The musician did not have a will. For nearly 20 years, a California attorney managed the estate until Jimi’s father, Al Hendrix, sued and won the rights to Jimi’s music. Al went on to create various trusts, partnerships and corporations. When Al died, he left the estate to his adopted daughter, Janie, from a later marriage. Jimi’s half-brother, Leon Hendrix, who was reportedly very close with Jimi, sued to be written back into the will, claiming that Janie manipulated her father into cutting Leon and other relatives out of any inheritance.
Outcome: Although the judge ruled that “Janie was the family member Al trusted the most,” some small victories were granted to Leon’s side.
Giarmarco weighs in: “Someone unknown and unrelated by blood to Jimi Hendrix, his step-sister, ended up with the bulk of the musician’s estate simply because he neglected to execute a will or living trust.”
Salvatore “Sonny” Bono, recording artist, record producer, actor and politician
Death: In January 1998, Sonny Bono was killed in a skiing accident.
Estate worth: Estimated at $1.66 million in 1999