Feb 20 2014, 3:40pm CST | by Forbes
Hoffman’s will, filed yesterday in New York City Surrogate’s Court, was signed in October 2004. At the time he had just one child – Cooper, who is now 11. Subsequently he had two daughters, Tallulah, and Willa, neither of whom is mentioned in the will.
On the face of it, that shouldn’t matter. As widely reported yesterday Hoffman, who died Feb. 2 of an apparent drug overdose at the age of 46, left everything to his longtime companion Marianne O’Donnell, who is the children’s mother. But that’s not the end of the story. In fact it’s only the beginning.
First a little background. Since O’Donnell and Hoffman weren’t married, she doesn’t get any of the estate tax breaks that are available to spouses. You can give an unlimited amount to your spouse, during life or through your estate plan, provided he or she is a U.S. citizen, with no federal or state tax applied. It’s called the marital deduction.
Hoffman’s estimated net worth at the time of his death was $35 million. Federal law provides an estate tax exemption on the first $5.34 million, but then levies a tax of up to 40% against the excess. In addition, New York has its own estate tax, of up to 16%, on the assets left to non-spouses, but only provides a $1 million exemption. All totaled, Hoffman’s estate would owe combined estate tax of more than $15.1 million, says Paul S. Lee, a wealth manager with AllianceBernstein. And since the marital deduction does not apply, any assets that remain when O’Donnell dies could get taxed again.
The will left open the possibility of using Hoffman’s exemption amount another way. It gives O’Donnell the right to disclaim (turn down) all or part of her inheritance and have it go into a trust. Such provisions are designed for flexibility – allowing her to make an informed decision based on her finances and the latest federal and state estate tax laws. Any assets that go into the trust bypass her estate, so would not be taxed when she dies.
Here’s where the problem arises: The trust referred to in the will only mentions Cooper, not his two younger sisters who were born after the will was signed. It provides that he’ll get half the trust principal when he reaches age 25, and the other half when he turns 30.
This is an example of what estate planners call the “after born child” problem. The law of most states, including New York, protects children from disinheritance if a parent forgets to update the will – subject to some ifs, ands or buts. Still, there’s a good argument under the meandering New York law that if O’Donnell disclaims, the other children can share equally in the trust, says William P. LaPiana, a trusts and estates professor at New York Law School.
One thing that could foul things up is if Hoffman made other provisions for them – for example, by making them the beneficiaries of retirement accounts, custodial bank accounts or a life insurance policy (none of which are covered by a will), he adds. In that case Cooper could wind up with a whopping trust, while the other two have relatively little and O’Donnell could spend the rest of her life trying to make up the difference. Her lawyer, Susan Witkin, an estate tax expert with Blank Rome, declined to comment.
The first step, LaPiana says, is for O’Donnell, who is the executor under the will, to ask the Surrogate’s Court to appoint a guardian ad litem to represent the two sisters, and apply the very tangled New York law on the subject to the facts at hand.
All this extra grief and expense because Hoffman’s will was not worded to anticipate the possibility of other children, and he did not update his estate plan after their arrival. One extra sentence in the will could have avoided these issues, LaPiana says, for instance by saying, “Any reference to Cooper includes children born to me after him.”
Had there not been a provision in the will for disclaimer, O’Donnell could have disclaimed with fewer restrictions. In that case, according to New York law, the three children would have automatically shared equally in the assets. But under that scenario the funds could not have gone into a trust and the kids would have gotten the money at age 21.
The postmortem on Hoffman’s estate plan bears an eerie resemblance to that of Heath Ledger, another actor who died young, of a drug overdose. By not updating his will he nearly disinherited his daughter, Matilda Rose, who was 2 when Ledger died in 2008.
Ledger’s three-page will, signed five years earlier when he was 24, probably seemed sufficient at the time. It called for the bulk of his estate to be put into a trust and divided into two parts. Half would go to his parents, Kim Ledger and Sally Bell, and the other half would be split equally among his three sisters – Kate and Olivia Ledger and Ashleigh Bell. But Ledger’s life changed. He was nominated for an Academy Award for his role in the 2005 film “Brokeback Mountain” and had a child with Michelle Williams (who played his wife in the film). They never married and split up shortly before he died. Ledger had not amended his will to mention either Williams or their child.
The situation raised a thicket of legal issues about whether his child was entitled to an inheritance. The answer depended on where Ledger’s domicile, or legal home, was. He was a citizen of Australia and signed his will there, often worked in California and died in his New York apartment. His domicile would determine which law applied.
Fortunately, Ledger’s parents and siblings avoided what could have been years of courtroom wrangling. Nine months after Ledger died, they relinquished their whole inheritance, reportedly as much as $20 million, to Matilda, who was approaching her third birthday. That may or may not be precisely what Ledger would have wanted. By updating his will after Matilda was born to make his wishes clear, he could have eliminated the guesswork and set up a trust for his daughter’s benefit. Under many state laws, the child’s mother could petition the court to put the inheritance in a trust.
Deborah L. Jacobs, a lawyer and journalist, is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide, now available in the third edition.
Source: Forbes Business
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