He may have been a brilliant actor, but Philip Seymour Hoffman had much to learn when it came to estate planning. Reports surfaced last week that the former Oscar winner repeatedly rejected the advice of his attorney and accountant, both of whom advised him to create a trust. He said he didn’t want his three children to be “trust funds kids.”
Instead, he felt their mother — and his longtime girlfriend — would take care of them. He viewed Mimi O’Donnell much like a wife, although he did not believe in marriage.
Sadly, because of Hoffman’s aversion to proper estate planning, his 34 million dollar estate faces a huge estate tax bill and other problems that could (and should) have been avoided if he had listened to the legal and financial advice he was given. Hoffman’s girlfriend and children would have been much better off if he had done the proper estate planning, with a revocable living trust (at the very least).
Philip Seymour Hoffman Didn’t Want Trust Fund Kids
A few weeks ago, former Police lead singer, Sting, expressed a similar sentiment. Like Hoffman, he did not want his kids (he has six) to have trust funds. Sting told Britain’s The Mail that he felt trust funds would be an “albatross around their necks.” While he wants to help them if they are in trouble, he wants them to have their own work ethic.
Certainly, these are noble intentions. But these beliefs highlight key myths about trusts — especially revocable living trusts — that simply are not true. There are many types of trusts; the most common and best type for most people is a revocable living trust.
So, courtesy of Philip Seymour Hoffman and Sting, we present Trial & Heirs’ Top Five Myths about Revocable Living Trusts.
1. Trust funds lead to children who are spoiled or lazy.
Hoffman and Sting obviously fell victim to this myth. Certainly, a large trust fund can lead to spoiled children. But it doesn’t have to! In fact, trusts can help the creator do just the opposite. The best trusts are those used creatively.
Hoffman obviously wanted his children to enjoy culture and fine arts, as he spelled out in his will. Why not set up limited trust funds so that the money would be used for those purposes only? Or, perhaps, he could have created a living trust so that his children would receive a modest allowance, but only if they visited a new museum or other place Hoffman approved of once each month.
Sting wants money to be available to help his children if they are in trouble, but not to deprive them of their work ethic. He can solve that by creating a trust for his children that allows them to access a certain amount of money under limited circumstances, such as health, education, or financial emergencies. In fact, he could actually promote better work ethics by setting up a matching trust fund that pays each kid a certain amount based on how much money they earn themselves (complete with exceptions for those who do charitable work, serve in the military, choose to teach children, or any other condition or exception Sting wants).
The point is that a good revocable living trust can achieve almost any goal. A person who sets up a trust with a good estate planning attorney can craft special language to tie the distributions to any number of conditions or events, based on that person’s values and goals.
Hoffman and Sting earned their money — why not pass it on to their children only when and how they want?
2. Trusts are only for rich people.
“I don’t need a trust; I’m not a millionaire.” Estate planning professionals hear this all the time. It’s simply not true. Who is a trust for? How about anyone who wants their heirs to avoid the expense, hassle, aggravation and stress of probate court? A properly-funded revocable living trust can avoid probate court entirely. And, maybe even more importantly, allows the creator of the trust to control their legacy from the grave.
Even for those who don’t care if their loved ones have to deal with probate court, a living trust also helps in other ways. It can help people by setting up one or more people (or institutions, if they prefer) to manage their assets during their life if they become unable to — in the manner, and under the conditions they want. This, again, can all be done without the need for a court proceeding, like guardianships and conservatorships (which many families need when the proper planning was not done).
This is why they are called “living” trusts. Once funded with assets, revocable living trusts start working even during the person’s life.
3. If I set up a trust, then I will lose control.
This is where the “revocable” part of revocable living trusts come in. In most cases, trusts are meant to be revocable, meaning they can be changed, amended, canceled altogether, or added to, whenever the person who signed the trust wants to … as long as they are competent to do so. (Does the Donald Sterling case come to mind for anyone? It should; he tried to revoke his family trust recently to prevent his wife from selling the Clippers — but was he competent to do so? Stay tuned for that one.)
Trusts also foster control even after someone passes away. By setting up a detailed, specific, and well-crafted revocable living trust, everyone can control exactly how, when, if, and why their money passes, and of course, to whom. That means more control for the person creating the trust, not less.
4. I don’t need a trust because I already have a will or joint accounts.
Wills, unlike trusts, have to pass through probate court to work. That means, they are public record, more expensive and difficult to administer, and more likely to lead to family fighting. Philip Seymour Hoffman’s estate provides a great example of this. None of us would know the details of his estate, or to whom or how he wanted to pass his assets, if he used a proper trust instead of relying on a will.
Reportedly, Hoffman also left a great deal of his assets in joint accounts with his girlfriend. While this does avoid probate court, it leads to many other problems. For example, what happens if she has creditor or other debt problems or gets sued? Imagine if she chooses not to use the money the right away, spends it only on herself, or develops a gambling or drinking problem. What happens if she dies or becomes disabled? These common situations can turn reliance on joint accounts into a nightmare.
Plus, there are tax benefits that can sometimes apply with trusts, which wills and joint bank accounts can’t achieve. In Hoffman’s case, in particular, he created an extensive tax problem by leaving the money to his girlfriend, who will pay estate taxes, and then the money will be taxed a second time when she dies or gives the money to the kids (depending, of course, on what tax planning she does and what the estate tax laws are when she passes away). A trust providing money to his children could have avoided the double estate taxes that will be incurred.
5. If I use a trust, I have to leave all the money to my children.
Sting and Hoffman both seem to believe that using a trust means all (or most) of their money has to pass to their children. No! Anyone can set up a trust and name whomever they want to receive their money, including charities, other family members, close friends, trusted employees, etc.
Sting said that he is likely to spend all of his money while he is alive, especially with 100 people still on his payroll. What if he dies sooner than he expects? Would he want to reward some of those long-time, trusted employees? A revocable living trust can help do that as well.
No one has to make the same mistakes that Philip Seymour Hoffman did and that Sting may be making as well. Talk to your legal or financial professional about whether a revocable living trust makes sense for you and your children.
By Danielle and Andrew Mayoras, co-authors of Trial & Heirs: Famous Fortune Fights! For the latest celebrity and high-profile cases, with tips to protect yourself, your loved ones, and your clients, click here to subscribe to The Trial & Heirs Update. You can “like” them on Facebook and follow them on Twitter and Google+.