Estate mistakes: celebrities may be rich and famous, but that doesn't mean they're immune to disastrous estate planning decisions.
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."
Most people don't realize their wills and trusts have no control over many of their assets. "Accordingly, a financial advisor can help coordinate property ownership and beneficiary designations with the client's will or trust to achieve the desired tax and non-tax results," Giarmarco says.
"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 | Age 46
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."
DIANA, Princess of Wales | Age 36
Death: In August 1997, Princess Diana died in a car accident in Paris, leaving her two sons and 17 godchildren behind.
Estate worth: An estimated 21 million [pounds sterling] in 1997
Estate plan mistake: Among her estate planning documents2 was a "letter of wishes," which stated that a quarter of her personal possessions (worth 100,000 [pounds sterling]) were to be distributed to her godchildren.
Outcome: The executor of her estate did not carry out her wishes, and instead, her godchildren received only small trinkets.
Giarmarco weighs in: "Personal property lists are a common and convenient way to dispose of clothing, jewelry, furnishings, art, etc., without having to amend one's will or trust. Unfortunately, Princess Diana (or her attorney) made a royal mistake by neglecting to reference the list in her will or trust, thereby making it ineffective."
JIMI HENDRIX, legendary guitarist and musician | Age 27
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."
MARILYN MONROE, iconic actress, model and singer | Age 36
Death: In August 1962, Marilyn Monroe died of acute barbiturate poisoning in her bedroom.
Estate worth: An estimated $370,000 in 1962
Estate plan mistake: In her will, Monroe left her acting coach, Lee Strasberg, three-quarters of her estate.
Outcome: When Strasberg died, his interest in Monroe's estate was passed along to his third wife, Anna. Anna eventually hired a company to license Marilyn Monroe products and she profited significantly from a woman she had never known.
Giarmarco weighs in: "Miss Monroe should have established a trust for Mr. Strasberg, providing him with income and principal as needed during his lifetime. Then, upon the acting coach's death, the balance of the trust principal would have passed as Marilyn preferred."
SALVATORE "SONNY" BONO, recording artist, record producer, actor and politician | Age 62
Death: In January 1998, Sonny Bono died in a skiing accident.
Estate worth: Estimated at $1.66 million in 1999
Estate plan mistake: Sonny left his widow, Mary Bono, without even a simple will or trust. Sonny also left behind four children--two adults and two minors at the time of his death--from a total of four marriages.
Outcome: Although Sonny had a surviving spouse, all of his children were entitled to a portion of his estate under California law. The court appointed Mary as the estate's administrator, but she had no instructions on how to sort out distributions. To add fuel to the fire, Mary Bono later had to defend a claim from a love child who came forward and filed as an heir-at-law, as well as a claim from Sonny's famous ex-wife, Cher, who alleged that Sonny still owed her money from their divorce.
Giarmarco weighs in: "Everyone should have a will or trust to dispose of their estate, especially someone like Sonny Bono, with children from multiple marriages. Otherwise, state law determines who shares the decedent's property."
MARLON BRANDO, screen and stage actor | Age 80
Death: In July 2004, Marlon Brando died of respiratory failure from pulmonary fibrosis with congestive heart failure.
Estate worth: Estimated at more than $20 million in 2004
Estate plan mistake: His housekeeper, Angela Borlaza, claimed that Brando verbally promised her continued employment and the house she lived in, saying that he left it in his name for tax purposes. Borlaza sued Brando's estate executors, alleging that she was a victim of a broken oral contract and accusing the executors of transferring power over to themselves via a codicil to Brando's will.
Outcome: Borlaza eventually agreed to settle all claims for $125,000.
Giarmarco weighs in: "Not even 'The Godfather' could prevent claims from being made against his estate, but this dispute could have been avoided by providing for the housekeeper in his will--or specifically disinheriting her."