Oscar winning actor Philip Seymour Hoffman’s $34 million estate is facing a huge tax bill because of poor estate planning. Like fellow celebrity Sting, who is reportedly worth $300 million and recently said he did not want his six kids to have trust funds, Hoffman did not want his three children to grow up to be so-called “trust fund kids,” according to multiple reports in July.

To make matters worse, Hoffman, who was 46 when he died of a drug overdose this February, also repeatedly eschewed the advice from his lawyer and accountant to create a trust. Instead, he had joint bank accounts with their mother, his long-time girlfriend Mimi O’Donnell, and believed she would look after their children’s long-term interests. (For related reading, see: Estate Planning: An Introduction.)

Sting’s beef with planning for his kids’ financial future by setting up trust funds? Such trusts would prove to be “an albatross around their necks,” her reportedly told Britain’s The Mail. 

Call it the “celebrity fear of raising spoiled brats” syndrome. (For related reading, see: An Estate Planning Must: Update Your Beneficiaries.)

Unprecedented Wealth Transfer

Hoffman’s poor estate planning underscores the need for both celebrities and us common folk to seek competent advice when leaving assets to our heirs and loved ones. Hoffman’s example is also a wake-up call to the staggering need for such estate planning advice in the context of the near and long term national wealth transfer of $58 trillion that started in 2007 and will run until 2061, according to one new report. (For related reading, see: Top 7 Estate Planning Mistakes.)

By not setting up some type of trust, Hoffman not only increased the amount of taxes his estate will pay to the IRS, but it took away his estate’s potential control to send his wealth to charities and institutions he admired. One of the great American actors of the past 20 years, Hoffman most likely would have wanted to use his estate to put his stamp on an arts organization or acting school that helped shape his talent and career. 

The coming transfer of wealth in the five and a half decade period covered by the report is staggering. Of the $58 trillion in U.S. wealth that will be passed, the potential total to charity is $26 trillion, according to report. 

That means 45% of the total wealth transferred could go to charitable giving. (For related reading, see: 6 Estate Planning Must-haves.)

Golden Age of Philanthropy

Titled “A Golden Age of Philanthropy Still Beckons: National Wealth Transfer and Potential for Philanthropy,” the report was conducted by John Havens and Paul Schervish for the Center on Wealth and Philanthropy. 

The report provides data based on a variety of growth scenarios. The figures cited here stem from a 55-year period, 2007 through 2061, in inflation adjusted 2007 dollars. The figures are also calculated based in a 2% annual growth scenario, which some economists believe to be likely over at least the near term. From the end of World War II through 2007, however, the economy has grown at a real rate of more than 3.3% annually, and during that time household wealth has grown at nearly the same rate. So, the transfer of wealth to charities could be more if the U.S. economy returns to the form it showed for decades before the great recession. 

Americans are a generous people who also don’t like to pay taxes. The potential transfer of wealth to charity proves this point, with $20.6 trillion of total lifetime giving and $5.4 trillion in charitable bequests. 

Where will this money go, particularly as the wealthy are increasingly making plans for their assets as part of a general estate or legacy plan while still living? (For related reading, see: Estate Planning Basics.)

Wealth Transfer Winners

“The transfers made during this period of life often involves donations to non-profit organizations, family foundations, donor-advised funds and charitable trusts,” according to the report. The wealth transfers “present an opportunity for the potential donor to allocate even more than usual amounts to a broad range of charitable causes and to experience the results of these gifts during their lifetime,” the report concludes. (For more, see: Cut Your Tax Bill With Donor-advised Funds.)

From the point of view of the charitable organization about to receive such largesse, this trend means they get an increasing amount of the wealth earlier than if the transfer was to come from an estate. Also, the wealthy donor typically plans such donations years in advance. In other words, early planning on the part of the donor means early receiving for the charitable organization. (For more, see: Differences Between Private Foundations and Public Charities.)

So, a lot of wealth will be transferred to charities. But there are plenty of mistakes individuals can make, with celebrities recently serving as examples. Here are a few quick rules of thumb to use when considering a charitable donation, keeping in mind the changes that kicked in last year due to American Taxpayer Relief Act of 2012. (For more, see: Top 8 Estate Planning Mistakes.)

-    Documentation of the donation is of the utmost importance. You must get all necessary documents from the charity or non-profit so you can claim the charitable deduction. 

-    The record stock market rally could be slowing down. Consider stock that has posted big gains and is highly appreciated as a potential charitable donation. That’s because taxpayers can receive a deduction of the fair value of stock that has seen gains without taking a hit from taxes on the capital gains or net investment income. One important note: the stock needs to be owned for at least 12 months before the donations. 

-    Do your homework and use common sense: check the tax-exempt status of the charity. 

-    And if you meet the qualifications, you can save income taxes by making a charitable donation from your Individual Retirement Account

The Bottom Line

The next fifty years could prove to be a golden age of charitable giving in the United States. It's likely you will at least consider leaving money to a charity or non-profit If you choose to, make sure you have the proper plan.



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