Grieving over the loss of a loved one is bad enough. But having the family finances paraded all over the news adds insult to injury. This is sadly what happened after the untimely death of actor Philip Seymour Hoffman this past February. However, there is a way to avoid this type of unwanted publicity.
Mr. Hoffman’s estate was exposed to the world because he used a will to settle his affairs, and a will – regardless of its very personal nature – eventually becomes a public document. When the family attorneys went to file probate documents with the Court, they uploaded a copy of the Hoffman will that anyone can access through the electronic court-records system. As a result, much has been written about what Mr. Hoffman could have done better to provide for his heirs. I cringe to think his family might be reading some of this.
The big question is: how do you plan ahead to maintain your family’s privacy in case of death?
Again, a will is not enough. The main benefit of a will is that the estate can avoid what’s known as “intestacy,” which is basically the court system stepping in and determining who gets what based on state law.
For high-net-worth families, the most effective way to maintain privacy is through a trust. In fact, privacy is on the top of our list of reasons for establishing a trust, which includes:
• To protect the privacy of you and your family;
• To reduce estate taxes;
• To avoid the expense, delay and hassle of the probate process;
• To manage assets so they support the people and causes you care about (family members, but also charities and other non-profits).
Trust(s) can be a substitute for wills. With one or more trusts, you can greatly minimize what you pass on through a will, which as noted earlier, will be public info. Trusts are legal entities that can effectively transfer assets and even future income to your beneficiaries – in a way that remains private. The trust itself, for example, can continue to receive income or royalties generated by your work after you pass away.
However, few people actually can (or want) to put all their assets in a trust. So a will is usually used for items such as cars, boats and other personal property. Still, only the assets mentioned in the will go through probate and so will be open to public scrutiny.
Below is a brief summary of some popular types of trusts we help to set up and manage for LNWM clients:
Revocable or living trust. Once set up, this trust can be changed or terminated by you (the grantor) because you’re still the owner of the assets and you continue to pay taxes on the income generated by the trust. Upon your death, however, the assets in the trust transfer to your named beneficiaries (spouse, partner, children or friends), without having to go through probate.
Irrevocable trust. The assets placed in this trust are no longer yours (they’re also out of your taxable estate); they’re managed for, and ultimately distributed to, your beneficiaries. And you can’t change anything without permission from the beneficiaries. The trust pays taxes on retained income.
Qualified personal residence trust (“QPRT”). This type of trust holds your primary or secondary residence, and in doing so, removes the value of this property from your estate.
Marital trust. The assets in this trust pass on to the surviving spouse (assuming the marriage is recognized by the state the trust is in), thus avoiding estate taxes.