Your Money, Your Future
Your Money, Your Future

Here's why Philip Seymour Hoffman's will is 'a mess'

Philip Seymour Hoffman
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Philip Seymour Hoffman was an Oscar-winning actor who played everything from Truman Capote to a priest, but it appears he didn't do so well with his estate planning.

Hoffman, who died in early February of an apparent drug overdose, had a will that was a decade old. In addition, its structure has left it available for public viewing, something celebrities and others can easily avoid.

(Read more: Actor Philip Seymour Hoffman found dead in NYC)

The estate plan itself is also problematic, experts say—perhaps because the lawyer who drew it up appears to specialize in real estate rather than trusts and estates.

In any case, with the exception of a trust for the child he had at the time the will was signed, Hoffman appears to have left his estate to his longtime companion and mother of the child, Marianne O'Donnell. It is not clear if the two children the couple had later are mentioned.

Wills are statements of feelings as much as they are instruments of tax planning, and it is impossible for outsiders to know the actor's emotional goals. But from a tax efficiency perspective, experts say, the will's quality is clear.

"He made a mess," said David Mendels, director of planning at Creative Financial Concepts, a financial planning firm in New York.

Mendels points out that because Hoffman and O'Donnell were not married and New York state does not recognize common law unions, she will probably pay estate taxes on the portion of the estate left to her.

How big a tax bite is that? Hoffman is said to have amassed a $35 million estate, and if he left all of it to O'Donnell, the state and federal tax bill would be $11.9 million, according to Richard Shapiro, a trusts and estates lawyer with Blustein Shapiro Rich & Barone.

Christina Mason, a partner at Kelley Drye and a trusts and estates expert, said the tax bill could be higher, perhaps close to $15 million, if Hoffman in fact had an estate of $35 million.

"It's a big number," she said.

Hoffman could have done several things to make his will more tax-efficient. Giving monetary gifts small enough to avoid taxes during his lifetime would have been one approach, and he may have done some of that. He also could have established trusts that would have sheltered some of O'Donnell's inheritance from taxes, according to Mendels.

Shapiro said Hoffman's younger children are likely to be provided for even though they do not appear to be included in the document. A provision in New York law says that if children are born after a will is executed and an older child has been provided for in some way, the amount set aside for offspring in the document would be divided among all the children.

That provision may not apply in this case, Mason said, but as all three children are O'Donnell's, "the odds are they'll end up OK." Even so, she said, "the one rule in trusts and estates is you can disinherit your children. She could remarry and leave everything to a new husband, who then disinherits the kids."

That could have been avoided with properly structured trusts for each child, she added.

Hoffman is hardly the first star to leave a will that creates problems after his death. Michael Jackson's will has posed enormous challenges for his family.

(Read more: Michael Jackson: Death and taxes)

And James Gandolfini's will left his estate with a hefty tax bill, among other problems.

(Read more: James Gandolfini's will a case study in what not to do)

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How could Hoffman have written a more efficient will?

For starters, experts said, he should have married O'Donnell, if only for tax purposes.

Daniel Rubin, a partner at Moses & Singer specializing in trusts and estates, said Hoffman also could have better structured the child's trust. As it stands, Cooper Hoffman will inherit the trust assets outright at age 30, and that can be dangerous.

"Money that stays in trust is protected from creditors, ex-spouses and to a large extent, estate taxes in the child's estate," he said, adding that very few of his clients are still giving children trust assets at a fixed age. Instead, his clients set it up so that at a certain age, their child can choose who the trustees will be.

"It keeps the protection from taxes, ex-spouses and creditors, but gives the child effective control over his trust," Rubin said.

(Read more: How Dad's planning helped us cope)

Shapiro recommended more frequent estate planning checkups.

"The fact is that the biggest blunder he made was not updating his estate," he said. "I would not be surprised if his dispositive wishes had changed. You never want to go 10 years without doing planning."

—By CNBC's Kelley Holland. Follow her on Twitter@KKelleyHolland.