The iconic Hugh Hefner, founder of Playboy magazine, died last week. Hefner was married three times and had four children, two from each of his first two marriages. He was also survived by his current wife, 31 year old Crystal Harris, whom he married in 2012, at the age of 86.
There is no doubt that Hefner’s estate is large, and likely includes interests in Playboy Enterprises, Inc., the privately held company he founded. How will his estate be divided? That depends on his Estate Plan.
If Hefner planned properly, we’ll never know the details of his Estate Plan. Rumor has it Crystal Harris will not receive any assets from the Estate, but that Hefner nonetheless provided for her. But how? My theory is that before his death Hefner established and funded a Trust for Crystal’s benefit that would provide for her after his death. This kind of trust is known as an irrevocable inter vivos QTIP Trust. (My husband tells me in this context it sounds like something dirty. It’s not.) QTIP stands for Qualified Terminable Interest Property. Inter vivos means it was established during the donor’s lifetime. Irrevocable means it cannot be revoked or amended.
There are several features of the inter vivos QTIP Trust that make it a good estate planning strategy for Hefner (and perhaps others like him).
First, a QTIP Trust is eligible for the unlimited marital deduction, and thus is not subject to estate taxes at Hefner’s death. In addition, Hefner’s gifts to the trust during his lifetime were not taxable gifts and thus did not deplete his gift/estate tax exemption. What is left in the trust at Crystal’s death will be included in her estate, but may be fully protected by her own estate tax exemption so that no estate taxes will be due.
Second, for the trust to qualify for the marital deduction, Crystal must be the sole beneficiary. In addition, she must receive all the net income from the trust, and may receive principal. These Internal Revenue Code requirements are likely consistent with Hefner’s goals in providing for Crystal.
Third, when the trust was established, Hefner set its terms. This means Crystal does not control the assets. In addition, Hefner directed how the assets remaining in the trust at Crystal’s death will pass. Thus, he could ensure that they pass to his children or grandchildren. If he had left assets outright to her, they could pass to her future husband or children. For this reason, QTIP Trusts are a great planning strategy for couples in second or third marriages.
Fourth, the QTIP Trust may be a grantor trust, so that Hefner – the donor – paid the income taxes on the trust income during his lifetime. This ensures that the income taxes do not deplete what is available for Crystal after his death.
Fifth, the QTIP Trust is separate from Hefner’s other estate plan documents. This creates less risk of a Will contest or other conflict during estate administration.
Inter vivos QTIP Trusts are not for everyone, but they can offer some clients significant benefits and estate tax savings.
Image from flickr, Alan Light. https://www.flickr.com/photos/alan-light/255835461.