Celebrity estate planning mistakes run the gamut from dying without a Will or Living Trust (as is the case of Jimi Hendrix and Prince) to failing to properly plan for estate taxes (like the Wrigleys, who owned the Chicago Cubs baseball team and the Wrigley Company best known for producing American chewing gum). Others simply failed to update their estate planning documents—which could have easily answered questions of domicile, a critical factor in the world of estate planning and taxes. Such was the case of the late Heath Ledger.
Every person has a domicile. According to Black’s Law Dictionary, domicile is “that place in which a man has voluntarily fixed the habitation of himself and family, not for a mere special or temporary purpose, but with the present intention of making a permanent home, until some unexpected event shall occur to induce him to adopt some other permanent home.” Essentially, it is a combination of two factors: residence and the intent to remain. Therefore, while a person can have many residences, he/she can only have ONE domicile.
In April 2003—before his Oscar-nominated performance in Brokeback Mountain and before his relationship with actress Michelle Williams with whom he fathered daughter, Matilda Rose, for whom he later purchased a $10 million life insurance policy—Ledger executed a Will governed by the laws of his native Australia. The Will reportedly declared his residence to be in western Australia. Listing assets and cash of just $118,000 (although his estate was believed to be worth more than $16.3 million), the Will split his estate one-half to his siblings and the other half to his parents.
In 2004, while filming Brokeback Mountain, Ledger met Williams and the two began dating. Matilda was born the following year in New York City. In January 2006, Ledger put up his Australian residence for sale and returned to Brooklyn where he shared a home with Williams from 2005 to 2007. In June 2007, the actor purchased the $10 million life insurance policy for Matilda; two months later, it was confirmed that Ledger and Williams had separated. The two never married. In spite of their separation, the two continued to co-parent Matilda in New York. Sadly, Ledger died from an apparent accidental overdose in his New York City apartment on January 22, 2008. His 2003 Will was never updated.
Following his death, questions remained. Where was Ledger domiciled—Australia or New York? What will Matilda inherit, if anything? An updated Will could have easily answered these questions.
The interplay between domicile and estate planning is often overlooked and yet has far-reaching consequences for an estate, especially with regard to taxes.
To start, Ledger’s immigration status could have meant a sizable difference in the amount of the federal estate tax exemption enjoyed. Although U.S. citizens and resident aliens are subject to federal estate tax on their worldwide assets, such persons are entitled to a larger estate tax exemption (in 2008, the exemption was $2,000,000). For Ledger, this would have meant that his worldwide estate and the proceeds of the life insurance policy would have been included in his taxable estate, had he been a resident alien at the time of his death. This would have yielded a vastly different estate tax result. In contrast, non-resident aliens are subject to federal estate tax only on U.S.-situs assets; however, these persons enjoy a much smaller exemption (currently $60,000). Had Ledger been a non-resident alien at the time of his death, then neither the proceeds of the policy nor his non-U.S. situs assets would have been included in his taxable estate.
The circumstances surrounding Ledger’s death could have also spelled further trouble as it pertained to the life insurance policy that was taken out months before his untimely passing. His death from a prescription drug overdose less than one year from the policy’s purchase date meant that his death was within the contestability period. This is a two-year period, starting the date of purchase, during which the insurance company may review the policy application for misstatements, misrepresentations, and falsehoods—all of which could potentially void the policy, including suicide. Fortunately for Matilda, who was an after-born child not included in Ledger’s Will, the proceeds were distributed. However, the insurance company could have argued two things: that the application contained a material misrepresentation (if Ledger failed to disclose his use of prescription drugs); or alternatively, that his death—though ruled accidental—was a suicide.
Cases like Ledger’s, where domicile is the crux of his estate planning issues, provide important lessons in both estate planning (specifically with regard to estate tax) and immigration. A simple update of his Will would have clarified any questions as to his domicile and how to determine which federal estate tax exemption applied. Furthermore, it exemplifies the importance of pre-immigration planning for purposes of estate planning. It is generally best practice to create an irrevocable life insurance trust (“ILIT”) to hold the life insurance policy. This allows the insured—whether a citizen, resident alien, or non-resident alien—to mitigate his/her federal estate tax exposure, as the proceeds will be excluded from the insured’s estate, even upon the non-resident’s change of status to resident.