James Gandolfini's $30 Million Estate Tax Mistake

[kcjenkins]

In "The Sopranos," the IRS didn't stand a chance against Mafia boss Tony Soprano. But thanks to poor planning, the IRS will be the biggest beneficiary of actor James Gandolfini's estate.

Gandolfini died with an estate worth an estimated $70 million. But in what estate lawyer William Zabel referred to as a "catastrophe" in an interview with the New York Daily News, Gandolfini's will left about 80 percent of his estate unprotected against estate taxes, with rates that will add up to about 55 percent when you consider both the federal and state portions.

What's worse, some well-established estate planning techniques could easily have avoided much of that bill while still achieving most of what Gandolfini was trying to accomplish.

What the Will Said

You can read Gandolfini's will for yourself, but on the whole, it has fairly simple provisions.

After giving $1.6 million to various friends and relatives and making provisions for his personal property and his house and land in Italy, Gandolfini split the remainder of his estate among four people -- 30 percent each to his two sisters, 20 percent to his wife, and 20 percent to his daughter. His son received the proceeds of a life insurance policy that isn't subject to estate tax.

As ordinary as those provisions might sound, Gandolfini's will represents a missed opportunity in estate planning terms. By leaving only 20 percent of his estate to his wife, Gandolfini missed out on what could have been an unlimited deduction for estate tax purposes for gifts made to a surviving spouse.

How to Handle Complex Family Situations

Of course, one complication is that Gandolfini's surviving spouse, Deborah Lin, isn't the mother of his son, Michael. Often in situations involving stepparents and children of previous marriages, parents are reluctant to leave all their money to a surviving spouse, as they want to ensure that their children won't have to rely on their stepparent to provide for them.

However, even in cases involving children of previous marriages, the use of marital trusts can usually take advantage of the marital deduction while still ensuring that children will eventually receive the bulk of the estate.

A typical marital trust will provide for income from trust property to be paid to the spouse, and for the assets that remain after the surviving spouse dies to go to the children or other desired heirs.

You have to be careful in drafting the marital trust so that it qualifies for the marital deduction while still providing protection for your kids, but proper planning can reach a beneficial result that could have cut tens of millions of dollars off Gandolfini's estate-tax bill.

Don't Make a Celebrity Mistake

Gandolfini's estate-planning errors are far from the only tax mistake among celebrities. Some are basic missteps, like Wesley Snipes having failed to file income tax returns and Nicolas Cage having an unpaid seven-figure tax bill outstanding. Lauryn Hill failed to pay taxes for years, and on Monday began serving a three-month sentence for tax evasion.

Moreover, Gandolfini at least had a will. Many celebs who died unexpectedly, including Jimi Hendrix, Amy Winehouse, and Barry White, didn't have valid wills at all, an issue which can raise a host of other complications and unintended results.

So in reviewing your own estate-planning situation, be sure you've taken care of the following issues:

Make sure you have a will. Doing so is the best way not only to make sure the right people get your property after your death but also to name someone to take care of minor children in your absence. Without a will, long court battles can ensue, and that will not only create emotional stress but also sap financial strength at a most difficult time.

There are a number of other vital documents to have. A living will lets you make your wishes known about life-preserving treatment, while a health-care power-of-attorney will let a loved one act more broadly on your behalf when you're unable to make your own decisions about medical treatment. Similarly, a durable power of attorney will let someone take financial action on your behalf if you're incapacitated, saving a huge amount of complications.

Finally, financial planning can be as simple or as complex as you choose to make it. With the federal estate tax exemption currently at $5.25 million, few people have to worry about tax considerations, although some states have estate taxes that kick in at levels as low as $675,000. Make sure to coordinate your will's provisions with your investments, life insurance, and other financial planning to ensure a smooth transition if something happens to you.

No one likes to contemplate their own death. But the expensive lesson that the IRS is about to teach the Gandolfini family is one that you don't have to learn the hard way, as long as you take some easy steps now to avoid a big IRS bill later.

http://www.dailyfinance.com/2013/07/08/james-gandolfini-will-estate-tax/?ncid=txtlnkusaolp00000420

[Guest Taxed]

I am safe. Will not have this problem.

[kcjenkins]

Me either, but I'm sure we all have clients that need reminding.

[Kea]

(Rounding off a lot....) Let's say I'm the daughter and now "only" receive approx 10% of Dad's estate instead of the 20%. I think I'm still OK receiving $7 million instead of $14 million. I'm sure she's used to a very different lifestyle than I am. But for me $7 vs $14 million would not be much different. There's no way *I* could spend even the $7 million in my lifetime. I just have no interest in owning HUGE houses or airplanes or any of that kind of thing. Sure, I could then be able to give a LOT more to charity.

Also, I would imagine she would actually prefer to have her father back than to have his money. (I don't know anything about their family so it is pure assumption on my part.)

[Guest Taxed]

>>> I just have no interest in owning HUGE houses or airplanes or any of that kind of thing. Sure, I could then be able to give a LOT more to charity. <<<

You would me amazed how many people change their minds after they can touch and feel all that money!

[GeneInAlabama]

. . . and you would be amazed at how fast some people who have never had anything before can go through a huge amount of money in a short time. I have seen it happen.

[Kea]

Agreed. I've seen it before, too - especially in entertainment and sports. (Mainly because they are already famous.)

[Guest Taxed]

I have no sympathy for those who blow their inheritance and then claim poverty or financial hardship.

[Randall]

He may have had all the advice but just didn't care. He probably wanted to keep it simple, give the money directly and not care about the tax.

[kcjenkins]

Even more likely, he assumed that being still in his 50's, he had lots of time to do some tax planning. At least that is how most people think. Plus few people realize, unless they have been doing some tax planning, just how high the estate tax is. Having paid taxes on it as they earned it, they don't even dream that the government is going to take more than half of what they saved.

[jklcpa]

Yes, KC I agree. One of my most wealthy client and his wife didn't have wills until late last year. In the 20+ years that I've known and worked with these people, first at a firm I was employed by, and now in my own practice, no one could ever convince them to have wills drawn up including their attorneys. They are frequently dealing with the attorneys because of the many land lots and commercial property they own, but they'd refuse to discuss any type of estate planning. They are both now in their early 60s with no health problems. They both have wills now, and what spurred them into action was a visit from the husband's sister that lived in Europe. On one morning during the visit she woke up and was having a stroke, and once at the hospital the doctor's found the cause of the stroke was that she had cancer that had spread to every major organ. She died later that week with another stroke and other organs in failure, and she never left the hospital. Apparently she came for the visit to say her final goodbye. My client got the real eye opener with having to have her transported back home and help the remaining family start to sort out her financial affairs. My client probably wouldn't have a will today without some major event or health scare.

[Guest Taxed]

Anybody remember the Prudential Life insurance ads. from the 70s?? They were pretty effective to drive home the point why a healthy breadwinner should have life insurance. Scare tactics work. Some people need to see it themselves before they will do something?

[Randall]

Yes, a lot of people with big money are naïve. The celebrity types should have lots of handlers around them but they still have to agree and sign the papers.

[kcjenkins]

And often family does not push it because they don't want to be seen as greedy, or as eager for their more elderly family member to "go ahead and die". It's not a comfortable subject for family, which was one reason I often brought it up with clients whenever they had some major change in their life. Not just elderly, I'd discuss the need for a will with the birth of a baby, for example. Since I was not going to be a bene, it was easy for me to bring it up.

[joanmcq]

He may have wanted the kids to get the money now rather than after his wife's death. You really don't know. Taxes aren't necessarily the reason why people make financial decisions.

The article is a bit weak though; Wesley Snipes didn't just fail to file tax returns, he filed amended returns changing his income to zero under one of those tax protester schemes. He actually got off light with a 3 year jail sentence. He claimed he was duped by bad advice, but if you read the testimony, he was promoting the scheme to his employees, and telling them he wouldn't withhold.