You Talkin’ to Me..? Forget About It!
Recent articles claim that James Gandolfini, known for his role as mob boss Tony Soprano in the hit HBO series “Sopranos,” is the newest star to be added to a long list of celebrity estate planning disasters. Did Gandolfini mess-up his will, making him another poster-boy for celebrity estate planning disasters as the critics claim? Maybe. Maybe not. The pundits main reason for including Gandolfini as one of the top recent celebrity estate planning disasters is due to the enormous negative tax consequences that resulted from his ill-fated estate plan that included only a will. Others feel Gandolfini’s large tax bill is simply a good illustration of the complexities and difficulties in planning for large estates. Let’s take a closer look at Gandolfini’s will – allegedly one of the new top celebrity estate planning disasters – to see why he’s getting so much flack and how you can avoid similar mistakes in your plan.
Details of T.V. Mob Boss’ Plan Adding him to Long List of Celebrity Estate Planning Disasters
Why have the details of Gandolfini’s plan gone public in the first place? After all, Gandolfini was known to be “stand-offish” with the media. You’d think he wanted his affairs kept private. He probably did. Failing to create a plan that avoids publicity on death is a common theme of many celebrity estate planning disasters.
What’s the lesson to take away? Gandolfini only created a will (not a living trust). His failure to create a living trust caused his estate to go through probate. Probate is public. Gandolfini’s estate plan would have remained private had he executed a living trust as part of his plan.
Tick Tock Tick Tock… It’s Tax Time
Gandolfini’s will left 80% of his estate (estimated at $70 million) to two sisters (30% each) and a 9-month old daughter (20%). This plan will cost $30 million in estate taxes. Current tax law allows spouses to leave an to leave an unlimited amount to each other without incurring “death taxes.” Leaving more than the exemption amount to non-spouse beneficiaries, such as children, grandchildren, relatives, or friends triggers the inheritance tax (40%) on death.
We can only guess if Gandolfini would have changed his plan had he known of the tax consequences. What’s clear is that Gandolfini’s heirs would have avoided a huge tax hit if his assets were left to his spouse or charity. Aside from the tax consequences of Gandolfini’s plan that may or may not include him as one of the top celebrity estate planning disasters of our era concerns how his heirs are going to get the cash to pay the tax bill. Gandolfini’s family will have to liquidate his property to pay-off Uncle Sam and do so within 9 months of his death as it’s unlikely that Gandolfini had bags of money in his house like his mob-boss T.V. counterpart.
Another reason for adding Gandolfini’s name to the top celebrity estate planning disasters of the 21st century concerns the double-tax hit his sisters will incur. Gandolfini’s sisters will be taxed now – at Gandolfini’s death – and again when they pass on. This “double tax” could have been avoided by leaving each sister’s share in trust. That way, the share wouldn’t be in the sister’s estate when she dies and thus not subject to double estate taxation. Leaving the property to the sisters in trust has the added benefit of protection from creditors (as well as an ex-spouse in case of divorce). There might be a temporary solution. The sisters and daughter can “renounce” their shares to be paid-off down the line. This won’t eliminate the tax due, but it will delay the due date until the relatives “elect” to take their shares.
Gifts to Children should be “Supervised”
Gandolfini wisely created trusts for his two kids. The problem? Gandolfini may have given his kids too much control at too young an age. The trusts provide that the kids get their full inheritance at 21. Really? Legal drinking age? You want them to also become members of the celebrity estate planning disasters list, Jimmy? A well-funded trust like this shouldn’t end at a certain age. Why? Who knows what your kids will be like, especially if given access to large amounts of money. Instead, it’s best to leave control of the trust assets to the trustee who acts in the best interests of the children until they reach an appropriate age.
Incomplete Instructions & Foreign Property
Foreign-owned property and incomplete plans are other common problems leading to many celebrity estate planning disasters. The basic rule – inheritance property laws of the foreign country (here, Italy) control disposition of foreign property. Gandolfini’s two kids co-inherited a house in Italy in which both have full possession rights at age 25. The Italian inheritance laws may interject a share for Gandolfini’s spouse, despite the provisions of his will. In addition to the problems of having to apply foreign law, Gandolfini’s will also gave incomplete guidance on how to treat the kids’ respective shares if either die before reaching 25. Does the remaining sibling become 100% owner? Is there a right of first refusal?
Life Insurance is Tax Efficient Way to Pass Assets
Gandolfini had an irrevocable life insurance trust that named his son as death beneficiary. Irrevocable life insurance trusts are highly tax efficient ways to transfer wealth because there is no tax owed on inheritance. What would have been even better and potentially took Gandolfini off the celebrity estate planning disasters list is if Gandolfini created a second life insurance policy specifically earmarked to pay the estate tax bill due on death.
Special people have special problems. The Sopranos is a syndicated T.V. show with a cult-like fan base that’s not going anywhere. Gandolfini was earning a million an episode by the show’s end. The residual beneficiaries of Gandolfini’s estate are going to reap a windfall in the future with royalty rights.
Elective Share for Spouse
Gandolfini’s wife was left 20% of his estate. In some states, a surviving spouse is entitled to “elect” a minimum percentage of the decedent’s estate despite the provisions of the plan. In New York, where Gandolfini resided, the spouse’s “elective share” is 1/3. That means that unless Gandolfini’s wife waived her right to the 1/3 elective share via a prenuptial agreement, she can demand 1/3 of Gandolfini’s estate despite what the will states. Gandolfini’s wife will receive her share free and clear of any estate taxes.
Jointly Held Property
Jointly held property passes outside of probate, which means that any assets that were jointly held by both Gandolfini and his wife (primary residence, bank and investment accounts, cars, etc) automatically transfer to her on his death. This could explain why Gandolfini left a relatively small share for his wife in his will – (i.e. she was provided for otherwise).