When actor James Gandolfini died, he was reported to have left a $70 million estate for which a federal estate tax of approximately $30 million was due in large part to his generosity to family and friends. In the article in the New York Daily News at least one commentator characterizes this as a tax “disaster.”
The Plan
Mr. Gandolfini made specific gifts totaling $1.6 million to various friends and family members, gave his property in Italy to his son and daughter, and then divided the rest of his estate, 30% to each of his two sisters, and 20% each to his wife, Deborah Lin, and daughter. He also created a trust for his son reported to be funded by a $7 million life insurance policy, which was subject to estate tax. It’s somewhat unusual that a celebrity would make his estate plan so public, since it could have been kept private through the use of a revocable trust.
Estate Taxes
Under the federal estate tax structure, funds going to a spouse or into a properly structured trust for her benefit are not subject to estate tax. But assets above the estate tax threshold, $5.25 million in 2013 and $15 million today, passing to others are subject to a 40% tax, plus any New York State estate taxes that may be owed, for residents of New York State. These taxes are due within nine months of the date of death, which may require selling property quickly if the estate does not hold sufficient liquid assets.
Even though Ms. Lin’s share of her husband’s estate was not subject to estate tax, the way the plan was structured her share was calculated after the taxes were paid, so she received less and the estate paid more than it might have had the trust been structured differently. It’s something of a circular calculation that is easiest completed by computer programs.
Second Marriage
One of the reasons Mr. Gandolfini structured his estate in this fashion, no doubt, is because it was a second marriage. If he had still been married to his first wife, he would be more likely to have had the bulk of his estate go to her, minimizing estate taxes, and relying on her to take care of their children, if perhaps not his sisters. Of course, there’s always the risk of remarriage and money and assets leaving the family entirely.
An Alternative Approach
Another approach would have been to limit taxes by leaving funds and property for Ms. Lin, with her receiving only the income during her life, the balance going to his children and sisters upon her death. This would have probably meant a long wait for them, perhaps forever for the sisters who might not live as long as Ms. Lin. A more balanced approach, with some funds going to the sisters directly today and some later, might have been the optimal plan.
More Life Insurance?
Another approach would have been to do for his sisters and daughter what Mr. Gandolfini apparently did for his son. According to the press reports, he purchased a $7 million life insurance policy owned by a trust outside of his taxable estate. Though this, undoubtedly, required large premium payments during Mr. Gandolfini’s life, it would have meant tax-free inheritances for his sisters and daughter.
Was It Really a Mistake?
While some commentators characterized Mr. Gandolfini’s plan as a mistake due to the large amount of taxes due, I’m not so sure. Mr. Gandolfini may have been advised on and totally aware of the tax consequences of his plan. He alludes in his will to providing for his wife in other ways, perhaps through gifts he has already made or joint property that will pass to her free of estate taxes. He very well may have decided that life will be simpler, if less entangled, if his sisters receive their shares outright rather than have to wait for their sister-in-law’s death. After all, even after paying estate taxes they probably each took home approximately $12 million. That’s still a lot of money. (Of course, some extra planning steps could have been taken to prevent a large portion of these funds from being taxed again when the sisters pass away.)
Remember, until the popularity of The Sopranos which first started airing in 1999, Mr. Gandolfini was not a wealthy man. To be able to leave a $40 million estate after taxes would have been unthinkable until then. He was also only 51 years old when he executed his last will. He must have thought he had many more years to fine tune the plan and perhaps do more estate tax planning.
We have seen many clients with complicated plans that have proved useless as the tax code or their circumstances have changed. Though we may have urged Mr. Gandolfini to take some more planning steps, I don’t think we can fault him or his attorney for not having done so.