Jul 16, 2013

Posted in Blog - "Altman Speaks"

The Will of James Gandolfini: Bad Tax Planning or Good Listening?

There are a host of articles and commentators stating that James Gandolfini’s heirs will be upset because his estate will pay approximately $30,000,000 in Federal and state estate taxes.  These same articles say that he could have (and should have) done some advanced planning to reduce the tax bite.  Some even suggest that James Gandolfini’s attorney may get sued as a result of the estate tax that is going to be paid.

Besides the fact that none of us, other than James Gandolfini and his attorney, know what he was thinking when he did his Will, I find it odd that people would say that if he knew about the estate tax, he could have avoided it.

Many years ago, I was working with a client, as special tax counsel, who had a net worth of $100,000,000.  I developed a complex estate tax plan that would have eliminated most, if not all, of the estate taxes.  The client had my plan reviewed by his accountant and his estate planning attorney, and both of them gave the plan their blessings.  When it came time to get final approval of the plan, so that it could be drafted and implemented, the client said to me “$45 million is enough for my children.”  In other words, it was more important for him to retain full control and access to the assets and the estate, than to save 55 million in estate taxes.

I am not saying that James Gandolfini had the same intention.  But, I have worked with many 40 and 50 year olds who do not want to do significant estate tax planning, even if it would cost their heirs significant estate taxes.  They believe that they will live a long time and have time to do planning later.

Moreover, in the simplest sense, he wanted to give 60% of his estate to his sisters.  There is no way to structure this bequest at death to avoid estate taxes.  He could have started a gifting plan to them that would have removed some assets from his estate and produced valuation adjustments at death to reduce the estate tax bill, but he may have decided that he did not want to do this, perhaps because it was complex or costly, or because he wanted full control and access as long as possible.

Some commentators have also mentioned that he should have purchased a huge life insurance policy.  That is true, if he was insurable and if he wanted to pay the premium.  He did have a $7 million dollar life insurance policy for his son, which is not subject to estate taxes, so he clearly understood this concept and was comfortable with some level of life insurance.  That being said, we do not know what the situation was in the years before his death.

It is important to remember that, at the time of his death, he was on his second marriage, had provided for his son from an earlier marriage through the life insurance policy, and had a very young daughter.  It is possible that his prior Will left 40% or less to his wife and 60% or more to his sisters.  It is possible that even if he was advised that he could have avoided the estate tax on the assets going to his sisters by giving them something now, he may not have wanted to do so.

How many of you would give away control and access to 60% of your estate in order to avoid future estate taxes on a bequest to their siblings or other relatives?

A few other observations based on things I’ve read on the case:

1.  The money going to his daughter is held in a trust until she is 21.  In my experience, that is too young.  He could have placed her inheritance in a trust that would have protected the inheritance from creditors, her future estate taxes, fortune hunters and disgruntled spouses.

2.  He could have also placed his sisters’ inheritances in protected trusts that would have ensured that, upon their deaths, there would be no additional estate taxes (even if it went to James’ daughter).

3.  He could have given 40% to his wife (instead of 20% to his wife, and 20% to his daughter), in a marital trust for her benefit, so that it the estate tax could have been deferred until her death.  The trust terms could have been broad enough that would have allowed the trustee of the “marital trust” discretion to make distributions to his wife, who could then use the money for their daughter.  (This does not reduce the estate tax, only defers it.)

4.  He and his wife could have given away both of their exemptions from estate tax last year or anytime this year.  But, again, he may not have wanted to.  (Of the 20 or so clients with whom I discussed giving away their estate tax exemption last year, only about 50% went through with it.  Not everyone wanted to make a $5,120,000 gift at the end of last year, no matter how wealthy they were.)

The Bottom Line

Estate planning is first about listening to the client:  finding out what the client’s goals are, what their concerns are and to whom they want to leave assets to.  Then, it is up to the estate planning attorney to make recommendations – both tax and non-tax recommendations.  Ultimately, however, it is the client who makes the final decision.

To assume that every client’s main goal is to reduce or eliminate estate taxes is wrong.  In this case, to criticize James’ attorney or to rile up his sisters is not fair, neither to James nor his attorney.  We will continue to follow this as it unfolds.

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