Sopranos’ $30 million tax bill hits a shrill note

There is nothing certain in life – except death, and taxes. So the saying goes – except when an estate is planned incorrectly. Then it is certain that there will be a whopping estate tax bill at the end of it all! In the case of the former Sopranos star James Gandolfini, who suddenly passed away at 51, it is estimated that his $70 million estate will pay a staggering $30 million in taxes! And given that there might not be a lot of idle cash sitting around, sizable pieces of the actor’s estate will need to be liquidated to pay the tax bill over the next nine months.

 

This case delineates the need to properly structure one’s assets, no matter the size of the estate, so that the tax implications are minimized as much as possible. Furthermore, with proper planning, any remaining outstanding taxes can be effectively paid with the use of life insurance policies.

James Gandolfini’s estate plan has been called a disaster. He elected to pass 20% of his wealth to his wife and daughter. 30% of the inheritance went to each of his two sisters. While his wife is protected from paying taxes on her share of the inheritance, the sisters will owe a tax bill right away. James was perfectly free to name his sisters as beneficiaries, and the fact that taxes are owed, is not the big problem. The larger issue is that the sisters will end up footing the tax bill twice – once upon their brother’s passing away, and then upon their own demise. The size of the sister’s beneficiaries’ inheritance will be considerably shrunk over what it would be if the assets had been passed to the sisters via a trust.

The wife, Deborah Lin has her own battles. Normally she would inherit 20% of all the assets tax free because of her marital status. However when the Gandolfini will was written, it said that she would inherit 20% of the residual estate after all taxes are paid. So the problem she faces is that she will end up footing a part of the estate tax bill even though she, personally, would not owe the IRS anything. However, lest we feel badly for the wife, she might have other assets which would go to her– any property that was held jointly such as homes, bank accounts etc.

 

A major issue with that estate was that no provision was made for paying off the taxes. Typically a life insurance policy would be set up specifically for the purpose of satisfying the taxes owed. In this case, James had a $7 million policy which was not part of his estate, and gets paid directly to his son Michael. This leaves the beneficiaries scrambling to meet the tax obligations.

The correct way for James Gandolfini to pass on his wealth, would have been via a trust. In the case of his sisters, he would have set up a trust for each of them in which they were named as trustee as well as beneficiary. This would have protected their inheritance from creditors and also from ex–spouses in the case of divorce.

In this story, there is a note of caution is for all parents, no matter the size of their personal assets. The Gandolfini children stand to control their entire inheritances when they turn 21. This can set the stage for potential disaster. Young kids and fast cars just don’t mix! A better choice would be to set up a discretionary trust and name reliable trustees.

 

The Kalara Law Firm advises clients on proper estate planning for all asset levels. For further information, contact us at 213 355 7000 or atty@kalaralaw.com

One thing is clear – the estate distribution and the taxes are going fodder for discussion and speculation, not to mention a great deal of legal haranguing, for a long time to come.