Was James Gandolfini’s Will A Tax Disaster, Or A Reasonable Plan For His Situation?

I never watched him in his famous Sopranos role, but now that he’s dead I’ll give some attention to James Gandolfini’s will. The will was filed in court in New York on July 2.  Probate files are open to the public.  For a beloved celebrity like Gandolfini it is only natural that the press obtained a copy of his will and publicized it. A copy is now available on the internet.

JAMES GANDOLFINI’S WILL – WHAT OTHERS HAVE SAID

My first exposure to the will was through two headlines posted by my favorite blogger, law professor Glenn Reynolds at Instapundit, on July 7:

 OOPS: James Gandolfini’s Will Is A “Tax Disaster.”

UPDATE: Jay Brinker says the will’s bad, but the reporting on it is worse.

The tax disaster comment originally came from a New York Daily News article, where a “top estate” lawyer is reported as stating that the “will is ‘a disaster’ that could see over $30 million of his estimated $70 million estate go to the government”.   The article has some juicy quotes from the lawyer, and a bit of an explanation of why the IRS would get so much of the estate and how that could have been avoided.

Jay Brinker, an estate planning attorney in Cincinnati, called Gandolfini’s planning questionable.  He also blasted most of the news reports and commentary on the web for being inaccurate and ill-informed. Since Brinker doesn’t have newspapers to sell, he could afford to be less flamboyant and more analytical.

He started out stating that James Gandolfini “was survived by a 13-year-old son, an infant daughter, and his second wife.  His estate is reported to be worth $70 million.”  His will “leaves his property in Italy equally to his children in trust, his clothes and jewelry to his son, bequests totaling $1.6 million to various individuals, and leaves 30% of the remainder to each of his sisters and 20% each to his wife and daughter.   The share for his daughter will remain in trust until she reaches 21.  The will states he has provided for his son elsewhere. “

Here are some of his observations about this situation:

Many points:

1.  He should have used a funded living trust to ensure privacy of his net worth and his intentions which avoids Cincinnati attorneys from critiquing it .

2.  Giving the daughter unrestricted access to her share at 21 is a recipe for disaster.  He should have staggered her distributions over 10 or 15 years with the earliest one at 25.

3.  The testamentary trust will be expensive to administer for the next 20 years.  A living trust would be easier, less costly, and private.

4. Estate taxes will be painful and could have been delayed/minimized. The federal tax bill will be nearly $20 million while the NY bill will be over $4 million.  He could have delayed the payment of taxes by leaving assets in trust for his wife and giving his daughter her share from the same trust after the death of his wife.

5.  Odd to leave 60% of the remainder to his sisters and none of it to his son.

6.  Unless the clothes/jewelry and  Italian property comprise the majority of the assets, all media outlets from Fox News to HuffPo and from ABC to NY Post, and all others, are incorrect in reporting that the son receives the bulk of the estate.

7.  The linked article also states that it is unclear who will receive the proceeds of other properties once they are sold.  It must be too difficult for reporters to ask an estate planning attorney to read the will and inform them that the proceeds are the remainder and will be distributed to his sisters, wife and daughter.

Dan Caplinger, an attorney and estate planner who works with Motley Fool, wrote that “as ordinary as those provisions” of James Gandolfini’s will might sound, the 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.”

However, Caplinger rightly notes that simply giving most of the estate to the surviving wife probably wasn’t the best choice.

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.

And there are other complications to the whole “disaster” narrative.  A comment at the TaxProf Blog points out that much is not known.

So it’s “unclear” whether the royalties, presumably part of the $70 million valuation and probably a large part of it, are going to the wife through a separate trust.

If the royalties are deferred, the estate tax payments likely can be deferred.

This speculation borders on libel of the decedent’s estate planners. We don’t know what they did, but we’re going to accuse them of creating a disaster?

Posted by: Bob | Jul 7, 2013 12:45:45 AM

MY TAKE

So what do I think about James Gandolfini’s will? Do I agree with what many others have said? Not completely.  They make some good points.  But much of this is very speculative. In fact I wouldn’t be surprised at all if it turns out that many of the assumptions being made by these pundits are wrong.

What I think the others got right.

    • The lawyer quoted by the NY Daily News is right in theory, IF you assume the worst case scenario in all respects.
    • Jay Brinker is correct that if Gandolfini had owned all of his assets in a revocable living trust these matters would not be public.  I agree with him 100% that giving large sums of money to a 21 year-old is not wise, and that it would have been better to stagger the distributions to the daughter. And he’s right that the reporting on the matter has been atrocious, especially the claim that the son will receive the bulk of Gandolfini’s estate. (I was surprised to see that some blog posts by lawyers gave inaccurate descriptions of the will’s provisions. Either they didn’t read the will closely, or they were relying on someone else for their information. On the other hand, a celebrity news column did have an accurate description of the will’s provisions.)
    • Dan Caplinger is right to point out that making full use of the marital exemption by leaving everything to the surviving spouse wouldn’t be a good idea given Gandolfini’s oldest child was from a prior marriage. And he is also correct in noting that trusts can be used to put some limitations on funds that qualify for the marital exemption. These are called QTIP trusts. (A subject for a post in the future.)
    • Florida attorney Joseph Karp rightly points out that Gandolfini, unlike many other celebrities, wisely prepared for the unthinkable. Shortly after the birth of his daughter, and only a few months before his death, he made a will with specific provisions for the daughter.

Where I think the others made a misstep.

The fundamental problem with this and similar commentary is that it assumes James Gandolfini’s will deals with the bulk of his property. That would be a reasonable assumption in a typical situation. The standard advice to a person who sets up a living trust is to have the trust own all of the person’s property, so that formal probate administration is not needed.  The standard practice is to back up the living trust with a will that pours over all of the probate assets to the living trust.  Gandolfini didn’t have a pour over will, he left a will with independent dispositive provisions.  This fact signals that trusts or other strategies were not part of his estate plan.

But this is not a typical situation. The estimated size of the estate alone is enough to make this situation atypical. And people do not always act in the typical manner. For example, I learned early in my career as a probate attorney that some people prefer to ignore the standard advice and will intentionally keep ownership of some assets instead of transferring all of them to their living trust. Another example that comes to mind is a client in Cedar Rapids who didn’t intend to use a will or trust to transfer most of his assets.  Instead, whenever practical he would transfer assets he acquired to his wife or to a limited partnership owned by his wife and children.

Also, the will itself provides evidence that Gandolfini in fact used trusts as part of his estate plan, including a trust for the benefit of his wife. The clues are in Fifth, Sixth, and Ninth Articles of the will.  In the Sixth Article Gandolfini states that he has made “other provisions”  for his wife.  The Ninth Article similarly states that Gandolfini has made “other provisions”  for his son. The Fifth Article discloses that for his son, those “other provisions” include a trust created for the son’s benefit.  In fact, an affidavit also filed with the court reports that the trust is an irrevocable life insurance trust (ILIT) that owned a policy on Gandolfini’s life with a face value of $7 million.

Given these clues, I think it is very likely that the “other provisions” for Gandolfini’s wife included a trust set up for her benefit before his death.  How would that affect the supposed estate tax disaster?  It makes a disaster less likely.  Any gifts made outright to her during his life would have been exempt from the estate and gift tax under the marital exemption.  Even gifts made in trust could qualify for the exemption if they were structured the right way, and if a QTIP election (if necessary) was timely made. So if he set up a trust for his wife before death it’s very possible that a large portion of his estimated estate does qualify for the marital deduction.  Is it likely?  Ask yourself, if you had 70 million dollars and could hire good attorneys, would you take steps to save millions of dollars on taxes?

There are other techniques that can be used to reduce the value of an estate, such as creating family limited partnerships (FLPs), and then giving the limited partnership interests with a discounted value to family members. I wouldn’t be surprised if Gandolfini used an FLP or similar techniques to shelter a large portion of his business assets from estate taxes.

To wrap up, I agree that the use of a will to dispose of at least part of his estate was rather unusual, but I can understand why his second marriage situation and his desire to help his sisters might give him reasons to do that. I do not believe that Gandolfini set himself up for a tax disaster.  There’s too much evidence that he used other estate planning techniques, and no real evidence that his lawyer was incompetent or that Gandolfini wanted his estate to pay a large tax bill.

The will shows that Gandolfini could be very generous to his family and friends, but I don’t know anybody who considers Uncle Sam part of the family when it comes time to pay taxes.

 

Update: James Gandolfini’s Lawyer Comments on the Will Controversy

 

 

Please check out the Arenson & Maas PLC website here.

You can leave a question or comment below, or contact me here.


Comments

Was James Gandolfini’s Will A Tax Disaster, Or A Reasonable Plan For His Situation? — 1 Comment

  1. This is a great and insightful article, thanks. You make nice points about the clues in the will and some of the tendencies of clients– ignoring ‘practical’ advice in some instances because they have different ideas when it comes to dispersing their wealth.

    Only a celebrity could make a will interesting! Thanks for taking the time to write this.

    Chris

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>