As we mourn the loss of a great actor who moved us with his performance as Mafia boss Tony Soprano in "The Sopranos", we also take this opportunity to look at the tax ramifications of his estate litigation or lack thereof. In the words of Benjamin Franklin, "In this world nothing can be said to be certain, except death and taxes."
James Gandolfini died with an estate worth an estimated $70 million. He left behind a wife and two children, one of which comes from a previous marriage. Prior to his death, Gandolfini executed a fairly simple will that exposed approximately 80% of his estate to substantial taxes, with rates that could add up to about 55% when considering both federal and state portions.
In Gandolfini's last will, he made provisions for his personal properties as well as his real property in Italy. Gandolfini also provided approximately $1.6 million to close family and friends and split the remainder of his estate among four people -- his two sisters (30% each), wife (20%) and daughter (20%). His eldest son received the proceeds of a life insurance policy that isn't subject to estate tax. By leaving only 20% of his estate to his wife, Gandolfini missed an opportunity to lower estate taxes by failing to take advantage of the marital deduction.
For U.S. estate and gift tax purposes, marital deduction is a type of tax law that allows a person to transfer assets to his or her spouse tax free or at a reduced tax rate. It is perhaps the best-known estate tax reducer. There is no limit to the amount of the marital deduction, however, it should be noted that marital deduction only defers taxes, it does not eliminate them. All the property that was transferred to the surviving spouse will still be taxed at that spouse's death if it remains in his or her estate. Accordingly, estate planners use various techniques to reduce taxes such as creating QTIP trusts or credit shelter trusts in addition to the marital deduction. Creation of such trusts provide the following benefits: a) ensures that the estate can be used to support the spouse; b) the estate escapes estate taxes; c) lifetime exemption amount is used (for credit shelter trusts, at least), and d) the amount in the trust eventually is disposed of as desired. Having a child from a prior marriage might have deterred Gandolfini from taking advantage of the marital deduction, however, creation of a QTIP or credit shelter trust would have allowed him to designate his children as the residual beneficiary while still allowing his spouse the use of the income and some of the assets in the trust.
Though it is hard to contemplate one's demise, proper estate litigation is necessary to reduce estate taxes and ensure the financial well-being of loved ones.
*This blog entry was not written by an Attorney and should not be construed as professional legal advice.