Death Tax Woes: Don't Make the Same Mistake Tony Soprano Did

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We were all shocked by the sudden, untimely death of James Gandolfini. Gandolfini was an immensely gifted actor who changed the face of television entertainment in the role of Anthony "Tony" Soprano, a deeply troubled gangster-in-therapy, who had to balance obligations to his family… and his Family.

By all accounts, James Gandolfini was generous and kind to family and friends alike. It has been reported that he left a large legacy, in excess of $70 million, to be divided between them. His net worth is an estimate, and his asset inventory hasn't yet been disclosed, but he did alright for a middle class kid from North Jersey.

Sadly, however, his nearest and dearest won't see anywhere near the full amount he left behind.

It turns out that James Gandolfini was generous – to a fault. His wish was that his legacy, in the form of real estate and other assets in the United States and Italy, be distributed in large chunks, the largest in a trust for his 13-year old son, Michael and 8-month old daughter, Liliana. His widow, Deborah Lin, is set to receive 20% of his estate. The will stipulates that the shares to be doled out after taxes.

But tax attorney William Zabel called the will a "tax nightmare," and estimated that some 80% of the Gandolfini's estate is liable for the death tax of around 45%. The tax man cometh and right soon; the bill comes due in 9 months.

Where Did He Go Wrong?

It's these particularly large portions that leave Gandolfini's legacy vulnerable to the tax collectors. The tax man gains entry through the large portions given directly to fewer people.

Even worse, since Gandolfini probably didn't have $30 or $40 million in cash lying around, his family will have to hustle – at the worst possible time – to liquidate what's been left to them. In some cases, they'll have to settle for less than the full value of an asset as a fire-sale atmosphere takes hold.

Had the actor gone a more roundabout, but safer way, his heirs might get to hang on to more of his legacy. For instance, he might have left all of his estate to his surviving wife, making an end run around the inheritance tax. So long as the spouse is an American citizen, direct bequests to that spouse are tax deferred for as long as the spouse survives.

The Gift of Breathing Room

This would have given Gandolfini's wife time to sit down with the lawyers and establish a network of tax-advantaged trusts to divide the estate on her passing. A grantor-retained annuity trust, for instance, allows assets to be transferred into it for the life of the trust. The beneficiaries receive annual payments, and appreciation is tax-free for those beneficiaries.

Another way would have been to provide a life insurance policy payable for the entire amount of the estate's tax liability. While he was still with us, James Gandolfini might have calculated the entire value of his estate, worked out the tax on it, and then taken out a life insurance policy that would cover the tax bill.

Life insurance payouts aren't subject to inheritance taxes. That would have given his heirs a worry-free, no strings attached lump sum to pay off and then be rid of the IRS.

Gandolfini might have left money to his heirs while he was still alive in the form of gifts. Gifts above $13,000 are subject to taxes, but then again, there are tax credits available that permit up to $1 million of gifts in a lifetime

It's also possible to attach stipulations to gifts that make them tax-advantaged. For instance, gifts for higher education and medical expenses aren't liable to tax.

In Estate Planning, Anything Goes

When planning an estate, when attempting to give it all possible tax advantages, a no-holds-barred, no-stone-unturned strategy is called for. It's wise to take advantage of all the different ways available – no matter how complicated or unorthodox – to protect your heirs' legacy.

You can't cheat death, and you shouldn't cheat on your taxes, but you don't have to lie down for either of them.

All Part of "The War on Success"

James Gandolfini's post-mortem financial woes illustrate a tricky problem in this country. Gandolfini made his money himself, through his own hard work and with his considerable acting talents.

But, because he wasn't devious and clever with his earnings, a goodly portion of them will end up in government coffers, rather than remaining with his numerous chosen heirs – his family and friends.

On the one hand, it's fair to pay your taxes. Fair tax rates are not impossible to achieve.

But is it fair for the government to tax the dead? After a lifetime of hard work? Is it fair that you have to be devious and clever to protect your legacy?

These are legitimate questions that have to be a part of any debate over fair taxes. But anything that comes from that debate is likely to be of little comfort to James Gandolfini's friends and family when the tax man comes knocking.

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  1. Dave | July 24, 2013

    Life insurance of that size may not have been an option. Given that he died relatively young, he may not have passed the screening (and contracts without medical underwriting are expensive).

    Consider also that someone with that enormous wealth would have been sought out by professionals who have estate planning expertise. Perhaps he wasn't interested. We don't know what his true intentions were and projecting our own biases is not illustrative here.

  2. H.Craig Bradley | July 24, 2013

    IRS BENEFIT INFLATION ADJUSTMENTS

    The annual tax-free gift amount was increased to $14,000/year by the IRS due to an inflation adjustment in October 2012. So, beginning in 2013, you can give $14,000 to any individual tax free. The previous annual limit was $13,000 (through 2012).

  3. Tom Marcellino | July 28, 2013

    As a Screen Actor Guild actor and law student, I have read James's story and I think he was an intelligent, talented and generous person that effectuated his will with his lawyers as they determined best. Keep in mind that his wife at the time of his untimely death-is his son, Michael's stepmother.
    Regardless of taxes…all of his heirs are in a very good financial position.

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