Tony Soprano may have been an expert at hiding his money from the feds, but actor James Gandolfini, the recently deceased actor who portrayed the fictional New Jersey mob boss on TV, apparently was not.
Moreover, advisors say that wealthy families can take some lessons from the mistakes the award-winning actor made in mapping out his estate plan.
Federal and state tax collectors will take more than $30 million of Gandolfini’s estimated $70 million estate, according to published reports. Gandolfini, who starred in the acclaimed HBO series The Sopranos from 1999 to 2007, died of a heart attack while vacationing in Rome last month at age 51. Estate attorney William Zabel, who reviewed Gandolfini’s will for the New York Daily News, called it “a disaster.”
Wealthy individuals and families looking to protect their estates from the heavy tax burden Gandolfini’s is facing should employ the right estate planning strategies early and update those plans as their circumstances change, experts say.
“Gandolfini passing away at age 51 reminds everyone that we’re not immortal and everybody should make sure they stay on top of their estate planning documents,” said Michael A. James, managing director of family wealth at Glenmede in Philadelphia, who recommends clients review their estate plans annually.
“One of the biggest challenges of estate planning is to get people motivated to do it,” said Stephen Breitstone, head of the tax law group and an estate strategist at Meltzer, Lippe, Goldstein & Breitstone in Mineola, N.Y. “If they don’t think they’re going to die, they’re going to put it off for another day.”
One of the most effective ways to protect estate assets is through the establishment of various trust vehicles. Under current U.S. estate and gift tax law, an individual is permitted to transfer $5.25 million into an irrevocable trust free of gift tax; married couples may put in $10.5 million.
While married couples may transfer unlimited amounts to each other outright or in trust without paying any federal estate or gift tax (as long as the recipient is a U.S. citizen), a marital trust may be right for many wealthy couples, according to estate planners. When the first spouse dies, estate assets are placed in the marital trust. The surviving spouse is provided for by the income the trust generates, but does not have access to assets intended for children or other heirs. This is especially important when children from different marriages are inheriting.
Establishing an irrevocable life insurance trust provides powerful estate tax advantages for wealthy individuals and families, according to Gary S. Wolfe, who leads the Los Angeles-based network of independent attorneys and consultants at Wolfe Law Group.
“If you spend $5 million for a life insurance premium and you get a $30 million death benefit, you just went six to one on your money and could have paid the entire estate tax out of that money,” Wolfe said.
Creating an offshore irrevocable life insurance trust delivers even greater tax advantages and more flexibility, according to Wolfe. For U.S. taxpayers, Puerto Rico offers the best of both worlds. The island is a U.S. territory and considered part of the U.S. for many practical purposes, but with the design and investment flexibility typically found in other offshore financial centers.
“The reason to do it offshore is that there is no restricted menu of investments,” said David E. Richardson, CEO of Mid-Ocean Consulting in Nassau, Bahamas. “You can invest the cash-value premiums in any investments you want, including hedge funds. Onshore, you’re restricted to a menu of investments that is determined by state insurance regulations, which often limit you to mutual funds or bond funds and which often underperform other investments.”
The strategy requires that the investments of U.S. taxpayers be held by a Puerto Rico-issued life insurance policy. Doing so will streamline tax reporting for U.S. citizens by eliminating the need to file a Foreign Bank and Financial Account (FBAR) disclosure form, which is required for investments in other offshore locations, and minimizing the likelihood of an Internal Revenue Service audit, according to Richardson.
James at Glenmede helps ultra-rich clients develop their estate plans by creating a financial model that shows them what will happen to their estates after they die.
“I take a client’s balance sheet and pretend that they’ve passed away,” said James. “I show them that this is how much is going to your family or friends, this is how much is going to taxes, and this is how much is going to charity.”
This type of financial model simplifies complex legal documents that many of his clients either do not have the time or inclination to digest completely. Most clients look at the financial model and “usually have very strong feelings” about the amount of tax their estates may be subject to, how much is being left to different heirs and their access to various assets, he said. The financial model helps them to make adjustments accordingly.
The law requires that an individual’s last will and testament be filed with a local probate court. That makes those documents public and available to anyone, as Gandolfini’s death illustrated. Within a few hours of his passing, Gandolfini’s estate documents were filed with the New York Surrogate Court. His will was posted on the Internet soon after and became the focus of media attention and public discussion.
Wealthy individuals and families who wish to maintain the privacy of their estates should consider a revocable living trust, which does not get filed with any court, said Alan Kufeld, tax principal in the Rothstein Kass Family Office Group in New York.
The firm recommends revocable living trusts for many of its high-profile clients in the entertainment industry and professional sports. “A revocable trust will avoid probate. It’s a private document. It helps prevent [details of an estate] from hitting the Internet,” and keeps the public from finding out what assets are part of the estate and who is inheriting those assets, Kufeld said.
Beyond the nitty gritty details, estate planners say the key to minimizing taxes on a wealthy estate like Gandolfini’s is to develop a strategic plan as soon as possible and update that plan regularly.
A study by Rothstein Kass published in September found that more than three quarters of the estate plans of a majority of families wealthy enough to have their own financial offices were at least three years old, even though nearly 95% of them had experienced significant life changes during that time. That is not consistent with proper strategic estate planning, according to Kufeld.
“The estate plan is a living, breathing plan that needs to be looked at any time there is a significant change in one’s life, whether it’s a new income-producing job, divorce, or a new child coming into the picture,” said Kufeld. Such reviews ensure that an estate’s assets will be distributed according to a client’s most up-to-date wishes.
“You have to do various types of estate planning transactions early and often to create trusts and fund those trusts in ways that generate wealth,” said Breitstone. “You want to transfer the tree, not just the fruit. If you transfer assets that are likely to appreciate in value and earn income early on, you can transfer a lot of your wealth over time, but it’s really a lifelong process.”