One of the best television actors of our generation, James Ganolfini, passed away last month at the age of 51. He played Tony Soprano of the HBO mob hit and was estimated to be worth up to $70 million when he died on June 16. He left behind a son, Michael, 13, and a daughter, Liliana Ruth, 8 months, as well his wife, Debora Lin.
Even though he had a will and left millions of dollars to relatives and friends, including his personal secretary and assistant, his estate is looking at big tax bill. As is so often the case with an untimely passing, Mr. Ganolfini simply did not do enough to protect his estate from the IRS. He probably assumed he had more time…just as we all do.
One attorney familiar with the situation said that just over 80% of the estate will be subject to “death taxes.” With a tax rate of 35%, the IRS will take nearly $20 million of the actor’s hard earned wealth.
Whenever I read something like this I wonder if Mr. Ganolfini would have done anything differently. Would he be happy that he spent so much time working simply to turn over his money to the Government? I have no idea of his politics, but I bet he wishes he spent more time with family and less time contributing to the Obama machine.
And this does not include State death taxes. If “Tony” is a resident of NY, then he might be looking at another tax hit of $11 million (this is an estimate based on NYs progressive rate, which starts at 5.085% and rises to 16% for the amount above $10,040,000). When it is all over, he will probably be paying over $30 million, plus huge legal and other related expenses.
So, who should be concerned with death taxes and estate planning? Everyone reading this should have a will and a living trust, which is what it appears Mr. Ganolfini had. This will allow you to minimize the costs of probate and transfer your estate as efficiently as possible.
A living trust and will can be created by an attorney in your State, or you can purchase a book and do it yourself. In many cases it is quite simple, and, if you can follow directions and file paperwork to retitle your real estate, I suggest you do it yourself. If you live in California and would like a referral to a practitioner here, feel free to send me an email at info@premieroffshore.com
But a living trust and will do nothing to shied your assets from the IRS, nor does it provide any type of asset protection. In 2013, if you have only this basic structure, and a net worth of more than $5.25 million, you will be turning over 35% of the amount over this exemption to the IRS…just as Mr. Ganolfini’s estate will be doing.
I also note that the $5.25 million exemption amount is only useful to you if you plan in dying in 2013. Otherwise, the death tax exemption has regularly moved between $1 million and $5 million, and I expect it to go lower (below $5 million) in the coming years. Because it takes time and planning to avoid this tax, you should assume that the exemption will be at $1 million when you die, as it was in 2003 and as it would have been in 2013 without congressional action, and take steps now to eliminate it.
There are a number of techniques to eliminate assets from your estate. For example, you can gift up to $14,000 per recipient per year, or up to $5,120,000 in your lifetime, although for estates over that amount such gifts might increase estate taxes. Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met.
Next, Family limited partnerships and family limited liability companies can be useful for the transfer of a family business to a child or children or the transfer of any large asset while utilizing the annual gift exclusion. The FLP allows you to to break apart an asset into shares, make use of minority and/or marketability discounts, and keep the annual gifts of ownership below the annual gift exemption.
This technique can allow you to remove a substantial portion of your estate while continuing to maintain control of the underlying asset. Continued control is normally maintained by having the Family Limited Liability Company be controlled by a majority vote. So long as you own a majority you are able to control the underlying asset.
For those of you with substantial estates and who are interested in diversifying internationally, I suggest an offshore trust with a life insurance “wrapper” that will be tax efficient now and allow you to remove life insurance proceeds from your estate.
While basic life insurance is typically part of your estate, and thereby taxable, it is possible to separate it out. To avoid estate taxes on life insurance the policy must not 1) name the estate as a beneficiary and 2) the deceased must not possess “incidents of ownership” at the time of death. In other words the deceased must not have had any of the following powers at the time of death: a) right to change beneficiaries; b) right to assign the policy; c) right to cancel the policy; or d) the right pledge or borrow against the policy.
A life insurance trust is the most effective means of assuring that the proceeds of a life insurance policy are not included in your taxable estate. They are generally recommended for those looking to move $1 million or more in to a life insurance / international trust vehicle and, when structured correctly, will avoid the IRS taking 35% of the life insurance proceeds.
I would also like to note that these international structures provide asset protection during your lifetime, while allowing you to control the assets and manage them for the benefit of your heirs. For a detailed article on international trusts, please see: International Trust and Asset Protection Structures. If you have questions on this, or any other topic, feel free to send an email to info@premieroffshore.com