The estate plan of deceased actor James Gandolfini has been labeled a “disaster,” a “catastrophe,” and “a nightmare from a tax standpoint.” But was it, in fact, a costly mistake, or was it simply a considered choice?
The actor’s will reportedly devises 20 percent of his $70 million estate after taxes to his wife. This leads to an interrelated calculation in which the tax payment reduces the marital deduction, triggering additional tax, further reducing the marital deduction, and so on.
If the 20 percent comes off the top, his wife would receive $14 million. Assuming a combined federal and state tax of approximately 50 percent for a New York resident, the total tax would be about one-half of the remaining $56 million, or $28 million.
Instead, his wife gets about $7.8 million (20 percent of $38.9 million) and the tax is about $31.1 million. Two points are worth noting:
Because his wife’s share is relatively small, the resulting tax increase is limited. Press accounts have dramatized that more than $30 million will have to be paid to the government, but almost that much would have been owed anyway as long as the marital gift is only 20 percent.
Secondly, it’s quite possible the result was intended. Enlarging the wife’s gift would have reduced the 80 percent share of his sisters and child.
Here at CEB, we have long warned practitioners against boilerplate clauses that charge all taxes to the residue, which could have produced the result in this case (assuming the wife was supposed to receive 20 percent of the estate before taxes).
In CEB’s California Will Drafting §26.24 and California Estate Planning §5.47, we cite the truly disastrous result in Estate of Lurie v Commissioner (7th Cir 2005) 425 F3d 1021, in which a marital deduction trust that received the residue of the estate was inadvertently reduced by inclusion of $40 million worth of irrevocable trust assets.
But press accounts indicate that Gandolfini also created trusts for his wife and child that may receive future royalties, suggesting that the result caused by the modest marital gift in this case was intended and not the catastrophe is was made out to be.
On the calculation of the estate tax in decoupled states like New York, see CEB’s Estate Planning for Special Assets, chap 5.
Related CEB blog posts:
- Going to the Chapel or Staying Alive: Marital Deduction for Registered Domestic Partners after Windsor
- Tax Tip for California Resident Trustee with Nonresident Beneficiaries
- 10-Steps for Developing and Implementing an Estate Plan, Part I
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