The late, great, James Gandolfini died suddenly last year in Rome, aged 51. The Sopranos star suffered a unexpected heart attack and was clearly taken at far too young an age.
However, the star’s sudden passing has provided a salutary lesson for us all in matters concerning taxation, for he left an Estate worth a reported US$70million, from which the IRS is expected to receive an estimated $30million in death duties – and while US and UK death tax rates and allowances differ, they are close enough for the circumstances surrounding the extent of the tax exposure to ring true on this side of the pond as well.
Less than two years prior to his death, James Gandolfini updated his Will, ensuring that his final wishes were up to date. For whatever reason, however, the actor appears not to have undertaken any specific arrangements to mitigate the effect of death duties. His Will was published following his death, and this shows that he was clearly a generous man, making gifts of $1.6 million to various friends and relatives before the bulk of his estate was split 30% to each of his two sisters, 20% to his wife and 20% to his newborn daughter. His son, from his first marriage, benefited from an insurance policy that was outside US estate tax. Unfortunately though, the way he chose to split his Estate has resulted in a windfall for the US taxman.
In the US (like the UK) transfers of assets to a surviving spouse are broadly exempt from death duties, so by only bequeathing 20% of his estate (say $14m) to his wife, the rest of the estate was exposed to tax. If we ignore the question of the make-up of his assets (and whether any were specifically exempt from tax on death, such as business assets in the UK), with the benefit of hindsight and purely from a tax point of view, simply increasing the proportion of his Estate left to his wife would have saved a substantial amount of tax on his death.
Even if the split of Gandolfini’s Estate was precisely what he intended and he understood the tax implications, a cautious approach might have prevented what could be a double-dip into the inherited wealth. If, for this purpose, we ignore the “small” gifts, the Estate after his wife’s share amounted to $56m, on which the $30m taxes were suffered. This would mean that each of his sisters would inherit $21m before suffering $11.25m in tax. The net inheritance of $9.75m each will have passed into their own estates and upon their death will again be potentially subject to death duties. With hindsight, had the funds been left in a Trust in Gandolfini’s Will, the inheritance could have remained outside their estates, but been available for them should they have needed (or wanted) it.
With regard to his newborn daughter, whilst clearly he wanted to provide for her absolutely, there were no controls left over the funds and, upon reaching adulthood, she will gain full unlimited control over her (estimated) $6.5 million inheritance. Often, when planning for children to inherit, Trusts are used to retain an element of control over the funds until the child reaches a more “mature” age, often 21 or 25, but sometimes even later, to ensure that the inheritance is not wasted.
But at least James Gandolfini did have a Will. Some celebrities die without even basic Wills, such as Jimi Hendrix and Amy Winehouse. In the UK, this is called dying intestate, which can give rise to a multitude of complications that, with a little forethought, could easily be avoided.
So had James Gandolfini taken tax advice, his Estate could potentially have saved millions of dollars, and left his beneficiaries in a better position. The lesson learned? Even the simplest of Wills should be undertaken with an understanding of the potential tax bill at the end of it all.