The recent passing of Soprano’s Star, James Gandolfini, focused attention on issues with his December 19, 2012 Last Will and Testament. Several of these issues apply to estate planning in general, not just for the rich and famous.
1. Addressing Privacy Concerns
Because Mr. Gandolfini did not coordinate a Revocable Trust with his Will, the Will released substantive terms of his estate plan to the general public. Individuals with privacy concerns typically utilize Revocable Trusts which are generally not filed with the Surrogate. For those who are neither particularly rich nor famous, Revocable Trusts have other benefits including enhanced asset management during lifetime and enhanced access to Trust assets.
Individuals with privacy concerns should also be aware of charitable reporting requirements. If a Will or Trust names charitable beneficiaries, many States, including New Jersey, require fiduciaries to provide a copy of the Will or Trust to the State. New Jersey also requires fiduciaries account to the New Jersey Attorney General’s Office. Effective use of non-probate planning techniques can avoid these disclosure issues.
2. Effective Use of Tax Credits in an Estate Plan
The media coverage on Mr. Gandolfini’s Estate highlighted the need for effective tax planning. While we do not have all the information about how taxes will affect his Estate, some terms in the Will could have substantial adverse tax consequences.
Mr. Gandolfini’s Will did not take full advantage of the unlimited marital deduction. Provided a spouse is a U.S. citizen, a spouse is entitled to an unlimited marital deduction under Federal Tax Law. Mr. Gandolfini’s wife only received 20% of the residue of his Estate. This means that the other 80% of the residue, and the specific devises, are likely subject to Federal and New York Estate Taxes.
In second marriage situations, using a Qualified Terminable Interest Property Trust (QTIP) defers Federal Estate Taxes until the after the surviving spouse’s death.
3. Terminating a Trust Can Have Significant Tax and Creditor Protection Issues
Finally, Mr. Gandolfini’s Will makes outright distributions to many beneficiaries, and terminates trusts when minor beneficiaries are relatively young. This results in two (2) potential adverse consequences. First, it exposes the assets to additional Estate Taxes upon the death of a beneficiary. Provided Mr. Gandolfini had not exhausted his Generation Skipping Transfer Tax (GST) Exemption for lifetime gifts, he could have created GST Exempt Trusts and prevented additional Estate Taxes upon the death of the Trust beneficiaries.
Second, outright distributions to trust beneficiaries expose Trust assets to claims by spouses and creditors. This issue is particularly acute where the beneficiary stands to inherit a substantial amount, or the Trust beneficiary has financial management problems. Trusts should always be drafted to provide asset protection terms and ensure that Trust assets are properly protected for beneficiaries.