Summertime is upon us soon. The tax season is behind us so now is the perfect time to consider an estate plan.
I read this article in a legal journal and HAD to share it.
By Michael L. Ferrin | April 17, 2014
James Gandolfini, the actor who played Tony Soprano in the popular television series The Sopranos, died of a heart attack last summer while on vacation in Italy. Since then, countless articles have been written by estate planning attorneys and others analyzing, criticizing, and dissecting the lessons to be learned from his estate plan. Most people do not have a potential $30 million estate tax bill due to poor estate planning (which could be seen by some as a nice problem to have), but many of the other problems with Mr. Gandolfini’s estate plan are common in most estate plans.
Mr. Gandolfini’s personal choices, as well as his estate and tax planning choices have been widely criticized. For example, it is reported that he left the bulk of his estate to his children, sisters and friends rather than his spouse. By holding the assets in trust for the benefit of his wife under an ascertainable standard and then having the balance go to the children on her death he could have saved significant estate taxes. Perhaps even more problematic is that the children receive their inheritance at age 21. His 9-month old daughter will receive 20% of what is estimated to be a $70 million estate outright at age 21. Through the use of a simple trust, this inheritance could have been protected and managed for her throughout her lifetime where it would be protected from creditors, shysters, con-men, divorce, and from poor choices that are inevitable when a young person is handed a pile of money before she is adequately prepared to handle it.
Mr. Gandolfini owned real property in Italy. Real property in multiple states and foreign countries can result in multiple costly probates if not properly addressed in an estate plan. Some of his property was vacation property. Vacation properties such as condos and family cabins have unique issues that need to be addressed before they are passed to the next generation. Failure to plan can result in loss of the property or hard feelings between family members.
How does the world know so much about Mr. Gandolfini’s estate plan? It really isn’t any of our business, is it? The answer is simple. Mr. Gandolfini chose to use a Will rather than a trust. A prominent estate planning attorney stated it this way; “But, the hardest choice to understand is Gandolfini’s choice to use a Will rather than a trust as his primary estate planning vehicle. By using a Will, he subjected his estate to the process of probate. Probate delays and expense vary by jurisdiction. But, in all jurisdictions, probate is a public proceeding. It is difficult to understand why he would choose to air his finances and personal choices in public. It is even more difficult to understand why he would expose his family to this. If he had used a trust rather than a Will, we would not know to whom he had left his fortune.” Steven Hartnett, Associate Director, American Academy of Estate Planning Attorneys.
Perhaps the most important lesson to learn from this is applicable to all of us – don’t procrastinate. Mr. Gandolfini died at age 51 while on vacation. He probably assumed he had many good years ahead of him to get his planning in place. It is human nature to put off setting up a trust or updating an estate plan, but this can result in unfortunate situations and problems for the loved ones we leave behind.
Here are a few things to keep in mind when discussing a Trust:
Frequently people believe if they have a small estate and if there are children or grandchildren involved they do not have to worry about creating two separate trusts upon the death of their spouse; even though the Trust documents state this should be done. It is my advice and recommendation that you DO create two separate trusts if your trust language tells you to do so. Especially so with second marriages and blended families.
We encourage that an Estate Tax Return be prepared when a spouse passes, regardless of the size of their estate. A lot of wealthy clients understand the need for preparing these returns while the “average” family does not feel like they have a large estate and do not need to file the return.
Inheriting Property and Assets
Some taxpayers believe that when they are older it is safer to have their beneficiaries or heirs listed as joint owners on their property, checking accounts, savings accounts, automobiles and houses. The parents think they are doing the children a favor and making things easier by having their children named as joint owners. In fact, this could cause problems when the parent passes on.
If a gift is made prior to the death of a parent, the basis of the inheritance, is what the parent paid for it. For instance, if the parent paid $100,000 for a home and the child was put on the deed with the parent, when the parent passes away the child’s basis for the house is $100,000. This means if they sell the house for $200,000 they will have a gain to pay tax on.
Consider not putting the children on the accounts or deeds. Instead, use a Power of Attorney that allows them authority to manage the property in the event of incapacity. Then prepare a Will or Trust and designate who will inherit the assets upon the parent’s death. This would allow the children to receive the property at a stepped-up basis (fair market value or what it can sell for); which means little or no tax would be paid once the child sells of the inherited property.
Finally, if you put children’s names on property and those children go through a divorce or lawsuit, it is possible that your property could also be lost or disposed of because the courts will assume the property is owned jointly by the parent and the child. Not only does putting the children’s names on property hurt the children tax-wise, it could hurt the parent both financially and legally, if there is any action taken against the children before the parent passes away.
Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.