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    Learning From ‘Tony Soprano’

    The passing of actor James Gandolfini, best known as Tony Soprano in “The Sopranos,” received a lot of publicity. Not all the publicity was in the entertainment or celebrity media. Financial and legal media pounced on Gandolfini’s will, generating a lot of commentary from lawyers and estate planners, little of it positive.

    Gandolfini’s estate plan was thought by many to be a bad one, because it appears that of the $70 million value about $30 million will be paid in Federal and State taxes. Instead of leaving most of the estate to his widowed second wife, which would protect it from estate taxes, he left 30 percent to each of his two sisters, 20 percent to his daughter from the current marriage and 20 percent to his wife. His son from the first marriage was given only clothing and jewelry under the will.

    While that seems like bad planning to many people, there are better conclusions to draw. This is an example of the many trade-offs and difficult decisions that often are involved in estate planning. It also shows that the will is not the entire estate plan.

    For example, Gandolfini might already have provided for his son previously outside of the will. In 2012, many wealthy people were making large gifts to loved ones to avoid the scheduled expiration of generous estate and gift tax exemptions. We don’t know how much wealth was shifted to his son and others before his death, and probably never will.

    There could be other assets that won’t pass through the will or probate process, such as retirement accounts and annuities.

    The will indicates Gandolfini set up a separate irrevocable life insurance trust that apparently carries a life insurance policy payable for the benefit of his son. Again, we might never know the details about this.

    Finally, this case shows that tax reduction is not the most important part of estate planning. Gandolfini apparently wanted to ensure wealth was passed to his sisters and young daughter. He had enough wealth that he could leave them substantial amounts even after paying estate taxes. So he chose to leave them directly substantial parts of the estate, though leaving it to his wife would have eliminated the estate taxes.

    The discussion about Gandolfini’s estate, however, does make two good points. One is that certain mistakes and oversights frequently occur in estate plans. The other point is that estate planning can involve some tough issues. Let’s review some of the important mistakes and difficult issues.

    Establish your domicile: Many people spend time in more than one location. Each location that has an estate tax will try to claim you were domiciled or resident in that State and tax it. It is a benefit to you and your heirs to at least clearly establish your domicile in one State. You do this by living more than half the year there and definitely not spending close to half the year in another State. This is easy to prove with a simple log book or calendar noting where you spent your time during the year. The optimum approach would be to establish domicile in the State with the lowest tax burden. But you might be like Gandolfini and prefer living in a high-tax jurisdiction such as New York. That’s fine, as long as you recognize you’re making that choice and what its costs will be. And make sure two jurisdictions can’t claim you as a resident.

    Review beneficiary designations: An array of wealth passes to the next owner outside of the will or a living trust. These most prominently include retirement accounts such as individual retirement accounts or 401(k)s, annuities and life insurance. Most estate planners say one of the problems they see most frequently is beneficiary designations that are woefully dated. IRAs still name a divorced or deceased spouse as beneficiary. Or the oldest child is named but not children born later. It’s not unusual for beneficiary designations to be blank. Bringing beneficiary designations up to date is easy and free in most cases. Not doing so is very costly to heirs.

    Managing digital assets: Oversight here is understandable, since digital assets still are fairly new. There are two issues to consider.

    The first issue is leaving a list of digital accounts and access information so your executor and others can access accounts without hiring an expensive forensic computer expert. The more of your life that is online, the more important this is. People need to access email, any websites and social networking sites you maintain, and financial accounts. It’s especially important to note expenses that automatically are withdrawn from your accounts, so these can be stopped in a timely manner.

    The second issue is ownership and continuation of online information. Do you want a personal Web page or Facebook page converted into a memorial site, shut down, or maintained as is? Some website providers have policies that take effect when they learn of a member’s passing.

    Business succession: Few business owners maximize value for their heirs. A good succession plan begins at least five years before ownership or management passes. You need to get the books and records in condition to satisfy a buyer. Performance over multiple years should be easy to compare, and generally accepted accounting principles should be used. Run the business professionally and be sure personal and family goals are separated from the business. Too many small businesses are run partly as family charities or extensions of the owner’s personal life. If your goal is to have a family member take over, then start the transition process. Don’t assume you can run it as you’ve always done and that the successor will step in smoothly right after you’re gone.

    Sharing homes and other assets: Many families have a vacation home or other property that the parents treasure and hope the children will enjoy. But think very carefully about leaving such a property to siblings and their families to share. Such arrangements often don’t fare well. The siblings might have different financial positions and goals. They also might have different attitudes about the property once they are owners instead of your guests. If you decide to leave it to them jointly, discuss this in detail with them ahead of time. Set up a clear ownership structure with rule making, and have an exit plan for them so the property doesn’t become a distress sale. Ideally, you should provide a separate financial account for maintenance of the property and payment of annual expenses.

    Leaving wealth to minors: Whether they are children or grandchildren, at least two issues arise here.

    The first issue is whether they should be treated equally. On the surface, it appears Gandolfini didn’t treat his son and daughter equally; but we really don’t know since wealth likely passed outside the will. But equal treatment is an issue many people struggle with. When one sibling has done better financially than others, should that sibling be left less wealth in the estate plan since he likely doesn’t need it as much? Or should one sibling be left little or nothing for the opposite reason: He has shown a propensity to waste money or has substance abuse or similar problems?

    The second issue is how much control should the offspring have and at what age. Gandolfini’s daughter will have complete control when she turns 21. That’s probably too young for a person to have responsibility for that much money. Trusts can be used to provide for the young person while protecting the wealth until he might be better able to manage it.

    Some estate plans go in the opposite direction. They impose a lot of controls and restrictions on wealth and continue them until the person is well into middle age. Some also impose incentives that amount to control of the person’s life, such as requiring them to meet certain education or income levels before receiving money.

    Discuss the pros and cons with your estate planner before deciding when and under what conditions young people receive control of wealth.

    Updates and changes: Gandolfini’s will was updated in December 2012, just two months after his daughter was born. That’s a good move. Wills should be reviewed at least every couple of years, and you should meet with an estate planner close to any major change in your life or finances. Examples of such changes are marital status, family births or deaths, change of financial status (for either better or worse), purchases or sales of major assets, and a change in your health or that of a family member. An estate plan is a process. It needs to change with circumstances.

    — Bob Carlson

    Bob Carlson is editor of the monthly newsletter and web site, Retirement Watch. Carlson is Chairman of the Board of Trustees of the Fairfax County Employees' Retirement System, which has over $3 billion in assets, and was a member of the Board of Trustees of the Virginia Retirement System, which oversaw $42 billion in assets, from 2001-2005. He was appointed to the Virginia Retirement System Deferred Compensation Plans Advisory Committee in 2011. His latest book is Personal Finance for Seniors for Dummies, published by John Wiley & Co. in 2010 (with Eric Tyson). Previous books include Invest Like a Fox... Not Like a Hedgehog, published by John Wiley & Co. in 2007, and The New Rules of Retirement, as published by John Wiley & Co. in the fall of 2004. He has written numerous other books and reports, including Tax Wise Money Strategies, Retirement Tax Guide, How to Slash Your Mutual Fund Taxes, Bob Carlson's Estate Planning Files, and 199 Loopholes That Survived tax Reform. He also has been interviewed by or quoted in numerous publications, including The Wall Street Journal, Reader's Digest, Barron's, AARP Bulletin, Money, Worth, Kiplinger's Personal Finance, the Washington Post, and many others. He has appeared on national television and on a number of radio programs. He is past editor of Tax Wise Money. Carlson is an attorney and passed the CPA Exam. He received his J.D. and an M.S. (Accounting) from the University of Virginia and received his B.S. (Financial Management) from Clemson University. He also is an instrument rated private pilot. He is listed in several recent editions of Who's Who in America and Who's Who in the World.

    | All posts from Bob Carlson

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