When you are working through the administration process of a loved one's estate, the last thing you want to have to worry about is estate taxes. Your loved one wanted his or her wealth to go straight to family members and loved ones, not to the California and federal governments. However, we have seen several examples in the news of heirs losing a huge portion of a loved one's estate to the Internal Revenue Service because of poor estate planning.
Most recently, "The Sopranos" star James Gandolfini left behind $70 million in assets to his family when he passed away recently. While he left behind a will detailing how much of his estate should go to each person, the IRS will be able to claim about $30 million of it. It's not clear if Gandolfini either didn't know about the ways to protect his assets from estate taxes or didn't get around to altering the terms of his will, but it has left his heirs in a difficult situation.
Gandolfini created a will that gave 20 percent of his estate to his wife, 20 percent to his daughter, and 30 percent each to his two sisters. Had Gandolfini left more than 20 percent to his wife, the IRS would not have been able to take so much. Because there are unlimited deductions for gifts to a spouse, he could have skirted estate tax by creating a marital trust. Through a marital trust, he could have created directions for how the money should be distributed -- whether to his kids or siblings -- without subjecting it to taxes.
Estate administration -- especially when it comes to taxes and dealing with the IRS -- can be tricky. For help dealing with the IRS after a loved one's death or to find ways to avoid estate taxes altogether, it may be helpful to work with an attorney.
Source: Daily Finance, "James Gandolfini's $30 Million Estate Tax Mistake," Dan Caplinger, July 8, 2013