Is estate planning important?

SITUATION

An adult couple, approximately 65 years of age, had two grown daughters as well as grandchildren. They owned various small businesses, investment accounts, and IRA/profit share-type accounts for a total estate of $2,800,000.

The couple owned two insurance policies. One for $500,000 on the husband to protect the wife because of debts on various business-related real estate. The second was for $500,000 on the lives of both spouses in a second-to-die policy. Both had executed estate-related documents for what they believed was an appropriate plan for their circumstances. A meeting with their CPA convinced them they needed to review their assets and the impact of their estate documents on their family.

They scheduled a meeting with their financial advisor to discuss their concerns, assets and documents.

The review with their financial advisor revealed:

• Under the existing scenario, a significant inheritance would pass directly to each daughter upon the death of both parents. However, the couple was especially concerned about such a potentially large sum of money being given directly to one daughter who was not as mature about finances as they had hoped she would be.
• The wife also expressed that she did not want to be required to ask her children for money from the trust in the event she was predeceased by her husband. However, the document showed that there was a trust in place and that both of her children were appointed as co-trustees.
• Additionally, the insurance policy proceeds would be included in their taxable estate because they owned the policies. Under this scenario, this would result in an unnecessary estate-related death tax liability of at least $500,000.

APPROACH

• A thorough review with their financial advisor illustrated the resources which would be available for the wife in the event her husband predeceased her. When she was comfortable with the review of the planned cash flow, she then appreciated the benefits and purpose of the credit shelter trust structured in their estate documents. Creating a credit shelter trust in the estate documents resulted in a projected $750,000 federal estate tax savings to the family. The financial advisor then made suggestions for alternative trustee appointments to assure her comfort as a surviving spouse.
• The insurance was reviewed from several different perspectives. First, it was owned in such a way as to be included in the gross estate of the insured and therefore included in the taxable federal estate. Second, an in-depth review revealed that one policy was a variable life plan which did not suit the client’s long-term objectives. Variable life insurance can be effective, but the underlying investments of their particular policy did not match the couple’s risk tolerance. The single policy on the husband’s life was also structured in his taxable estate and was an expensive product. The coverage was needed to offset existing short term debt on his large real estate holdings. A less expensive product suited to the short term need was recommended by the financial advisor.
• The financial advisor helped the couple to also review their holdings and actual document language to be sure everything achieved their current and long-term intentions. Beneficiary designations to children allowed the children to receive assets outright. This did not suit the couple’s current plan, so language was added to the trust in the will to hold the inheritance for the child who could not handle money. However, the trust terms were liberal; the daughter was treated equally in the value of her inheritance but the trust was designed to preserve the inheritance for an extended period of time for her. It was designed so that, ultimately, the trust assets would be released upon the child attaining a specified age.

RESULTS

Following just one thorough review with their financial advisor, the plan finally reflected their personal intentions and current circumstances.

• As a result of spending time with their financial advisor to review their financial situation, the couple felt much more informed regarding their holdings relative to their retirement income and long-term lifestyle needs.
• They structured an estate plan that allowed for sound federal estate tax principles, while providing for each other.
• And, just as they wished, their plan accommodated the separate needs of each of their children.
• Finally, the husband was able to successfully change the financial aspects of his financial and insurance products to meet his obligations to his wife as well as to preserve the family legacy for his children.

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