When Bill, 68, and Mary, 67, sat down to talk with Heritage, their demeanor didn’t show an ounce of the anxiety they felt. Her husband’s recent heart attack and family history had left Mary concerned about financial stability and both of them troubled about their old estate plan. Mary was a director at a non-profit and a “still-aspiring” artist, and her husband had always handled their investments and taxes. The thought of tackling those items by herself was overwhelming. She’d rather have the cash in a bank account but knows that’s not a good solution.
Their wealth appeared to exceed $15MM but complexities were everywhere. A large part of their annual income derived from a family trust that paid nearly $150,000/year to Bill, but, upon his death, the income goes to their children—bypassing Mary. Nearly a third of their wealth was wrapped up in three homes—each with a high level of sentimental attachment. Bill and Mary give nearly six figures to charitable causes each year and are highly visible in the community. Despite years of talking about it, they haven’t updated their wills since the children were still in grade school.
Bill and Mary need to look at their wealth holistically and understand where major risks and vulnerabilities exist.
1. A rising market for 10 years had helped Bill justify the aggressive portfolio that he had built over time. For him it was perfect, but upon his death, the trust income disappears and Mary has a portfolio far too risky for her needs.
2. Bill has become a victim of his investing success and doesn’t want to pay the capital gains associated with his stock picks. Now he has several concentrated positions.
3. They haven’t taken Social Security yet and have received mixed signals as to the best time to start taking benefits.
4. Their most valuable property is a $2MM family home that Mary inherited, and it’s nearly three times as expensive to maintain as the other two.
5. Bill retains a $1MM umbrella policy that he got 10 years ago.
1. Their wealth exceeds the estate tax limit for their state of residence, and when the federal estate tax limit reaches sunset in 2026, the threshold will fall below their current net worth. Assets above the federal level will cause a large tax liability when the surviving spouse dies.
2. The irrevocable family trust that pays Bill income has provisions for their children after his passing–Bill and Mary need to coordinate their plans with the trust document.
3. Bill has an old whole life policy with a $1MM death benefit and substantial cash value. That benefit will eventually be taxed as part of their estate.
4. One of their three children is in a second marriage and another may soon be out of her first. How do they ensure that wealth flows through their bloodline?
1. High levels of charitable giving combined with large capital gains in the stock portfolio suggest that a charitable remainder trust based on Mary’s life can offer an income solution.
2. The family trust document may give Bill a limited power of appointment to provide income for Mary. He needs to see his attorney for legal advice and make sure he uses the power in his will if it’s available.
3. Explore risk capacity and risk tolerances to determine an appropriate risk aware portfolio
4. Evaluate the current portfolio relative to Bill & Mary’s risk capacity together and as survivors.
a. Design a portfolio which addresses risk diversification, income source variation and tax exposure differences while complementing estate plan design and objectives.
b. Consider portfolio implementation vehicles and options to provide reliable and/or guaranteed income generation, especially to Mary upon Bill’s passing.
5. Review the viability of the insurance policy. Regardless of whether it is retained, replaced or liquidated/replaced, Bill and Mary should consider placing it into a life insurance trust that is coordinated with other estate planning documents/
6. Mary’s family home may be placed in a qualified personal residence trust to help reduce estate taxes and pass the property to her heirs.
7. They may want to consider drafting trusts or adding trust language to their wills to protect their heirs’ inheritance from divorce and creditors.
8. Holistically coordinate their estate plan so that the family trust, retirement plans, insurance policy and wills don’t conflict or leave any gaps.
9. Consider a formal gifting program for the family that will help reduce estate taxation over time.
10. Consider dramatically increasing the coverage on the umbrella policy.
11. Conduct a personal Social Security analysis to determine the optimal timing of benefits.
Please remember that all clients are different and individual suitability should be determined. These case studies are presented as information only; actual results may vary. It is not our position to offer legal or tax advice. Seek the advice of a professional advisor prior to making a tax-related investment and/or insurance decision.
CRN – 3141647-062620