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CASE STUDY:
Power, Procrastination, And Persistence

This information is for hypothetical and educational purposes only and should not be considered specific tax, legal, investment or planning advice, which will only be provided on a personalized basis. These are not actual clients, this is for educational purposes only. This information is based upon on our understanding of current laws, which is subject to change.

Introduction

I will never forget the words of Mr. Client, a deca-millionaire client with an income stream in the seven digits.  We were sitting in his conference room and he had the analysis we had done on his estate in his hands, moving it back and forth as he spoke on the phone with his high-priced New York City attorney.  He forcefully and directly blurted out these words:

“Your job tomorrow when you see Randy is to shoot bullet holes through this plan.”

As you can imagine, that statement sent shivers down my spine.  Mr. Power was accustomed to wielding a great deal of power and influence over those around him; in fact, he was so used to intimidating his advisors that some of them simply gave upand became “order takers”.  That night I didn’t sleep well at all as I anticipated what I was sure would be a difficult meeting with the attorney and other staff assigned by Mr. Power to go through our estate planning recommendations.

The meeting began with coffee and assorted pleasantries; then the moment came for the senior attorney to speak and really get the meeting going.  Much to my surprise, he said the estate planning recommendations we had provided were in fact on target.  Even though Mr. Harper had updated his estate plan just six months earlier, the attorney acknowledged that plan was inappropriate for Mr. Harper’s needs and that everything in our plan was perfectly appropriate to consider and discuss with his client.

The lessons I learned from that meeting have stayed with me to this day:

1.  Never make assumptions about what has occurred in the past or what is occurring in the present

2.  Always offer to review a client’s current situation and provide the most straightforward assessment and recommendations possible.

3.  Never be intimidated by the number of zeros on a net worth statement

Objectives

Mr. Client came to us with the following objectives:

1.  Get the estate in proper order, ensuring his son would be cared for in the event of Mr. Client’s death.

2.  Plan for efficient transfer of his business to his step-daughter after his current key person retired.

3.  In the event of his death, take care of his second wife for the rest of her life in the amount of approximately $150,000 per year net (compared to her current standard of living of approximately $300,000 per year net).

4.  Assure the ability for Mr. Client to maintain a lifetime retirement income of $25,000 per month net, placing particular attention to “bullet proofing” his investments.

5.  Satisfy his wife and her wishes regarding their home and the corresponding equity in it, while also protecting his interests in the home to ensure they would pass directly to his children.

Observations

After reviewing Mr. Client’s information thoroughly, we made the following observations:

1.  Mr. Client’s last will and testament was totally fragmented and not in line with his objectives; for example, it included special bequests to his children and various charities which were not what he truly wanted.

2.  Estate distributions to his children were fully taxable upon his death, creating significant liquidity issues at that point in time.  It was very likely his heirs would be forced to use his retirement plans for liquidity, magnifying the tax issues even more.

3.  Mr. Client’s divorce decree from his previous marriage required specific monthly maintenance payments which did not terminate at his death.  The current structure of his estate plan did not adequately fund this legally binding requirement.

4.  In the event of his death, the trust document governing distributions from Mr. Client’s trust was not in line with the amount of money he wished his son to receive.

5.  Mr. Client’s retirement plans were beneficiary to the estate, making them fully taxable; at current tax rates this would mean an immediate 40% shrinkage of those assets with no flexibility to reduce that amount.  Additionally, overall estate taxes at current rates were projected to be about $7 million; over the next ten years that amount was projected to grow to about $12 million.

6.  Mr. Client’s asset structure was more than adequate to fund his objective of $25,000 per month retirement income; in fact, we projected that at age 90 he would be well over what was needed with approximately $15 million in investments.

Recommendations

In designing a balanced set of solutions for Mr. Client, we suggested the following:

1.  Mr. Client should restructure his retirement plans to go into a trust with the flexibility to defer payouts over the next generation; specific wording was used in the document to ensure this would happen.

2.  Mr. Client should create a charitable needs trust to meet his charitable objectives, while restructuring his overall assets to ensure his children each received a specific dollar amount outright upon his death as well as their portion of the home equity assets.

3.  Mr. Client should restructure his tax obligations to be based upon a pro rata portion of what his second wife would receive in comparison to his children.

4.  Mr. Client should purchase secondary life insurance to cover the cost of estate taxes.

5.  Create a family limited partnership into which real estate could flow; this would ensure Mr. Client retained the ability to control these assets without inflating the estate unnecessarily, thereby reducing his taxable estate.

Summary

Mr. Cleint chose to implement all of our recommendations.  By doing so we reduced estate taxes from approximately $7 million to approximately $4 million, and structured his overall assets so they would flow the way he wanted.  Unfortunately, approximately two to three years after implementing these recommendations Mr. Client  fell terminally ill.  However, thanks to the success of these recommendations the business continues to survive to this day.

Investing involves risks, including loss of value. Gifts do not receive a step-up in basis. As such, heirs may be subject to capital gains taxation. Other limitations and restrictions may apply not identified above.