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CASE STUDY:
The Spouse & Creating Urgency

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

When I first met the Client, he was in his mid 60’s and still intimately involved with his business, commonly working 12 to 15 hour days even on the weekends; the value of the business represented the majority of his estate. Mr. Client had a son who was a few years into working for the business and had hopes some day of taking over the business for himself.

The tip off that this case would be extremely interesting and challenging came when mr. and mrs. client gave me their will, which had not been updated for over 30 years. Nothing at all had been done as far as estate planning, yet the overall value of his estate (driven primarily by the value of his business) put him in the low deca-millionaire range. I had been working on Mr. Client for over ten years, trying to convince him of the need to do some proper estate planning but to no avail; there were countless meetings schedule over that time period, but he inevitably found a reason to cancel each one.

So what finally changed to convince him he should pursue the planning process? His wife. Once I successfully involved his wife and helped her understand the vital importance engaging in the planning process, she was able to convince him to carry forward with the meetings and follow through on proper estate planning.

Objectives

Mr. Client came to us with the following objectives:

1. Ensure his wife would be cared for in the event of his death.

2. Provide an opportunity for his son work in the business while also taking care of his daughter.

3. Minimize taxes both on current income and on the estate.

4. Hire a controller for the business.

5. Restructure the business to add more middle management.

6. Bring his son up to speed within the next six months, allowing Mr. Client to transition some of his current responsibilities over to his son.

Additionally, Mr. Client's wife came to us with the following objectives:

1. Know where they currently stand financially.
2. Know what would happen in the event of one or both of their deaths; specifically, how would their son and daughter be cared for and should a trust be created for their benefit.

Observations

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

1. Mr. Client's last will and testament was over 30 years old and he did not have a current tax planning will.

2. Mr. Client was not taking advantage of gifting opportunities to his children by reducing the size and value of his estate before making such gifts.

3. Mr. Client's estate was subject to significant unnecessary taxes of approximately $5 million.

4. Mr. Client's retirement was well funded for financial independence with sufficient outside assets, decreasing dependence on the business.

5. In the event of his death, Mr. Client's existing life insurance and non-business related assets and investments were sufficient to ensure his wife’s current and comfortable lifestyle.

6. The needs of Mr. Client's son were not sufficiently coordinated into hisestate plan, especially with regard to key man insurance coverage for his son.

7. Mr. Client was overdue for a thorough review and audit of all existing life insurance to ensure appropriateness for his current situation and needs.

Recommendations

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

1. Mr. Client should create a family limited partnership to move investments out of the business; the benefits of doing this included discounting up to 35%; gaining better control of the assets; creating greater protection from creditors; and leveraging gifting opportunities for his children.

2. Mr. Client should create a formal plan to ensure smooth business transition. The elements of this plan should include freezing the current value of the business; recapitalizing the business to create two classes of stock shares, voting and non-voting; and selling the non-voting shares to his son at a 50% discount. This approach would have a minimal net effect on cash flow while taking care of Mr. Client's financial independence needs. The note could be self-cancelling, allowing the son to stop payments upon second death.

3. Mr. Client should update his will to be a tax planning-related will.

4. Mr. Client should purchase second to die survivorship life insurance to pay for estate taxes.

Summary

Mr. Client chose to implement all of the above recommendations, thereby reducing estate taxes by approximately 25%. This turned out to be a significant benefit, as Mr. Client was diagnosed with terminal cancer just after his life insurance went into place. He died approximately one year after final completion of the planning process; however, thanks to the estate plan we helped him put in place his wife and children continue to be well cared for after his passing.

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.