It is rare that I consult with any two clients who are the same. Or even almost the same.
This column is an exception to the rule.
Two couples called me for a second opinion in the same week. They wanted my advice on their four-year-old estate plans.
Let’s start with the basic facts.
Estate A
Joe, 67, and May, 65, have three children, none of whom is in the business. For their five grandchildren they used an education plan.
They used a family limited partnership for their $400,000 in cash assets and their $9.6 million invested in stocks and bonds.
The couple used a 50/50, a method for holding title to their homes yielding a large discount for estate tax purposes, for their two residences worth $1.8 million.
They used a subtrust for their $2.4 million in IRA and 401(k) investments.
They sold their business and their total assets are $14.2 million.
Estate B
Pat, 62, and Sue, 61, have three children, all of whom are in the business. For their seven grandchildren they used an education plan.
They used a family limited partnership for their $300,000 in cash assets and their $1.9 million invested in stocks and bonds.
The couple used a 50/50 for their two residences worth $2.1 million.
They used a subtrust for their $2.2 million in IRA and 401(k) investments.
They used an intentionally defective trust for their business worth $7 million. They used another family limited partnership for their business real estate worth $2.6 million.
Their total assets are $16.1 million.
A few more facts: Joe had a successful business that he wanted to transfer to his son, Sam (the only business child), who ran the business daily.
Sam was killed in an auto accident. Heartbroken, Joe sold the business, including the business real estate. The after-tax proceeds are included in Joe and May’s investments.
An interesting point is that if Joe had not sold his business, the total assets for Joe and May and for Pat and Sue would be almost identical.
Also, the asset mix now — except for the business and business real estate — is identical.
If both couples got hit by the same bus (with their current estate plans in place), the estate tax liability using 2011 rates would be about $6.8 million for Joe and May and $7.7 million for Pat and Sue. That leaves a net of $5.4 million to Joe and May’s family, and $6.4 million to Pat and Sue’s family.
Now look at Estate A’s strategies — the family limited partnership and subtrust — and Estate B’s strategies — the family limited partnership, subtrust and intentionally defective trust. You get a quick bird’s-eye view of two typical estate plans: one without a family business and one with a family business.
This column over the years has hammered away at the concept that you design a proper estate plan by selecting the right strategies to satisfy your goals based on the assets you own. Basically, these two families have identical goals: to maintain their lifestyles for as long as they live, to pass their wealth on to their heirs intact (eliminating the impact of the estate tax) and to educate the grandchildren.
And, of course, Pat and Sue have one more goal: to transfer the business tax-free to their three sons, all of whom are active full time in the business.
One final goal: Both Joe and Pat want to control all their assets — including the business, for Pat — for as long as they live.
Pause for a moment. How many of the above goals are the same for your family?
The strategies used in both of the estates accomplish all the goals listed for both families. The single biggest tax-saver and creator of tax-free wealth is the subtrust, which was used to buy second-to-die life insurance ($5 million for Joe and May and $6 million for Pat and Sue).
When the new estate plans are fully implemented, it is estimated that the families will receive the following dollar values of assets — all taxes, if any, paid in full: Joe and May in excess of $16 million; Pat and Sue in excess of $18 million. These amounts are more than double what would have been received under the old estate plans.
