Getting A Second Opinion On Your Plan

There are three types of readers who call us for help: the reader who has an estate plan but needs a second opinion; the reader who has no plan; and the reader who has been working on a plan for years and just can’t seem to get it finished. Which type are you?

Joe, a 61-year-old from Ohio, fell into the first category. He wrote me a letter that said in part: “My current plan [two short wills and two long revocable trusts; one of each for Joe and his wife, Mary] looks good, but somehow I don’t feel comfortable.”
Sadly, and as is often the case, Joe and Mary’s plan contained some common estate planning errors.

Joe and Mary are worth a little more than $7 million. Also, Joe has a number of insurance policies on his life totaling $2.2 million. He also has $1.8 million in his rollover IRA. Both of these name Mary as the beneficiary. The $7 million also names Mary as beneficiary. The balance of these assets ($5.2 million) include Joe’s business, their residence, some real estate and other investments. They are all held in joint tenancy by Joe and Mary.

The wills and trusts were designed by a large law firm to pass Joe and Mary’s assets in a highly organized plan, first to the survivor (either Joe or Mary) and then to their children and grandchildren. Because Joe is 4 years older than Mary (and females statistically outlive males by about 4 years), it was assumed that Joe would pass on first.

So, suppose Joe goes to the small business in the sky first. Everything, and we mean everything, would go directly to Mary. Joe’s trust would get nothing and be a worthless stack of paper. Why? As the named beneficiary, Mary would get the $2.2 million in insurance. For the same reason Mary (the named beneficiary) gets the $1.8 million in the IRA. What about the other assets worth $5.2 million? All of these go to Mary immediately, because property held in joint tenancy goes to the survivor.

If Mary had died the day after Joe, with this plan, the tax bite would have exceeded $3.5 million (using 2011 estate tax rates) of the $9.2 million owned by Mary. Their kids would net only about $5.7 million.

What’s the lesson to be learned from this second opinion story? A will and a revocable trust, by themselves, can never be a complete estate plan.

We used a number of strategies to change Joe and Mary’s estate plan: 1) a qualified personal residence trust for the residences; 2) an intentionally defective trust to transfer Joe’s business to the kids tax-free; 3) an irrevocable life insurance trust for the insurance; 4) a subtrust for the profit-sharing plan to pay for the additional life insurance needed; 5) a family limited partnership to hold the balance (real estate and investments) of their assets; and 6) an organized future-gift-giving program for their children and grandchildren.

If, after completed plans are put in place, Joe and Mary die at the same time, then the kids would net, after taxes, about $9.5 million. The longer Joe and Mary live, as the future-gifting program is implemented, the more tax-free dollars are transferred to the kids.

If you would like to participate in my 2005 survey (comparing readers’ plans), please send me the following information: your last year-end business financial statement (include all pages); a current personal financial statement for both you and your spouse; names and birthdays for you, your spouse, your children, their spouses and your grandchildren; and business, home and cell numbers.

Send the information to Irv Blackman, Wealth Transfer Plan Test, Blackman Kallick Bartelstein, LLP, 10 South Riverside Plaza, 9th Floor, Chicago, IL 60606. In the meantime, if you have any questions, call me at (847) 674-5295.

That’s our plan to help you do your plan and do it right. Let’s hear from you.