Serious Decisions On Sunny Days (Why You Need Wealth Legacy Assessment)

Are you worried about the possibility of being the target of a frivolous lawsuit? Are you concerned about passing assets to your children, but then seeing half their inheritance walk away in the hands of an ex-spouse? Or, do you think about the issues facing your heirs in receiving too much money – too soon, or having a situation arise whereby they are not emotionally or mentally equipped to manage their inherited wealth? Are you uncomfortable about the prospects of retirement, and potentially outliving your income stream?

These were some of the major concerns Drs. Bill and Kathy Blade shared with their long-time friend and CPA. Their financial success and comfortable incomes had allowed them to put off making “serious decisions on sunny days.” Now that their three adult children, Mark, John, and Sarah, are establishing their own lives, Bill and Kathy realized it was time to tackle issues that they had been putting off.  In particular, they needed to address the special planning considerations for their autistic son, John. Recognizing that their situation warranted a thorough and integrated evaluation, their CPA referred them to us for a Wealth Legacy Assessment™.

Bill and Kathy are both physicians. Bill is 55 and a highly regarded surgeon. Kathy is 53 and a pediatrician. They met in medical training, and married 26 years ago. They have worked hard, and been very successful, professionally and personally. They love their family, their work, and time permitting, sailing! They currently have a net worth of $14 million, of which only $5.9 million is in their combined retirement plans, and a pre-tax income of $610,000 from their two practices. They plan to retire in five years, and have a targeted retirement income goal of $25,000 per month with a modest inflationary factor.

Their Wealth Legacy Assessment™ identified a number of issues and recommendations.  This article focuses on those recommendations relating to trusts. A future newsletter will address the balance of their planning concerns and proposed solutions.

  • Their wills, trust, and other supporting documents are significantly outdated, and do not address asset protection issues for their adult children Mark and Sarah, or the special needs issues of their son, John.
  • While $5.9 million of their assets are protected in their retirement accounts, there is a significant amount of assets remaining at risk, without asset protection strategies in place.
  • Assuming they continue to put money into their retirement plans, modest growth, no unplanned negative financial event, and low inflation, they will make their objective of $10 million of income producing assets within the next five years. At a 4% withdrawal rate, and assuming a 3% inflationary factor, Bill and Kathy will have sufficient assets, none-the-less, to retire in five years.
  • They have not considered the devastating potential impact of Federal Estate Taxes upon their estate when they both die. While they do have substantial liquid assets to the pay death taxes, they are willing to consider more cost effective methods to pay the government.
  • While they have been generous in their donations, no philanthropic objectives have been established in their wills or trust documents.

Our Wealth Legacy Assessment™ recommendations:

  • With their current income and assets the Blades can take advantage of the current tax laws in 2012 and set aside $5 million in trust for their children today.

Set up a Nevada Asset Protection Trust (Nevada APT) and fund it with $4 million in marketable securities.  A Nevada corporate trustee (Dunham Trust in Reno, NV is one of my favorites) is selected to give these California residents access to Nevada’s favorable trust laws.  The trust is structured as a completed gift and is therefore removed from their taxable estate.  Bill, Kathy, Mark and Sarah are all permissible beneficiaries.  They will have access to the funds during their lifetime at the “discretion” of the Nevada corporate trustee.  When Bill and Kathy die, the assets remain in trust for their children and future heirs – gift and estate tax free. Further, the assets will be protected from potential financial predators, creditors and ex-spouses

Create a Supplemental Needs Trust for John and fund it with $1 million in marketable securities.  The trust is structured as a completed gift and is removed from their taxable estate.  The assets in the trust will not affect John’s eligibility for Medicaid or Supplemental Security Income (SSI).  The Nevada corporate trustee is named as the current trustee with Bill and Kathy as co-guardians and Mark and Sarah as successor co-guardians.  When Bill and Kathy pass away the corporate trustee will remain in place and Mark and Sarah will assume the role of guardians.  We recommended naming their favorite charity, Autism Speaks, as the remainder beneficiary when John dies.

  • Set up an Asset Replacement Trust (ART) to purchase a life insurance contract with a survivor benefit of $7 million dollars. Thanks to the trust rules in Nevada, the ART can remain intact for up to 365 years. Since they plan to retire in five years, we recommended accelerating the life insurance premiums to $76,000 per year for five years. With conservative return assumptions, this should make the contract self-sustaining upon their retirement. With the future of estate tax exemptions unknown, this balances the Blades’ desire to maximize what the children receive estate tax free while still generating their $300,000 annual retirement income.
  • The trust allows the Blades to take a loan from the cash value of the insurance policy in the future if the need ever arises.
  • Create and fund a revocable living trust so that at their death the assets not in the Nevada Asset Protection Trust, Supplemental Needs Trust or Asset Replacement Trust will transfer to their children without the time, expense and publicity associated with probate.
  • Have Bill and Kathy act as trustees during their lives.  Upon Bill and Kathy’s deaths, a Nevada corporate trustee is named as successor trustee and the living trust pays outright 10% to Mark, 10% to Sarah and 10% to Autism Speaks with the remainder staying in separate trusts for Mark and Sarah under the direction of the Nevada trustee.

By establishing the three distinct trusts, the Blades have:

  • Immediately removed $5,375,000 and its future growth from their taxable estate due to their contributions to the Nevada Asset Protection Trust, Asset Replacement Trust and Supplemental Needs Trust. All of the assets remaining in those trusts will be passed on to their children free of gift and estate taxes.
  • Retained sufficient assets to comfortably withdraw $300,000 annually at a 4% withdrawal rate after they retire.  They also have access to a portion of the funds in the Nevada Asset Protection Trust and in the Asset Replacement Trust if they suffer an unexpected financial setback.
  • With the Supplemental Needs Trust they have provided for John’s care after they die without jeopardizing the government benefits he is currently receiving.
  • Protected the assets placed in the Nevada Asset Protection Trust and Asset Replacement Trust during their lifetime from potential creditors as well as from their children’s potential creditors after Bill and Kathy pass away.

As a result of the Wealth Legacy Assessment™, Bill and Kathy are spending more time with their children, working, sailing and enjoying life rather than worrying about their finances.

Imagine That™”!

Written by R. J. Kelly – Feburary 2012

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