Estate Plan for John & Betty Casper
By Robert R. Tweed

Estate planning has two primary objectives:

1. Minimize estate taxes to pass on as much as possible to your heirs and
2. Control how your money is distributed at your death.

When John Casper retired at 65, he and his wife Betty (62) had accumulated an estimated $5.2 million in assets consisting of:

• Their personal home, valued approximately $1 million
• $3 million in rental properties, consisting of a $1 million office complex and $2 million in multi-family rentals
• Rollover IRA assets of $520,000
• Unqualified investment assets of $540,000
• Cash equivalents - $200,000

Based on their current lifestyle, they wanted to receive at least $150,000 annually in income from their assets during retirement, which could easily stretch 20 years or more. In addition, they wanted to make certain that when they die, their heirs would receive as much of their estate as possible.

Our preliminary estate planning recommendations and rationale were as follows:

1. To avoid having their estate go through probate, they needed to set up an “ABC Living Trust” and have their assets titled in the trust’s name, with the exception of their IRA assets. The “ABC” Living Trust” property preserves both of John and Betty’s federal death (estate) tax exemption– saving their children and grandchildren several hundreds of thousands of dollars in death tax. Additionally, the “ABC” Living Trust” holds the assets in a way that allows the assets to get a full step-up in basis on assets such as stocks and real property. In short, at the first death, the surviving spouse could sell without capital gains taxes or start depreciating rental property all over again-saving thousands of dollars in income tax.
   
   Furthermore, the children inherited their respective shares in a Generation Skipping Tax (GST) trust. This protects the child from future ex-spouses, potential creditors, and potential estate tax.
   
   In most states, assets not in a living trust are subject to probate when an individual dies. Probate is a court-supervised process for transferring assets to the beneficiaries listed in one’s will. With a living trust, assets are administered for John and Betty’s benefit during their lifetime, and then transferred directly to their beneficiaries when they die without going through probate. This passes assets onto one’s heirs much quicker and without probate costs. Assets and their values also do not become public record, providing the family with greater privacy.
   John and Betty were named trustees in charge of managing their trust’s assets, with their oldest son as a successor trustee. As successor trustee, he would manage the trust’s assets if John and Betty ever become unable or unwilling to do so or in the event of their deaths.
   
   
2. Designated beneficiaries for their retirement account assets were modified to have the spouse as the primary beneficiary and the three children as contingent beneficiaries. After both spouses pass away, the children would become the primary beneficiaries. The IRA would be split up a third each and each child would have their required minimum distribution calculated individually on each child’s respective life expectancy. This offers the potential to reduce minimum distribution requirements and extend the deferral period – “stretching” the IRA.
   
   A $2 million life insurance policy was purchased under an Irrevocable Life Insurance Trust (ILIT) with their three children as beneficiaries and their oldest son as trustee. Each year, John and Betty can gift $24,000 per child to the trust to pay the premium for the insurance. This transaction is commonly referred to as a Crummy Provision and allows the whole policy to be outside the parents’ estate.
   
   
3. Within the Living Trust, we had the clients sell their $2 million in multifamily units and purchase Tenants-in-Common properties through several 1031 exchanges , which allowed them to defer capital gains taxes on the sale of the buildings. TIC assets get a 30% discount on valuation because of illiquidity, which drops the current taxable equity to $1.4 million on a death tax return. The TIC would provide regular rental income as well as depreciation tax credits. This also freed the Caspers from the day-to-day issues of property management and allowed them much more time for travel.
   
   
4. The caveats to this approach are that real estate investments incur various risks, including but not limited to: illiquidity, limited transferability, and variation in occupancy which may negatively impact cash flow, and even cause a loss of principal. Real estate values may fluctuate based on economic and environmental factors and are generally illiquid. TIC investments provide simplicity by eliminating active property management headaches. However, the owners do not have direct say over the day-to-day property management situations, they vote on major issues.
   
   
5. A Family LLC was created to take ownership of the commercial office complex. This would allow John and Betty to gift each of their six grandchildren $24,000 in shares in the LLC each year, effectively transferring ownership to their grandchildren and within seven years removing the commercial property from their estate. LLC income could be used for their grandchildren’s education and other expenses.

The overall impact of these actions eliminated probate costs when John and Betty die, began a planned migration of assets tax-free from their estate to their children and grandchildren, reduced the taxable value of their assets, provided for the payment of eventual estate taxes through the life insurance policy, and left John and Betty with full control over their equity.

These situations and examples are presented for illustration purposes only. Do not assume that the same conclusion could be drawn from any other person.

Tweed Financial Services, Inc. is a registered rep with CapWest Securities Inc. Securities and Investment Advisory services offered through CapWest Securities Inc, Member FINRA, SIPC, MSRB. Tweed Financial Services and CapWest Securities Inc are non-affiliated companies.