Case Studies2018-06-28T14:55:23+00:00

Case Studies

The use of retirement plan distributions and a stand-alone retirement trust to protect a Special Needs child

George and Debra have been clients of our firm for many years. They have a mentally challenged daughter, Samantha, who is in her twenties. Samantha lives with her parents. Most of George and Debra’s assets are in retirement assets, primarily IRAs owned by George. George and Debra’s primary concern is Samantha’s future well-being and what will happen to her when they are no longer available to care and provide for her. They retained us to help them structure a plan in light of these special circumstances.

First, we explored the concept of a Special Needs Trust for Samantha, one that would not jeopardize any public benefits to which she may be entitled, yet would provide for her supplemental needs, those not covered by such benefits. George and Debra indicated that they did not want Samantha to be limited for her support to public benefits. They felt that they had accumulated enough wealth to provide for all of Samantha’s needs, not just those supplemental to what she might receive from a governmental agency. In addition, they had no other children, and therefore did not have to worry about short-changing other beneficiaries in favor of Samantha.

We recommended that George and Debra provide for Samantha after their death through the use of a discretionary trust, to be administered by a trusted family member, with an institutional successor trustee. We included various caretaker provisions so that Samantha would also have the benefit of personal, in addition to financial, benefits.

We first had to assure that we fully utilized both George’s and Debra’s applicable exclusion amount for federal estate tax purposes and to minimize their exposure to state death taxes so that they would not pay any more federal or state estate taxes than absolutely necessary. By using cross general powers of appointment, we were able to assure that they would maximize their estate tax exemptions to the greatest extent possible.

The more difficult planning involved George’s substantial retirement assets. Upon George’s death, he wanted to assure that Debra would have the maximum use of his IRAs for her continued support, but since those IRAs will only qualify for the unlimited marital deduction at his death, we drafted beneficiary designations that will allow Debra to disclaim all or a portion of those benefits. The disclaimed portion will then be distributed to George’s by-pass trust, of which Debra is a beneficiary, and where they will qualify for his applicable exclusion amount. Thus, we left Debra some post-mortem planning options that will allow her to make decisions on the basis of the facts and circumstances as they exist at George’s death, rather than presuming those circumstances today.

Finally, we were able to use several recent IRS rulings to their advantage by creating a stand-alone retirement trust for Samantha, one that will allow accumulation of IRA distributions without jeopardizing the ability to “stretch” the distributions from George’s IRAs, and thereby taking advantage of continued tax-deferred growth in the IRA after George’s and Debra’s death. The wealth-creation potential of such a strategy is substantial, and will allow George and Debra not only to provide generously for Samantha’s well-being during her life, but will also allow them to leave a substantial inheritance to more remote family members at Samantha’s death.

Samantha, though challenged, is competent to make decisions for herself. We wanted to make sure that Samantha, who had some modest assets, would have her wishes respected for the distribution of her assets at her death by preparing a will for her. More importantly, we drafted a Durable Power of Attorney for Property for Samantha so that her parents will be able to help her manage her assets during her life, and we also prepared advance medical directives (Durable Power of Attorney for Health Care, Living Will and HIPAA Authorization) to assure that agents of Samantha’s choosing will be in a position to make appropriate health care and medical decisions for her in the event that she is unable to make such decisions for herself.

Creating and preserving a family wealth model and accomplishing estate tax reduction through valuation discounts

Derek and Lily were savers. They believed in and practiced delayed gratification. As a result, even with reasonably modest salaries, they had accumulated substantial farm land in several states. But they needed to find a way to manage the various farms that they owned and to pass on their wealth and their investment knowledge to their three children; they wanted to create a family wealth model that would enhance not only the management of their investment properties, but also pass on to their children the lessons they had learned through their lives. Finally, they were concerned about the substantial estate tax that would be generated at their deaths if they took no action.

We first designed a foundational plan with Living Trusts to set up an overall distribution of their estates at their deaths. After drafting to maximally reduce their overall estate tax, we provided for asset-protected trusts for their children. Derek and Lily liked the idea that the trusts that they created for their children would not be available in the event one of them suffered a divorce later in life. Though they trusted their children and had no wish to “control” their inheritance from the grave, they also were wise enough to understand that providing their children with this protection was a gift, since it was something that the children themselves would have great difficulty accomplishing on their own.

We then had them set up a Family Limited Partnership to own their farm land. In this way, they are able to consolidate management of diverse assets under one umbrella entity, with centralized management. This vehicle also gives them the opportunity, in the future, to do some aggressive gift planning while still maintaining control of the assets that they give away. A Family Limited Partnership is a useful vehicle for transferring wealth to a younger generation because it allows the senior generation to maintain control, while at the same time transferring value to the younger generation. It also effectively reduces the size of the taxable estate in the hands of Derek and Lily, both as the result of gifts that are made during life and as the result of potential valuation discounts.

By using a limited partnership, Derek and Lily are able to potentially make larger gifts than would otherwise be possible. Because limited partnership interests may qualify for valuation discounts, they will be able to transfer larger chunks of their estate through annual exclusion gifting than would otherwise be possible. And, at death, their limited partnership interests will likely be valued below the value of the farmland owned by the limited partnership, thus reducing their overall estate tax even more.

As time goes on, Derek and Lily will likely build upon their “family investment plan” by combining Defective Grantor Trusts for their children, giving them additional opportunity to transfer value to their children, and thus further reducing their taxable estates. Their overall objective of bringing their children into the family wealth model that they are setting up will require that they actively meet with and mentor their children on an ongoing basis, and slowly bring them into management positions within the partnership over time.

Lifetime gifts and creative use of trusts provide estate tax relief

An old college friend, who practices law in a neighboring county, called to ask me to help him with a particularly difficult planning situation. Roger, a physically robust gentleman of 89 had lapsed into mental incapacity, and his family had just discovered that he had a substantial taxable estate. Roger had never been married and had no children of his own. He had two surviving brothers and 25 nieces and nephews.

His existing Living Trust provided that his brothers were to split one-half of Roger’s estate, and the balance was to be distributed among his nieces and nephews. Though Roger had been a blue collar employee for most of his working life, he had amassed a small fortune, substantially in excess of the federal estate tax exclusion. Doing nothing would have meant paying millions of dollars in estate taxes to both the federal and the state government upon his death, a situation that his family considered intolerable, and one that Roger would have abhorred.

A thorough examination of Roger’s existing estate planning documents revealed a valid Durable Power of Attorney for Property which named his brother, Frank, as agent. It gave Frank the power to alter or amend existing trusts, and to draft new trusts. That power became the basis for substantial additional estate planning that we were able to accomplish for Roger.

First, we had Frank create an intentionally defective grantor trust (IDGT), naming Roger’s brothers and nieces and nephews as beneficiaries in the same proportions as Roger had done in his Living Trust. We took advantage of Roger’s lifetime one million dollar gift tax exclusion to fund the irrevocable trust, and then also made annual exclusion gifts to the trust for all the beneficiaries, thus removing $324,000 from Roger’s taxable estate. Considering the federal estate tax was a flat tax of 45%, the annual exclusion gifts will save Roger’s estate $145,800 in federal estate tax for each year that such gifts are made, not to mention the Illinois state estate tax savings. The growth in value of the one million dollar gift is now also outside Roger’s taxable estate, as is the income generated by that one million dollar gift. Finally, because the trust is “defective” for income tax purposes, we are able to have Roger pay the income tax generated by the assets in the trust without having those payments constitute an additional gift to the beneficiaries.

Finally, we instituted a “rolling GRAT” strategy with a portion of Roger’s stock portfolio, whereby we created separate two-year zeroed-out Grantor Retained Annuity Trusts (“GRATs”). A GRAT is intended to pass a portion of the contributed asset’s appreciation out of Roger’s estate without any gift or estate tax. The success of that strategy will be determined by two factors: stock market returns on the stocks that we used to fund the GRATs, and the length of Roger’s life. We are confident of at least modest success because research shows that the odds are about 95% that a rolling GRAT strategy will move at least some wealth out of Roger’s estate if he survives for 5 years.

Taking advantage of a power that Roger left to his brother as his agent under a Durable Power of Attorney, we were able to accomplish, at least partially, one of Roger’s enduring goals: to keep as much of his estate out of the hands of the tax man as at all possible. We obviously would have liked Roger to have been competent to participate in his planning, but even without his direct participation, we were able to preserve more of his wealth for his family than would have been the case had we not intervened.

Incorporating charitable trusts and life insurance planning to accomplish charitable goals and estate tax benefits

David and Laura came to us as a referral from a financial planner. They had amassed a substantial estate, and had some very specific family and charitable goals.

As with all of our clients, we first obtained detailed personal and financial information from them. We then met to discuss the specifics of their current situation, and we learned about their children, their goals and aspirations, and their financial and personal philosophy. Using that information, we designed a foundational plan that accomplishes many of their family goals and that allowed us to add some additional planning to supplement and further enhance their overall objectives.

The foundational plan included Living Trusts that sheltered each of their available exclusions from estate tax, and then provided trusts for the survivor of them. At the death of the last of them to die, they established beneficiary-controlled, asset-protected trusts for their children. Since they planned to do their charitable giving during their lives, no charitable gifts were made except as an ultimate disposition.

Once their trusts were fully funded and their assets were appropriately allocated between their trusts, we designed and drafted a Net Income Charitable Remainder Trust with make-up provisions (NIMCRUT). With the help of their financial advisor, we had them contribute some of their highly appreciated assets to the NIMCRUT. This allowed them to avoid the capital gains tax on the sale of those assets, to put the entire value of those assets to work for them without reduction for capital gains taxes, and to claim a substantial charitable income tax deduction. They are now able to generate a stream of income for the rest of their lives from those investments. The entire balance of the NIMCRUT at the death of the last of them to die will be contributed to the charities of their choosing.

Finally, in order to replace the assets that were contributed to the NIMCRUT, they created an irrevocable trust and had the trust purchase a policy of second-to-die life insurance. They are able to use the income generated by the NIMCRUT to pay the premiums for the insurance policy if they choose. The policy proceeds will be paid to trusts for their children at the death of the last of them to die, and will replace what the children “lost” as a result of the contribution that was made to the NIMCRUT. Because the policy is owned in an irrevocable trust, it will not be subject to estate tax, either at the federal or state level. Thus the children will enjoy a tax-free inheritance in the amount of the death benefit of the policy, in place of the assets contributed to the NIMCRUT, which would certainly have been subject to estate tax had they been left to the children instead.

David and Laura were able to accomplish both their family and their charitable objectives. Through appropriate charitable planning they were actually able to enhance, rather than interfere with, their ability to benefit their children. They felt that they had accomplished a win-win situation.

Preserving family goals and accomplishing wealth planning through team work and integration of various disciplines

Becky called us one afternoon several years ago. She was crying and obviously distraught. We had known Becky and her husband, Kevin, for several years, having prepared wills for them when they were newly married, with two young daughters. The girls were now pre-teens.

Becky told us that Kevin had died very unexpectedly. He had just been killed in an automobile accident.

Becky was understandably distressed about her loss. She was also concerned about the fact that Kevin had always been the breadwinner for the family, and that now she would be the sole support of her family. The girls were obviously her primary concern, from an emotional, financial and parental standpoint.

We were able to refer Becky to a personal injury attorney, who filed suit to recover damages as the result of Kevin’s death. In the meantime, we helped Becky negotiate the administration of Kevin’s estate, and thus relieved her of the burden of worrying about managing the financial and legal aspects of the death of her husband.

The personal injury suit resulted in a substantial settlement for Becky and her girls. Unfortunately, that was just the beginning. The judge wanted to set up guardianship accounts for the girls that would have allowed a distribution to them as each turned 21 years of age. Becky and Kevin had taken pains to structure their wills in such a way that the girls’ inheritance would stay protected in trusts until they were much older. We were able to intervene in the personal injury action on behalf of the girls and work with their guardian ad litem, appointed by the court, to accomplish Becky’s goal of guaranteeing that the money they received as a result of their dad’s death would remain in trust until they were much older. They now each have a substantial fund for the payment of their college and other necessary expenses as they grow up.

Once we accomplished a resolution to that issue, we referred Becky to a financial planner and worked with him to arrange her finances and investments in such a way that she could stay home with the girls and would not have to return to work on a full-time basis. In fact, she was able to be a stay-at-home mom for the first several years after Kevin’s death. We then also helped Becky draft a living trust wherein she set up additional trusts for the girls that provided them with security as they got older and which also afforded substantial protection from future creditors. Through her estate plan, Becky can be assured that, should she die prematurely, the money that she leaves to her daughters will be managed appropriately, and that the girls will have a good financial foundation upon which to build their lives.

How to avoid unexpected and unwanted consequences

The following situation demonstrates the importance of regular and timely reviews of an estate plan. It also points up the desirability of including sufficient flexibility in an estate plan to allow for unanticipated circumstances.

A certified public accountant referred her client, Edith, to us. Edith’s husband, Walter, had died several years ago, and she asked us to review the administration of Walter’s estate, an administration that was being handled by another firm. Apparently, the estate had not yet been completely settled. The accountant had reviewed the federal estate tax return and had found errors, which led her to question the handling of the administration of the estate generally.

Walter had been head-strong, enjoyed being in control, and was accustomed to doing things according to his rules. He was an attorney by profession although he did not fully understand nor practice in the area of estate planning. Nonetheless, he drafted his own estate plan. He failed, however, to review and update his estate plan in the last several years of his life, despite the numerous financial and personal changes he experienced. The result was a plan that, in the end, failed to accomplish his most cherished goals. He had bequeathed certain assets that he thought had minimal value to his grandchildren, with the balance to be distributed to his children after his wife?s death. His primary goal was to ultimately benefit his children, but as it turned out, he had given the bulk of his estate to his grandchildren, at the expense of his children, due to the increase in value of assets bequeathed to his grandchildren after he drafted his estate plan.

We met with Walter’s wife and daughters, and reviewed the administration of his estate. They had already spent over $80,000 in legal fees and expenses on the administration, in part because Walter’s plan did not address a number of issues that required resolution at his death. We felt that it was in the estate’s best interest not to intervene and instead to allow the existing attorneys to close it. We were left, however, to deal with Walter’s mostly inflexible estate plan.

Most estate plans provide for some flexibility and post-mortem estate planning options. In his estate plan, Walter had left his wife little “wiggle room” to amend his plan to accommodate changed circumstances. As a result, we had few options. We immediately had Edith set up her own estate plan with her own assets, wherein she was able to primarily benefit her children. We also had her exercise a limited power of appointment that Walter had given her in his trust; unfortunately, the power was available for only limited assets, leaving the remainder to be distributed primarily to grandchildren, which Walter thought was appropriate when he drafted his plan, but which was no longer desirable in view of the changed circumstances and which he would no longer have wanted if he were alive.

With some additional, limited post-mortem estate planning, Edith will be able, over time, to direct more of Walter’s assets to their children. Considering her age, however, it is doubtful that she will have sufficient time to successfully affect the bulk of the assets in Walter’s estate.

Had Walter engaged in a regular review of his estate plan with an experienced estate planning attorney, his plan could have incorporated the flexibility necessary to avoid these pitfalls. It is impossible to predict the future, so, keeping your estate plan flexible and up-to-date is crucial and can often serve to rescue what otherwise would have been an undesirable and unintended result.

The role of the estate planning professional often goes far beyond application of his legal knowledge and expertise

When John first called, it seemed like a routine inquiry. However, that impression faded quickly as he continued to talk, informing me that he had been diagnosed with a terminal illness and that he wanted his wife, Donna, to take no part in his estate plan before or after his death. He insisted that we represent him alone, to the exclusion of his wife.

At our initial appointment, John again reaffirmed that he did not want Donna to have any control over the family finances after his death; he further indicated that he was prepared to file for divorce if necessary to assure that she would have no control of his estate. Furthermore, he was insistent that their teenage child receive large monthly allotments with no restrictions. In short, I had a client that was extremely, and justifiably, distraught, and he was acting irrationally and not in his family’s best interests.

We talked at length about his goals for his family, and his feelings toward Donna. I began to realize that John loved his wife very much and did not want to get divorced. That being the case, I convinced him to let us try to help him and his wife, together, design an estate plan that would accomplish both of their objectives and save their marriage at the same time. In essence, I needed to design a plan that would enable them to keep their family intact and, at the same time, give him control over his estate even beyond his lifetime.

I met with both John and Donna on a number of occasions to discuss the various estate planning options available to them as a couple. We also spent a good deal of time talking about their marriage, helping each one to understand the other. Donna understood that John simply needed to feel in control of his destiny, a control of which he had been robbed as the result of his medical diagnosis.

Both John and Donna eventually agreed to let us draft trusts for each of them. However, despite our continued counsel to the contrary, John insisted on setting up a trust for their teenage child that gave her a substantial monthly allowance, and over which his wife would have no control. We kept up a dialog with both John and Donna over the next several months, and continued to advise John of the risks involved in making such substantial gifts to a person of such a tender age.

Only days before John’s impending death, he called me and asked me, in a clear and concise manner, to amend his estate plan. In coming to terms with his situation, he now wished to give his wife control over his entire estate and the right to determine the timing and amount of their child’s inheritance. We discussed this revision in depth, as it was in stark contrast to his previously stated wishes. He emphatically confirmed his new instructions. We prepared new documents, and he signed the updated documents soon thereafter. John died peacefully a few days later, surrounded by his family.