Family & Individuals Wealth Management

Case Study

Please remember that all clients are different and individual suitability should be determined. These case studies are presented as information only; actual results may vary. It is not our position to offer legal or tax advice. Seek the advice of a professional advisor prior to making a tax-related investment and/or insurance decision.

Bill, 70, is a senior partner at a prominent law firm. He and his wife, 70 year old Mary, have two sons and four grandchildren. Both sons are successful themselves and don’’t need their parents’’ assets. Although Bill and Mary have Unified Credit Trust wills, there are no generation-skipping provisions.

Bill has a law firm pension of $140,000 per year with 65% survivor annuity if he predeceases Mary. Their assets are jointly owned, except for Bill’’s $800,000 of financial assets outside of retirement plans and Mary’’s $40,000 IRA (although Mary is the beneficiary of all of Bill’’s retirement plans and IRA assets). Their net worth of $13.8 million is broken down as follows:


  • Retirement plans/IRAs may be subject to 70% or more taxation at death, inclusive of federal estate taxes, state inheritance taxes and income taxes.
  • Inadequate liquidity: $4 million to settle approximately $5-6 million in estate settlement costs, inclusive of death taxes, income tax on retirement plans/IRAs and costs of estate administration, without having to “crack open” retirement plans/IRAs.
  • Mary does not need more of Bill’’s retirement plan and IRAs. She has adequate resources from his pension, Social Security and the $4 million other financial assets.
  • If Mary predeceases Bill, there will be two adverse consequences:
    1. Her Unified Credit will likely be lost, since she has no assets in her name (except for her IRA) and
    2. The family will lose the ability to “stretch out” the income taxation of the retirement plan/IRAs over the children’’s or grandchildren’’s lifetimes.
  • Up to 46% in estate taxes at Bill/Mary’’s deaths, followed by up to another 46% tax if the sons die, could result in over 70% taxation of each dollar Bill has worked so hard to earn. All of the estate taxes on the life insurance and most taxes on the residential real estate could be avoided with proper planning.

Potential Solutions

  • Current pension laws dictate that the distribution pattern of Bill’’s retirement plan/IRA assets would be “locked in” based on the beneficiary designation as of April 1 of the year after Bill’’s death. By March 31, we had established six separate accounts, with each son and grandchild the beneficiary of one account.
  • Mary remained beneficiary of $800,000 of Bill’’s retirement plan, which Bill and Mary will draw down first through required minimum distributions (RMDs) allowing the other accounts to grow.
  • This “carve out” for the children and grandchildren also reduced the RMD for the first taxes and allowed for continued tax-deferred growth of the difference.
  • The $200,000 carved out for each grandchild is expected to yield more than $12,000,000 over the grandchild’’s lifetime (6% return).
  • Replaced Bill’’s existing life insurance with $3.5 million of survivorship life insurance owned by an estate tax-free irrevocable trust. This solves the estate liquidity shortfalls. Bill and Mary will gift to the trust each year and the trust will pay the premium. The trust is generation-skipping (ultimately, the trust assets will distribute to the grandchildren or great-grandchildren, skipping taxes).
  • Retitled joint assets to Mary’’s name to fund her Unified Credit Trust and included provisions on new wills to take advantage of generation-skipping tax at sons’’ deaths.
  • Exemption will occur at Bill and Mary’’s deaths, avoiding the second estate tax of up to 46%.
  • Created four Qualified Personal Residence Trusts (QPRTs) to transfer both homes out of the taxable estate for one-quarter of the value, assuming the trusts mature.
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