Estate Planning Case Study

Rich and his wife, Ruby, heard that you are an expert in the field of Estate Planning as a result of the superior education you received at WPU.  They have been thinking about planning their estate for a long time now and have gone to a number of financial planners who have not been able to design a plan that makes sense to them.  So they come to you for help.

In your data session you find out that Rich's parents, Henry and Harriet, were married for 40 years and had two children, Rich and his sister, Rebecca.  During their marriage, Henry and Harriet made annual gifts to each of their children up to the allowable annual exclusions.  In 2004, Harriet convinced Henry to step up their gifting program.  Henry agreed and made a taxable gift to his children of $1.0 million in addition to their normal annual exclusion gifts, and filed the appropriate gift tax returns electing gift splitting.

Henry and Harriet each had Credit Shelter/Bypass Trust Wills with the balance of their estate going to the surviving spouse.  Henry died in 2008 at age 85 with a gross estate of $10.0 million.  At that time Harriet also had assets in her name of $10.0 million.  Henry's Will was probated and his estate administered.  When the estate administration was completed, Henry's executor funded his Bypass Trust with his remaining applicable credit exemption amount.  The trust is designed to remain in place for Harriet's benefit and be distributed equally to Rich and Rebecca when Harriet dies.  The balance of his estate passed to Harriet.  Harriet died on October 1, 2010 with a Gross Estate of $15.0 million.  Under the provisions of her Will, her net estate passes equally to her two children, if living, and if a child predeceased Harriet, then to that child's living descendants, per stirpes, if any, otherwise to the surviving child, if living, otherwise to that child's living descendants, per stirpes.

Rich is age 58, and his wife, Ruby, is age 57.  They have been married for 30 years and live at 4 Glendale Avenue, Wayne, NJ.  They have a son, Alvin age 26, who is a personal injury attorney for a big law firm in Newark, NJ.  Alvin is married to Arlene and they have two children, James age 6, and Jenny age 5.  Both children attend a very exclusive and expensive private school.  They also have a daughter, Karen, age 21, who is not married.  She is still in school working on her degree in bio-gastric anthropology and expects to continue and get her doctorate.  Rich believes that the world just doesn't have enough bio-gastric anthropologists, and wants to provide for Karen to finish her education if it can be paid for in an efficient way.  He estimates that it will take Karen about 5 more years to finish.  Both Alvin and Karen live in NJ.

Rich graduated from Podunk Polytechnical University with a degree in civil engineering and is the 100% owner (and 100% voting member) of Macadam Company which is a Limited Liability Company that specializes in building and repairing roads, parking lots and other infrastructure.  The company has 20 employees and its annual net income is about $750,000.  This is after Rich takes an annual salary of $200,000.  Rich feels that the company is worth about $7,000,000, and expects it to grow by about 10 to 15% over the next 6 to 8 years after which time Rich will sell the business probably to a competitor.  Ruby is a stay at home mom.

Rich also owns a building outright at 123 Money Road, Fairfield, NJ.  The business operates from this location and pays rent to Rich under a triple net lease.  He estimates the net income from the building to be $250,000 and the value to be $2,500,000.  There is a lot of activity at this location and Rich is concerned about his liability should there be an accident on the premises.

Rebecca, age 49, is not as financially successful as her brother, Rich, or as her parents.  Rebecca is a single working mother with one son, Robbie, who is 16 years old.  Her husband, Robert, was in his own business and was making ends meet until an auto accident resulted in him being paralyzed and unable to work from 2004 until now.  The medical bills have been excessive and Rebecca has only been able to meet them with the money gifted to her by her parents over the years.  While Robert and Rebecca are loving parents to Robbie, neither has any acumen when it comes to finances and managing money.  Rich is very concerned about his sister's situation and would like some ideas as to how he or his mother can help her.

They give you a copy of their net worth statement which is attached as Exhibit "A".

They also bring you a copy of their Wills which were executed in 1992.  Rich's Will provides for a Specific Bequest of $500,000 to his college alma mater.  It also provides that the remaining estate will pass to the other spouse, if living, otherwise to Alvin and Karen, if living, and if either child is not living, then to the deceased child's surviving descendants, per capita.

In your discussion during the meeting you find out that Rich feels that his Will is outdated and needs to be updated to have his estate benefit Ruby and his descendants more effectively and efficiently.  He also wants to make sure that Ruby has access to his estate assets should Rich die first, but also that Alvin and Karen receive their share of the estate when Ruby dies.  He expresses that Ruby is a good wife and loving mother, as well as a very attractive woman who would be a "great catch" for some guy after Rich is gone.

Rich also realizes that his estate has grown significantly, and will continue to grow in the years to come.  He also realizes that his estate will increase as a result of the inheritance that he will receive from his father's and mother's estate.  He is not opposed to starting a gift giving program if it makes sense and if it provides him and Ruby with enough resources to enjoy their remaining years and live out their lives in comfort.  He estimates that he would need approximately $300,000 to live comfortably in retirement.  Ruby is not interested in making any gifts now, but will cooperate in any gifting plan to the family or to charity that makes Rich happy.

Your assignment is to devise an estate plan for Rich and Ruby.  The facts of the case and the clients' Statement of Financial Position should be reviewed in detail.  As part of your recommendations, you should calculate how much Rich will receive from his parents' estates after all the estate taxes are paid assuming that Harriet dies in 2011.  Harriet has been living on the growth and income from her estate so assume no growth.  You should also explain the difference between probate and non-probate assets and which one is more advantageous in their estate plan and suggest the use of documents other than their Will that will accomplish the same objective.  You should show them a calculation of their probate estate as well as a calculation of the amount of federal estate taxes that will be due based on their current plan should Rich die today and Ruby dies immediately thereafter.  Assume that their deaths occur after Harriet dies.  Assume no credit for tax on property previously taxed.

You should also discuss revisions to the clients' Will, if appropriate, that will pass the assets to and/or for the use of their descendants in an effective and efficient manner.  Also, make recommendations as to how assets should be titled to implement the plan and whether additional documents should be put in place.  You should also discuss gifting strategies that will reduce Rich and Ruby's gross estate.  Any gifting recommendations should include a discussion of the federal gift tax law and why your recommended gifting plan makes sense.  You should include a strategy to provide liquidity to the estate to pay any estate taxes due.  Feel free to discuss any other objectives that you think your clients should consider, and any other planning ideas that you feel are appropriate.

Remember that Rich is a very busy entrepreneur and wants your presentation to be thorough, organized and concise.  I suggest that you structure your plan by first listing all your observations and your clients' objectives as you see them.  You should then itemize your recommendations.  When doing an estate plan, knowledge as well as communication is important.  It is just as important for your grade.  So write your plan with clarity, good grammar and accurate spelling.