Question: Financial planning case study

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 55 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. Henry and Harriet each had Credit Shelter/Bypass Trust Wills with the balance of their estate going to the surviving spouse. Henry died in 2011 at age 85 with a net estate of $10.0 million. At that time Harriet also had assets in her name of $5.0 million. Henry's Will was probated and his estate administered. When the estate administration was completed, Henry's executor funded his Bypass Trust with the full applicable credit exemption amount for 2011 ($5,000,000). The trust is designed to remain in place for Harriet's benefit and be distributed equally to Rich and Rebecca when Harriet dies. The provisions of the Bypass trust also gave Harriet a testamentary limited power of appointment to distribute the assets of the trust among a class of beneficiaries which consists of Henry's descendants. The balance of his estate passed to Harriet outright. Under the provisions of Harriet's Will, if she survives Henry, 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 28, who is happily employed in the company business. Alvin is married to Arlene and they have two children, James age 7, and Jenny age 5. Both children receive their education through the Wayne, NJ public school system. Rich and Ruby also have a daughter, Katie, age 22, who is not married. She is in school working on her doctorate degree in bio-gastric anthropology and is employed by Intestinal Labs, Inc. She makes about $105,000 a year and expects significant increases after she completes her degree. Rich believes that the world just doesn't have enough bio-gastric anthropologists, and wants to provide for Katie to finish her education if it can be paid for in an efficient way. He estimates that it will take Katie about 2 more years to finish.

Katie also has a life partner, Caryn, who she has been with for a number of years. Rich likes Caryn and appreciates that Katie is happy in their relationship even though they are not married . However, he knows that Caryn is not financially secure and also knows that right now Katie would want to provide for Caryn if she ran into financial difficulty should Katie die. Rich wants to advise Katie regarding the best strategies to consider in providing for Caryn knowing that his wife, Ruby, and his son, Alvin, do not approve of this relationship and question Caryn's motives. He would not want to advise Katie to do something that could not be undone should their relationship not work out. Both Alvin and Katie 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 including Rich's son, Alvin, and its annual net income is about $750,000. This is after Rich takes an annual salary of $200,000. Alvin plays an important role in the management of Macadam. Rich feels that the company is worth about $6,000,000, and expects its revenue and value to grow by about 8% to 10% annually over the next 6 to 8 years. Alvin has expressed a strong desire to continue the business after Rich retires or dies and Rich wants to transfer some and eventually all of the business to Alvin, but still maintain the lifestyle that he and Ruby currently enjoy. Ruby is a stay at home mom.

Rich also owns a building outright at 123 Money Road, Fairfield, NJ. Macadam Company 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 $3,000,000. 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, Rich's sister, is age 49. She is not as financially successful as her brother, Rich, or as her parents. Rebecca is a 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 and/or Harriet 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. Both Wills provide that the remaining estate will pass to the other spouse, if living, otherwise to Alvin and Katie equally, if living, and if either child is not living, then to the deceased child's surviving descendants, per stirpes. Rich would like to explore other more efficient methods of charitable giving both at death and/or during his and Ruby's joint lives, which possibly could result in a charitable deduction today without giving up the income from the asset.

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 Katie 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. He also wants to make sure that most if not all of the business goes to Alvin and that Alvin has control of the business. He also wants to make sure that the estate is distributed in an equitable manner so that Katie receives a fair inheritance given that the growth and success of the business can be attributed in large part to Alvin's efforts. 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. Rich indicated that he would be interested in any strategy that would result in the assets coming from his parents' estates to bypass his estate so long as he and Ruby have some way of having access or benefiting from those assets in the unlikely event that the need should arise. He also has no objection to Harriet using the assets over which she has control to help his sister, Rebecca, and her family.

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 with particular attention to the titling and location of assets. As part of your plan presentation, you should calculate how much Rich will receive from his parents' estate after all the federal estate taxes (disregard state estate tax) are paid. In estimating the federal estate tax, assume that Harriet dies in 2014 with an estate of $10,340,000. 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 what approach would be more advantageous in their estate plan given their asset ownership structure and suggest ways to avoid probate. You should also suggest the use of documents other than their Last Will & Testament that will accomplish their objectives. You should show Rich and Ruby a calculation of the probate estate base on their current scenario assuming Rich dies after Harriet but before Ruby, as well as a calculation of the amount of federal estate taxes that will be due based on their current plan should Rich die first and Ruby dies immediately thereafter. Assume that their deaths occur after Harriet's assumed death (apply a $5.34 million estate tax exemption and assume no credit for tax on property previously taxed).

You should also discuss revisions to the clients' Wills, if appropriate, and a discussion of any other documents 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, leverage gifts 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 and to possibly provide for an equitable inheritance to Katie. Feel free to discuss any other objectives that you think Rich and Ruby should consider, and any other planning ideas that you feel are appropriate, including any recommendations that Harriet should consider to meet the family objectives that you will identify.

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' goals and objectives as you see them. You should then itemize your recommendations. The narrative part of your plan should be no more than 5-6 pages one and one-half spaced with a 12 point font. Calculation of the probate estate and your estate tax calculations can be shown separately.

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 so that I will enjoy reading it.

Attachment:- rich and ruby statement.xls