Case Study: The Bailey Family

The Financial Checkup: Overcoming Adversity in Creating the Best Prescription for Financial Success

By: Randy Fox
Firm Name: InKnowVision
Contact: Randy@inknowvision.com
Location: Naperville, IL
Industry: Tax Consulting

Quick Read
Steven and Annette Bailey are 74 and 71 respectively, have three grown children and seven grandchildren, and hold a total net worth of $13.5M. With more than half of their assets ($7.5M) invested in mutual funds overseen by Steven, the couple lives modestly on about $100K per year. Although the couple carries a $500K life insurance policy, their recent health problems prevent them from purchasing additional life insurance at an affordable price.

They want to transfer as much of their wealth as possible to their children and grandchildren while maintaining their current, modest lifestyle. In addition they favor charitable interests over paying taxes, and hope to achieve all these goals with a well-designed estate plan.

Challenge
Because of his heart problems, Steven was rated a table D risk and Annette, who experienced a bout of cancer less than a year ago, was declined life insurance altogether. With the resulting high costs of insurance they have hesitated to move forward. A financial advisor who is working to get Steven as a client referred them to a local attorney for estate planning and that attorney introduced us to the Baileys.

The couple owns a beach house property that has been a family gathering place and would like to make certain it stays under family control for the future use of their children and grandchildren. The Baileys wish to transfer a large amount of wealth to their heirs, and although they desire to make a charitable gift as well, they are unsure how it will affect their ability to support themselves and maintain their current lifestyle.

As we discovered after utilizing the Family Wealth Diagnostic, Steven and Annette would lose $4.5M to taxes while the heirs would receive about $9.5M should the couple die this year. If they live to their joint life expectancy, $14.5M goes to taxes while only $13.5M goes to their heirs. There are no charitable gifts in any of their current documents even though they have expressed a strong desire to make that a significant part of their plan.

Design
In order to create a positive impact for the family we developed a sophisticated structure for:

·         Maximizing wealth transfer to heirs

·         Establishing a charitable gift

·         Securing affordable life insurance

·         Maintaining current lifestyle

Using the Family Wealth Goal Achiever we were able to develop a successful strategy which helped the clients to establish a means of achieving all of their goals and more:

We established a Family Limited Liability Company (FLLC) with voting and non-voting member interests
Transferred $7.2M of marketable securities to FLLC in exchange for voting and non-voting shares
Established a Restricted Management Account (RMA) with $5M of FLLC marketable securities
Advised Steven to give up control of assets to ensure proper respect of RMA, which will now be managed by the financial advisor mentioned above
Funded RMA, then appraised FLLC and RMA
Established Grantor Deemed Owner Trusts (GDOTs)
Made a cash gift of 10% of appraised value of FLLC interests to GDOTs
Sold non-voting LLC interests to the GDOTs for interest-only note, where interest is paid at the long term Applicable Federal Rate (AFR) at the funding of GDOTs
Determined that annual note payments of $198K supports current lifestyle
Enlisted Steven's healthy sister, Betty, to buy into LLC then enter a buy sell agreement obligating LLC members to buy out certain interest upon the couple's death
Determined that buy sell obligations created a legitimate "insurance interest"
Established Testamentary Charitable Lead Annuity Trust (TCLAT)
Confirmed annual gifts to heirs of about $240K annually

Results
In assisting this couple with their goals for their lifetime and beyond, we turned to the Family Wealth Diagnostic and the Family Wealth Goal Achiever to assist in identifying risks as well as opportunities. For the Baileys we will establish a solid structure for eliminating taxes, creating greater wealth for their heirs, declaring charitable intent, and securing an affordable life insurance premium. Best of all we will give the entire family the peace of mind they deserve.

The concern with purchasing a life insurance policy was resolved when Betty was added to the equation, and the couple could secure the survivorship insurance that would allow them to complete their charitable intentions without significantly reducing their children's inheritance due to additional liquidity.

With the new plan in place, the heirs will receive $14.6M if Steven and Annette die immediately and family charity will receive $6.2M. There will be no estate taxes due. If they live to life expectancy, the heirs will receive $23M, family charity will receive $8M, and taxes are still eliminated. Furthermore, the financial advisor who brought in the case is now managing $5M, life insurance was placed when everyone thought it was impossible, and the attorney has a client who is thrilled with his work.

Lessons Learned

·         Avoid hurdles by incorporating family members where applicable

·         Use life insurance as a means to increase charity and inheritance

·         Smart planning means the entire team wins