K.I.S.S.: Keep It Simple Solutions for Improving Investments, Inheritance, and Intentions

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

 
Quick Read
Joel and Renee Waldman are 67 and 66 respectively, have six grown children and 11 grandchildren that live close by, and have a net worth of $6.5M, much of which is tied up in their $2M home. Joel runs his own consulting firm, is still actively working, and has a large retirement plan in place. The advisor on this case was approached after Joel attended his charitable giving seminar. The family is very philanthropic and wishes to include charity in whatever planning they undertake.

Challenge
The amount of estate tax that will become due on death is overwhelming, and limits the ability to leave an inheritance to the heirs or reach philanthropic goals. Not only that, but if the couple lives to life expectancy they will experience a 50% reduction in the size of their estate.


Design
While their goals did not require complex planning, we were able to use the Family Wealth Diagnostic and the Family Wealth Goal Achiever to make improvements on their current situation. These included a greater inheritance for heirs, a sizeable gift to the family charity, and relief from large tax payments.

As we discovered utilizing the Family Wealth Diagnostic, the estate is projected to grow rapidly over the clients' lifetime leading to nearly $7M lost to taxes if they live to life expectancy -- an astonishing 50% shrinkage rate. Because of the retirement plan there will also be significant income taxes due, doubling the impact of taxes on the estate. In order to create a desirable outcome for the family we developed a sophisticated structure for:

·         Reducing income taxes    

·         Increasing inheritance to heirs

·         Providing a charitable gift


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

1. Split the ownership interest of principal residence, formerly in joint tenancy, between Joel and Renee, providing "fractionalized" ownership and lack-of-control discount
2. Appraised individual interests then contributed shares to individual Qualified Personal Residence Trusts (QPRTs)
3. Utilized 10-year QPRT terms and made each QPRT a grantor trust for income tax purposes
4. Advised Joel and Renee on rent payment obligations to QPRT at end of term
5. Established a joint Irrevocable Life Insurance Trust (ILIT)
6. Designated ILIT as one of the beneficiaries of each of the QPRTs
7. Purchased a $5M survivorship policy on Joel and Renee using the ILIT, where the policy receives a large first year premium, and resumes receipt of payments after the        tenth year
8. Had Joel and Renee loan the first premium to the ILIT
9. Determined that at the end of the QPRT term, when they begin paying rent, the QPRT will distribute the rent payments to the ILIT to pay the premiums without any tax consequences or Crummey notices
10. Had Joel name the family charities as the successor beneficiary for his retirement plan
11. Instructed the Waldmans to add Testamentary Charitable Lead Annuity Trust (TCLAT) provisions to each of their existing Revocable Living Trusts
12. TCLATs will effectively take the remaining portion of the estate that would be taxable and place it in trusts that distribute income to the selected family charities for a period of years, with the remainder passing to their heirs free of estate tax

Results
With this plan in place we were able to pass $15M to the heirs, an increase of $8M over the current plan, while leaving $6M to charities. We have all but eliminated the estate tax and it was accomplished without undue complexity. Additionally, the advisor has strengthened a client relationship based on trust and confidence.

 
Lessons Learned

·         Surrender of some control creates freedom from tax

·         Cash flow from QPRT to pay premiums for life insurance

·         Delay partial distribution to beneficiaries for maximum tax avoidance

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