Case Study: The Sutherland Family
Randy Fox, CFP, InKnowVison, LLC
Timing is Everything: Planning for time-sensitive distribution and protection of wealth
By: Randy Fox
Firm Name: InKnowVision
Contact: Randy@inknowvision.com
Location: Naperville, IL
Industry: Tax Consulting
Quick Read
Frank and Carla Sutherland are 76 and 72 years old respectively, are active and in good health, and are very close with their three children and nine grandchildren. Their current net worth is $11M with $1.5M in Frank's manufacturing business and $5.6M in vacant land pending development. Frank expects to sell the business for $5M in three years due to his invention of a proprietary product.
The Sutherlands wish to relieve their estate tax burden, increase their liquidity, establish charitable giving, and leave more money to their heirs.
Challenge
Their current estate plan was not working to full advantage. With a combination of revocable living trusts, and a joint irrevocable life insurance trust holding a $5M survivorship policy, the couple had just enough to pay the $5M of taxes that would be due should they die this year. However, they would be responsible for $14M in taxes should they live to life expectancy. The heirs would only receive $13M -- less than the amount paid to the IRS in taxes.
Design
Because timing was very critical due to various sales and property liquidations, we developed a creative cash flow model that included plans for the sale of the business in three years, and the establishment of a large life insurance policy. The implementation of this plan will result in the elimination of estate taxes, the increase of charitable giving, and more of the clients' assets going to their designated beneficiaries
Frank and Carla have only done simple estate planning so they will need a well-developed strategy that allows them to achieve their present and future goals, including:
· Eliminating all estate taxes
· Increasing liquidity
· Expanding charitable capacity
· Multiplying gifts to heirs
· Ensuring asset security
The new estate plan that we developed included a number of steps which helped the family to establish a means of achieving all of their goals and more:
- Set up a Family Limited Partnership (FLP) and transferred two of the couple's real estate properties, Frank's business, and some marketable securities
- Established new Grantor Deemed Owner Trusts (GDOTs) for each individual
- Made a cash gift to each GDOT then sold FLP interests to GDOTs for a note, where the note will be paid off when the GDOT sells the business in three years and the GDOT is then responsible for income taxes
- Purchased a new $5M survivorship policy through the GDOT, with a first year premium and delayed premiums resuming in 10 years
- Established a Qualified Personal Residence Trust (QPRT) with a 10-year term for each individual using the primary residence
- Designated the rent payments occurring at the end of QPRT term as payment for premiums on existing life insurance policy
- Established a Testamentary Charitable Lead Annuity Trust (TCLAT)
Results
By implementing our new estate planning strategy the clients are achieving their objectives of increased liquidity, charitable giving, tax benefits, and asset protection. If Frank and Carla live to life expectancy, we will increase the amount of assets passed to the heirs (from $13M to $24.5M immediately) with residual amounts up to $4M coming at the end of the TCLAT term. All estate tax has been eliminated. The ongoing gifting program is strengthened, and the plan allows for a significant gift to the family charity.
Lessons Learned
· Existing assets helped fund insurance premiums
· Taxes were virtually eliminated due to trust structure
· Available cash increased to enhance lifestyle spending and gifting
Randy Fox, CFO, InKnowVision, LLC
www.InKnowVision.com
randy@inknowvision.com
LinkedIn: Randy Fox
To learn about Randy Fox click here!
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