Starting From Scratch: Building, Implementing & Managing an Estate Plan for a Widow's Wealth

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

Quick Read
Rose Fast is a 64-year-old widow who was left with an estate worth nearly $10M, of which $8.25M is tied up in two real estate properties. The value of the real estate has risen; however, the rents have not kept up with the market value. Rose uses the rental payments to support her $120K/year lifestyle, but she wants to leave her two children and six grandchildren as much of her wealth as possible.  

Challenge
While the value of the inheritance is significant, most of the money is tied up in real estate which leaves little to distribute among heirs. The value of the real estate has risen but the rental costs have not kept up with the fair market value, putting the client at a disadvantage for receiving surplus income. Estate taxes, coupled with this loss of income, will eventually make it difficult for the client to maintain their current lifestyle.  By implementing a new estate planning strategy we will help the client increase the inheritance to heirs, charitable giving, tax benefits, and asset protection.

Design
Because there has been no real estate planning prior to the husband's death, we were able to start with a clean slate which provided time and cost advantages for the client. A strategy was developed in a way that would not only increase the amount received by the heirs but also create the opportunity for tax savings. The outcome of this plan will result in the maintenance of the client's lifestyle, the ability to benefit charities, more assets going to the designated beneficiaries, and the elimination of estate taxes.

Rose will need a well-developed strategy that allows her to achieve her present and future goals, including:

·         Giving the maximum amount to heirs

·         Maintaining her current lifestyle

·         Securing a solid, manageable estate plan

The new estate plan that we developed included a number of steps which helped the client to achieve all of her goals and more:

1. Set up a Family Limited Partnership (FLP) and transferred in one of the real estate properties to it
2. Established a Grantor Deemed Owner Trust (GDOT) and made a small gift
3. Appraised LP units and sold to GDOT in exchange for a note
4. Purchased a specially structured, financed life insurance policy for $10M through GDOT, allowing addition of principal and all interest to be "rolled in" to the policy (interest rate on borrowing must be less than 12%)
5. Established a Testamentary Charitable Lead Annuity Trust (TCLAT)

Results 
The incorporation of the FLP and GDOT ensures Rose the cash flow needed to maintain her current lifestyle while the addition of the life insurance policy allows Rose to post collateral for the policy loan without any requirement to pay premiums, at least for the foreseeable future. Establishment of the life insurance policy ensures that an inheritance to her heirs will begin immediately upon death even though the TCLAT payments are on delayed disbursement. These payments can be directed by the heirs to their charities of choice in order to gain status and recognition in their communities. Ultimately, we have eliminated all estate taxes but have increased asset protection, lifestyle preservation, wealth to heirs, and charitable contributions.

Lessons Learned

·         Strategic asset redirection increases flexibility of funds

·         Creative cash flow modeling provides lifestyle protection

·         Charitable giving provides strong tax benefits

Randy Fox, CFO, InKnowVision, LLC

www.InKnowVision.com

randy@inknowvision.com

LinkedIn: Randy Fox 

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