The Real Deal: Utilizing Real Estate Investments to Solidify a Quality Financial Plan

By: Randy Fox

Firm Name: InKnowVision

Contact: Randy@inknowvision.com

Location: Naperville, IL

Industry: Tax Consulting

Quick Read

Kenneth and Deann Barrington are 61 and 60 respectively, both in good health, and have two grown and unmarried children. Their current net worth of $14M is largely due to Kenneth's active role in real estate investment and development, meaning however, that most of the assets are illiquid. They are somewhat charitable and wish to increase their giving once a new estate plan is established.

Challenge

The Barringtons currently have very little liquidity with which to meet their spending needs, including gifts to charity and the heirs. Their current planning does not incorporate any charitable gifts or techniques for achieving tax relief.

Design

In orchestrating a strategy for this couple we turned to the Family Wealth Diagnostic and the Family Wealth Goal Achiever, where we were able to analyze various liquidity events and enable a successful outcome for their current and future goals.

As we discovered by using the Family Wealth Diagnostic, Kenneth and Deann would owe $4.4M in estate taxes if they were to both die today, which increases to $17.7M if they live to life expectancy. In order to create a positive impact for the family we developed a sophisticated structure for:

·         Minimizing estate tax

·         Establishing a charitable gift

·         Maximizing inheritance to heirs

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

1. Created a Family Limited Partnership (FLP) and funded it with $2.25M of investment properties
2. Set up individual Grantor Deemed Owner Trusts (GDOTs)
3. Made a small gift of $73K to each GDOT
4. Appraised FLP interests then sold units for interest-only installment note
5. Established Irrevocable Life Insurance Trust (ILIT) for Kenneth and Deann
6. Applied for $5M survivorship policy, and paid premium by making single gift of $668K resulting in zero payments for 40 years
   
7. Fractionalized residence into undivided 50% interests and contributed interests to individual Qualified Personal Residence Trusts (QPRTs)
8. Chose 31-year QPRT term to minimize gift and delay payment of rent, which means that insurance in ILIT will play a crucial role in the wealth transfer process since Kenneth and Deann may not outlive QPRT term
9. Added a Testamentary Charitable Lead Annuity Trust (TCLAT) with 25 year term, eliminating any possible remaining assets from the taxable estate and giving  ILIT another important role in the transfer

Results  

Implementing this new plan means we were able to transfer $16M to the children currently while giving $9M to charity and nothing to taxes. If the couple lives to life expectancy, we get $23.5M to the children and $8.7M to charity, again with no estate tax. We were also able to clearly point out the liquidity challenges that the Barringtons were facing which enabled them to minimize their stress by planning for the sale of properties at various times.

Lessons Learned

·         Capitalize on real estate assets to decrease taxable estates

·         Invest in life insurance policies for secure transfers of wealth

·         Enhance charitable giving efforts through establishment of trusts

Randy Fox, CFO, InKnowVision, LLC

www.InKnowVision.com

randy@inknowvision.com

LinkedIn: Randy Fox 

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