Estate Planning – Case Study
You and your husband are married for two years living in community property state with a prenuptial agreement declaring that all the property owned is a separate property. You came to seek for advice to accomplish your financial objectives. Being able to retire when you reach age 65 is your priority. On the other hand ability to minimize death tax at the death of the first spouse and the death of the second spouse and provide adequate liquidity for each of your estates are important factors you would like to plan and possible accomplish in the future.
After reading provided documents my goal is to determine your financial strengths and weaknesses and suggest different appropriate ways to reach your personal and financial objectives. Financial strengths: Mary, you own 80% interest in closely held company (Crescent City Publications). Income statement shows that your salary is about $120,000 a year. Including your husband’s income, investment income and rental income I can conclude you have a high net worth. Your investment portfolio seems to be very strong.
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Investments in different stock, bonds and funds ensures diversification which leads to result that your investments are currently doing very well except one which we can discuss more appropriate investment options. I also recommend you to try to invest in foreign mutual funds which will definitely increase the value of your portfolio. You consider yourself to be moderate-aggressive investors. To move forward and improve your investing I think you should get involved in short term trading. You have a great universal life insurance policy.
It was great decision to get a universal life insurance policy which a term insurance policy with a cash accumulation account attached to it. What I consider beneficial and useful thing is that the premium is flexible. This allows you to make additional contribution to the policy in case you have extra cash or your business is doing extraordinary well in a certain year. If policy has enough cash in accumulation account and you are lacking money to pay premium, policy gives you an option to make a payment for you. However, as you get older, the pure cost to maintain policy increases.
There is no need to worry because as long as you continue to pay a stated premium each year, life insurance remains in force. You will need more expensive life insurance protection; the accumulating cash will pay for it. Your move to purchase universal life insurance policy was very wise because it is used to cover temporary needs and permanent type of insurance. You and your husband own life insurance policies. It benefits you in multiple ways. It serves as source for education for Valerie, it creates or sustains wealth for your family and it also provides source of retirement income.
What I consider of being a biggest advantage so far is the liquidity at death which is one of your financial objectives. Moreover Life insurance will protect income stream for beneficiaries. Disadvantage is that life insurance policies will be incurred in your gross estate. I would suggest establishing Irrevocable Life Insurance Trust (ILIT). Person establishing trust (you or Robert) will set the terms of distribution of trust assets to beneficiaries. I consider this as very valuable tool especially when children are not very good in managing their finances.
This would definitely protect them from spending received money at once. The primary purpose is to exclude the death benefit of a life insurance policy from an insured’s federal gross estate and the trustee of the trust will become the owner and he will have an incident of ownership in the life insurance policy. If the trust owns the policy the proceeds won’t be included in the insured’s gross estate. Robert has disability insurance coverage provided by his employer but your employer does not provide disability insurance that is why you did very wise step by purchasing your own disability policy.
Looking at you age and your health condition disability insurance is a good thing to have and reasoning is that if you or your husband becomes disabled, you can meet your obligations on 60 to 65% of what you currently make. Your auto insurance is very good. The property damage coverage insures the resulting damage to the other party’s vehicle. In this case it is $100,000. Your policy also include Uninsured motorist coverage which insures your resulting injuries should you be hit by someone who has no insurance coverage.
Mentionable part of your auto insurance is Medical payment coverage providing additional medical assistance for emergency room visits, surgery and follow-up visits and Comprehensive coverage that covers your vehicle from fire, theft, acts of nature and acts of fowl. It is very good they have an umbrella policy. Umbrella insurance refers to a liability insurance policy that protects the assets and future income of Robert and you. On the other hand policy can become the primary policy “on the risk” in certain situations.
Typically, an umbrella policy is pure liability coverage over and above the coverage afforded by the regular policy, and is sold in increments of one million dollars which in a case of Robert and you it is $4,000,000. The term “umbrella” is used because it covers liability claims from all policies underneath it, such as auto insurance and homeowners insurance policies. I personally advice to all of my clients to have established will. Therefore, having established will is very essential part of your and Robert’s estate planning. It provides you an opportunity to control of disposition of property at death and also avoid intestacy law.
Your will distributes $1,000,000 to each of your children and Robert is remainder beneficiary. Considering your age (45) and comparing it to your husbands’ Robert (24) and including also your health conditions it is more predictable that you might be the first spouse to die. In this case I would recommend establishing inter vivos Qualified terminable interest trust (QTIP). In this case trust should grant Robert the annual income of the trust and transferring the remaining assets to your children Valerie and Dominic when he passes.
QTIP will qualify for unlimited marital deduction which allows the estate tax on the property to be deferred until the death of the surviving spouse. This will also fulfill one of your objectives which is allowing your estate to avoid taxes when you pass away. You and Robert have estimated your funeral expenses for $50,000. I would also recommend to include side letter of instruction which will detail your wishes such as burial or funeral wishes (grave marker, type of flowers, kind of music etc. ) moreover it will make it easier on decedents family.
One vital thing is that funeral expenses may also be deductible form the gross estate but these funeral expenses must be incurred by the estate to be deducted. Financial weaknesses: What I noticed I the fact that deductibles on health insurance seem to be high. Health insurance deductibles are a way to help offset the cost of health care. Health insurance deductibles require the insured to pay a certain amount toward his health coverage before the insurance company has to begin paying under the health insurance policy. The higher the deductible is, the lower the premiums are likely to be.
I advise you to lower deductibles on your health insurance because you make enough money to do that. Home is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections such as losses occurring to one’s home, its content etc. The cost of homeowners insurance often depends on what it would cost to replace the house and which additional riders. If one wish to include additional items to be insured it must be are attached to the policy. Your homeowners insurance policy does not seem to be enough.
The value of your home they paid was $350,000 and your homeowner insurance covers only $300,000. This is very risky. I advise you might consider update this policy and increase the coverage. After research information about mortgages I found out that current rates are around 4 % to 5%. In my opinion you need to refinance your mortgage to lower rates. What refinancing of mortgage does is that is saves more by paying monthly less in a case if there are lower rates or the term of loan is extended. Robert also should participate in his retirement plan not only for retirement but the company will match 3% that’s free money.