April 2016 Case Design

CLIENT: John and Carol Davis, both aged 57, own a small supply company for restaurants and taverns and live in New Jersey. They have been married for 29 years and have 2 children, Jackie (27), and Joseph (25). Jackie has been in the business for the past 5 years and Joseph is an engineer in Manhattan. John and Carol did some basic estate planning 3 years after their 2nd child was born and haven’t reviewed it since.

Recently, john was flipping through the channels on his television and started watching a program regarding a woman who had to handle her mother’s affairs while she was in a nursing home. The woman in the television program was having a number of difficulties and John started thinking about what might happen to their business, their family, and all of their assets if anything ever happened to him and his wife.

John and Carol met with a GWSP advisor to discuss all of their concerns and the objectives they’d like to accomplish. Below are the bullet points:

Objectives:

1. Reduce the burden on their children after they pass away

2. Reduce the financial burden of New Jersey Estate Tax

3. Protect their assets from long Term Care expenses

4. Transfer their estate to their 2 children equally

5. Generate $200,000 of household income in their retirement years

Financial Situation: Net Worth: $5,585,000

• Primary Home: $850,000 (no Mortgage)

• Business Real Estate: $2,100,000 ($600,000 Mortgage)

• Personal Checking: $25,000

• Personal Savings: $200,000

• IRA (John): $80,000

• IRA (Carol): $80,000

• Brokerage Account: $350,000

• 20 Year Term Life Insurance (John): $1,500,000 (6 Years Remaining)

• 20 Year Term Life Insurance (Carol): $1,000,000 (6 Years Remaining)

• Business Valuation in 2011: $2,500,000

• Current Household W2 Income: $300,000

• Current K1 Distributions of Business Profits: Approximately $100,000 Annually

Key Observations:

• Assuming neither John or Carol pass away in the next 6 years and do not purchase any more life insurance their total NJ Estate Tax Burden would be roughly in the neighborhood of $677,000 which also assumes that each of them utilize their $675,000 Lifetime Exemption.

• If their life insurance is personally owned and a death benefit is paid out, that would also be includable in their taxable estate which means it would potentially increase the Tax Burden.

• One child is in the business and one child has nothing to do with the business. Without proper planning, their previous estate plan done 20 years ago may have all of their assets split evenly among their 2 children – which means the one child with very limited understanding of the business would own 50% of the business.

• Many business owners believe their retirement income will come from their business in retirement years after their children take over the business. While this may work out depending on the next generations ability to manage the business – it may be useful to have some income generated outside of the business.

• Long Term Care Insurance could be extremely useful, but it may be best used in combination with effective estate planning.

Planning Steps:

GWSP Advisor asks the Client which advisors they believe should be involved in the process.

• Client’s CPA

• Client requests a Trust and Estate Attorney in GWSP Network

• Client asks for GWSP to keep their Wealth Manager in the Loop

Case Design:

1. Create an Electronic Cloud-Based File

a. Include the following:

i. Estate planning Documents

ii. Asset Deeds, Statements, Account Numbers, Passwords, Etc.

iii. Important notices regarding the business

iv. List of Advisors with contact information

v. Basic Instructions – Who to call first, What to do, Noteworthy items

vi. Legacy Letters to Family Members

2. Trust-Owned Life Insurance Planning to create liquidity outside of the Estate

3. Trust Based Planning to Protect Assets from Long Term Care Expenses with Long Term Care Insurance

4. Estate Equalization Plan

a. Business Succession Plan for Jackie

b. Life Insurance for Joseph in the amount of the value of the business

c. All other Assets divided equally

5. Create Retirement income of $200,000 Annually

a. Integrate a plan utilizing annuities and working with their wealth manager regarding their brokerage accounts and retirement accounts.