Assets Less Than $2 Million

Husband and Wife (H & W) have combined assets of $1,000,000, of which $450,000 represents the equity in their home (net of mortgage) with the remaining $550,000 represented by $300,000 of non‑qualified investments and $250,000 by H’s interest in his company’s pension plan.

In addition, H has $300,000 of group life insurance coverage through his employer and a $700,000 personal term policy both of which name W as beneficiary.

H&W have two children, ages 5 and 7. Their non‑qualified investments are in joint name payable to the survivor upon death, as is their personal residence. W does not work. H’s current income is $150,000 per annum. H is 43 years old and W is 40.

H & W are not concerned with estate tax issues since their combined assets, inclusive of life insurance, do not exceed the $2 million Estate tax exemption. However, because of their two young children, it becomes critical for them to plan to cover two possible situations. First, if H dies there must be sufficient income to support W and the children without W having to sell the home or be forced to return to work. Second, in the event of an unforeseen circumstance where both H&W die, their documents must be designed with trusts in place for the children, naming trustees who will oversee their trust until college graduation and thereafter. Both of these goals can be attained with good planning.

Assets of $4 Million

Husband and Wife (H and W) have $3 million of assets in joint name, consisting of their personal residence, a vacation home, and their investments. H also has a $1 million life insurance policy insuring his life with W designated as his beneficiary. H and W have simple Wills leaving all their assets to each other and then to their children in the event they both die.

H and W come in for an estate planning consultation and discover that if they were both to die, there will be a Federal Estate Tax liability of nearly $800,000. This is the case because if H predeceases W, she will inherit all joint property (totaling $3 million) and will receive the $1 million of life insurance on H’s life leaving her with $4 million of assets in her individual name. Given that the Federal Estate Tax exemption is currently $2 million (and is scheduled to fall back to $1 million on January 1, 2011), if W were to die shortly after H, she would have a taxable estate of $2 million resulting in a Federal Estate Tax of almost $800,000. In addition, State inheritance taxes based upon the law of the jurisdiction in which H died can be anticipated as an additional heavy burden to H’s estate. With skilled planning, in this case Federal Estate Taxes can be eliminated and State inheritance taxes can be substantially minimized.

Assets Over $10 Million

Mr. Thomas (“T”) is an 85 year old widower who has approximately $10.5 million of assets of which $5 million is in an IRA rollover account, $4.5 million is invested in marketable securities, and $1 million represents the net value of his personal residence. T has one child, a 50 year old son (“S”), who is married with three children.

Upon T’s death, a Federal Estate Tax of approximately $3,850,000 will be payable with respect to his assets assuming the above values are applicable at the date of death. Furthermore, it is probable that significant State inheritance taxes will be payable, the amount of which will depend upon the jurisdiction in which T’s permanent residence is situated.

In addition to Federal Estate Tax, an income tax will be payable with respect to the distributions to S from T’s IRA rollover account. In this regard, S will be entitled to a deduction for a pro rata portion of the Estate taxes to the extent they are attributable to the IRA. It is estimated that S will pay approximately $1,425,000 of State and Federal income tax on the IRA distributions when they are made.

By reason of the combination of Estate taxes and income taxes, it is projected that T’s assets will be depleted by $5,275,000 not taking into account applicable State inheritance taxes. Although this is a highly complex case, an actual combined estate tax and income tax savings of $3,595,000 was recently achieved by our office in an actual case similar to this one.