SITUATION

A couple lives comfortably and, between the two of them, have a significant estate. However, their objectives for a final estate distribution plan differ.

Theirs is a second marriage. The wife has four children from a previous marriage, the husband has none. Their total combined estate is comprised mostly of assets which he accumulated prior to his marriage to her. He wants to generously provide for her if he predeceases her; however, he prefers to control the final disposition of his assets upon her demise.

In addition, the husband is willing to establish a charitable giving program if it can be done without significant federal estate tax erosion of his estate. His wife’s concern is to protect her separate assets for the benefit of her children and to maintain her lifestyle; and her husband agrees.

APPROACH

The husband worked with his financial advisor to clearly identify all of his assets. As part of that process, assets which pass by beneficiary designation such as IRAs, annuities, and profit-share type accounts were reviewed for proper beneficiary designations.

• The consultant recommended that gifts to charities could be satisfied with assets which had accumulated on a tax-deferred basis. Charities would realize the full value of such assets and avoid some, if not all, income tax consequences. By contrast, a personal beneficiary would be subject to income tax on the portion which had accumulated tax-deferred during the husband’s lifetime. The consultant further explained that if the husband had two million dollars -- whereby one million was in IRA-type accounts and one million was in traditional investments -- the beneficiary of the IRA investments would be subject to two types of taxes: the death taxes AND income taxes. By contrast, the beneficiary of the traditional investment assets would be subject only to death taxes and not to income taxes in most circumstances.
• Also, whether the husband would realize any lifetime income tax benefits with charitable giving was a benefit but not a priority for him. He was more concerned with federal estate taxes because they could erode the top dollars in his estate by almost 50% on every dollar. After consulting with all of his advisors, the solution was to organize his individual holdings in personal trusts after his demise.
• One trust would be known as the family trust and would support his wife for all of her lifetime. Then, upon her demise, the family trust assets would pass to designated nieces and nephews.
• The second trust would be a marital trust with QTIP provisions; it would receive the bulk of his assets and provide exclusively for his wife during her lifetime. However, upon her demise the majority of the remaining marital trust assets are to pass in his name to a community foundation to support the arts, private scholarships and library facilities in his community.

RESULTS

As a result of meeting with their financial advisor and reviewing assets in light of current intentions, the couple was able to establish documents which meet their family needs.

• As a result of his plan, the wife’s standard of living will not be decreased if the husband predeceases her. And, the husband’s intentions for the final distribution of his assets will be honored. Had he left the same assets outright to her, she would control the final distribution of his assets.
• Both husband and wife expressed a mutual desire to honor each other’s intentions but they acknowledged that either of them as the surviving spouse could be subject to unknown circumstances in the future. In particular, he felt that if large sums of money were left in her direct control, she could be the victim of designing persons regardless of her honorable intentions. The trust planning mitigated the threat of unknown future opportunists.
• She expressed a concern not to compromise her lifestyle in any manner whatsoever. Therefore the terms of both trusts were drafted to generously provide for her.
• In addition, their name will live on in perpetuity with final gifts to a foundation for the benefit of local charities. The only shortfall in this plan was to the federal taxing authorities, as his estate could possibly pass totally free of current federal estate taxes!

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