Case Study: A Blended Family
How can a single estate provide for multiple needs without being gobbled by estate taxes?
The following is a hypothetical case study that demonstrates a proposed approach for a family who is living comfortably with a significant estate, but their objectives for a final estate distribution plan differ.
The wife has four children from a previous marriage, but the combined estate is comprised mostly of assets the husband acquired before he married her. He wants to provide for her in the event he passes first, but wishes to control the disposition of his assets if he survives her.
The husband wants a charitable giving program to avoid federal estate tax, while the wife is concerned with protecting her separate assets for the benefit of her children.
The focus should be on important considerations for the family’s goals and desires:
–LD Lowe could recommend tax-deferred gifts to charities, which would realize the full value of such assets and possibly avoid income tax.
–LD Lowe could explain that, if the husband had $2 million ($1 million in IRA accounts and the other in traditional investments), the IRA investments could be subject to both estate and income taxes. The solution would be to reorganize his financial holdings into personal trusts. One trust, “the family trust,” would support his wife. The second trust would be a marital trust with Qualified Terminable Interest Property (QTIP) provisions also providing for the wife. A QTIP trust is provided under Section 2056 of the Internal Revenue Service code and allows couples to take advantage of the marital deduction and still control the ultimate distribution of assets at the death of the surviving spouse. Should the husband pass away before the wife, as long as she has a lifetime income interest in the property, his property is treated as passing to her. At her passing, the remaining assets would transfer to a community foundation, rather than her children.
An estate plan using the QTIP trust could be executed that would reflect the couple’s specific goals:
–The wife’s standard of living will not decrease if the husband predeceases her.
–The husband’s intentions for distribution of his assets will be honored.
–The family name will live on in perpetuity with final gifts to a foundation for the benefit of local charities.