Case Studies

Case Studies

Estate, Income Tax, and Insurance

A client completed a comprehensive review and restatement of his estate plan two years ago with his attorney. The client had his accountant provide basic income tax background, had his insurance specialist provide a listing of the insurance, and had the investment manager provide account balances. The client had a substantial portfolio of investments, most of which were highly appreciated and jointly titled. Both spouses had a substantial IRA. One spouse had life insurance, some of which was term and some of which was universal life. One spouse has a medical problem that had significantly shortened his life expectancy. With this information and full discussion of the desire to distribute assets to the children at the death of the survivor, the attorney prepared a new will, revocable living trusts for each spouse, provision in each trust for a special needs trust for one of their children, health care directives and powers of attorney. The attorney prepared a lengthy letter documenting the conversations that led to the documents and included actions to be taken.

Two years later, here is what we found:

The clients had not retitled the joint accounts to their respective trusts. No consideration had been given to titling the highly appreciated assets to the trust for the spouse with a shortened life expectancy. The universal life was underfunded and required that additional capital be applied to keep the death benefit. The beneficiary of each policy was never changed to the trust. The asset titling was never changed to be consistent with the documents. The primary beneficiary of the IRAs was each other, but no contingent beneficiaries were named, leaving the special needs child’s share unprotected in the event of a common disaster or no change in beneficiary made at the death of the first spouse.

Potential net result:

Lost opportunity to reduce income tax with appropriate capital gains tax planning. Life insurance on medically challenged spouse lost. Revocable trusts unfunded leaving surviving spouse without adequate oversight of her estate. Unfunded trusts leave the special needs child as an heir without the protection of the special needs trust. The opportunity to coordinate the IRA assets with the balance of the estate including the funding of the special needs trust was missed.

Retirement Cash Flow and Tax Planning

A client is 68 and getting ready to retire and start receiving Social Security. His wife is 10 years younger and retired seven years ago from a high-paying job. They are charitably inclined. They are Pennsylvania residents but are considering purchasing property in Florida. Their Pennsylvania home has no mortgage, but they have a home equity line of $200,000 on that property. In addition to a significant 401(k), he has accrued a substantial pension benefit from a former employer. They have a highly appreciated, investment portfolio outside of their IRA.

  • Should he start Social Security now?
    • Age 68? Age 70? Age 68 with life insurance/LTC
  • How should they plan his spousal Social Security?
    • Age 62? Age 66+2? Her own or 50% of her husbands? Age 70?
  • What option should he select for his pension?
    • Joint with survivor benefits? Lump sum plus survivor benefits? Lump sum? Straight life benefit?
  • If he does not take Social Security, will they have a very low-income tax bracket?
    • Withdraw from IRA?
    • Roth conversion?
    • Realize capital gains?
    • Defer charitable gifts?
  • Should he take Medicare with a supplement or an Advantage plan?
  • How will he get health insurance for his wife?
  • Should he pay cash for the Florida property or finance?
    • Interest on first home likely not deductible, but mortgage on Florida home is. Better to apply cash to home equity and get the largest mortgage possible in Florida
  • Should they become Florida residents?
  • Under the new tax law, is he an itemizer or covered by the new standard deduction?
    • Deduction for state taxes limited to $10,000
    • Standard deduction up to $27,000
  • How will he handle charitable gifts now and in the future?
    • They can still give away appreciated assets, but there is no tax benefit if they are using the standard deduction
    • In two years, look at RMD/QCD
  • Does he have any loss carry forward? Is his portfolio manager aware and using that option?

*These are case studies and are for illustrative purposes only. Actual performance and results will vary. They do not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. These case studies do not represent actual clients but a hypothetical composite of various client experiences and issues. Any resemblance to actual people or situations is purely coincidental.