Leaving assets Equally or Fairly!
The One Page Issue
The Issue Overview:
Parents want to leave different property to their two children. Son A is in the family business, while Son B is a teacher. They also want to update their estate plan.
Break down and fact pattern: Family owns a business worth approximately $3 million (ballpark guess by accountant, but not a certified appraisal). The account has suggested that the owner get a certified appraisal. There is a building worth $800,000 that houses the family business, and residential real estate worth about $1.5 million. Their home is valued, $500,000, and an investment worth about $600,000. Their net worth is approximately $6,400,000.[i]
Rents and salary are where the family derives their income.
The rental income profits are being invested back in the real estate to pay down the mortgages which will be paid off in five years.
Intention of estate owners; Specifically, at the death of the surviving spouse, Son A is to receive the business and the business property. Son B is to receive the real estate and residence. The investment account balance to be split equally.
Past Planning: The parents have done very little estate planning. They have an old, “I love you will” and do not have healthcare directives in place.
One Page Issues:
Summary of Issues:
A. Upon dad’s death- the status of mom and her income.
B. The real estate other than the business building to Son B.
C. Distribution of business assets to the son A
D. Estate settlement costs and taxes.
ONE PAGE SOLUTION!
One Page Solution (s), things we suggested to consider:
- Certified evaluation of the business as a watermark of value, for a variety of things.
- Update wills, possibly a living trust (Qtip/bypass) and Medical Directives
- Placing real estate in Irrevocable defective grantor trust with spouse as income beneficiary (Defective Grantor Trust) remove from estate and future value[ii].
- Parents are not concerned with making gifts. (See footnotes).
- Parents are aware of a possible reduction in the exemption credit.
- There is also the issue of the loss of stepped-up cost basis in the future because of future tax law changes.
- At spouse death, Son B can receive the investment property. Son B will receive the commercial building and the business.
- If more cash is needed in the estate, the business could fund a life insurance policy on Mom and dad (2nd to die) to absorb taxes and transfer costs. Using the company to fund the policy via a split dollar or bonus plan. If so, the life insurance would be purchased by an irrevocable trust.
Overview
These were a a few of the strategies the family could do to improve their situation, although there are many more ways to plan their estate. Most important, this was the direction the family felt more comfortable after reviewing other possibilities. Compared to the default estate plan they had; this planning puts them in a much better position to accomplish their goals.
Bottom Line:
- The spouse will have the income needed to stay in her world.
- Son A received the company along with the building.
- Son B is treated fairly in that he receives the real estate and income from the real estate.
- It also works well if the mother passed first. The only exception would depend on the value of the stock which the father owned at his death. Currently, he owns 100% of the stock. (Once the business value is known other planning strategies could be implemented to save taxes and accomplish their financial goals as a family. Things such as using minority stock discounts, recapitalization, estate tax funding with life insurance, gift programs, along with other techniques to accomplish the personal family goals).
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[i] Business needs certified appraisal- current value is an estimate
[ii] We are considering current tax laws; however, we are on the verge of a possible lowering of the exemption credit and repeal of the stepped-up basis
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