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Personal Story
Client A, age 61, and client B, age 58, came to us with a net worth of just over $3.3 million. They were both semi-retired but were uneasy about where they stood with their retirement planning and cash flow. Their kids were 29 and 27 years old, respectively, and they were still providing educational support for each child over the next 3 years as one was going to graduate school and the other one was going to law school. Amazingly enough, nearly their entire net worth was in investable assets. They had been renting their personal residence and had very little other personal property. They had $525,000 in retirement accounts, and roughly $4.2 million allocated between 3 taxable accounts, including over $1.5 million invested in a trust company that was actively managing their investments. They had done some estate planning 8 years ago but still felt something was missing. They were also interested in exploring ways to give to charity but were unsure how to proceed. Through our in-depth analysis, we were able to maximize their financial potential by focusing on retirement planning, investment planning, and estate planning.
Retirement Planning
The clients expressed a wish to be able to spend $150,000 per year in retirement. It was a goal they felt was optimistic. Our customized retirement/cash flow analysis took into account all expected inflows and outflows and assumed a modest, achievable return. We also ran the retirement analysis until client A was age 98 and client B was 95 to be ultra-conservative. The clients were ecstatic when our analysis revealed that they could spend $218,000 per year and still remain well within their risk threshold. In fact, they had over $1.5 million in surplus investable assets beyond their need. Our retirement/cash flow model also gave them a look at varying rates of return and spending levels so they could fully realize the effects of different scenarios. They were also able to see different scenarios involving heightened health-care costs, and their imminent home purchase. Clients A and B finally felt that they had a firm grasp on where they stood financially and the ramifications of changing circumstances.
Investment Planning
Our analysis of their investments found that there was a lot of duplication between their 3 main taxable accounts and they had allocated a large portion of their assets in investments that weren’t entirely suitable for their risk tolerance. They also had over $600,000 invested in one stock. We tracked performance in their $1.5 million trust account that was professionally managed over the previous 6 years and found disturbing news. The equity portion of their managed portfolio, which constituted 80% of their account, had lost 3.29% on an annualized basis over the time period. By comparison, the S&P 500 Index and Dow Jones Industrial Average had annual returns of -0.89% and -0.96%, respectively, over that same span. We were able to offer them 3 different professionally-managed alternatives that averaged 11.11%, 13.56%, and 10.78% over the same period with no greater or less risk than they had previously experienced. Also, we were able to provide them an outlet to defer taxes by recommending a variable annuity that allowed them to share in market gains but still earn a guaranteed 6% return. As a result, our investment recommendations have equipped Client A and B with increased potential for returns with decreased risk.
Estate Planning
Client A and B had done more estate planning than the average client beforehand. They had set up wills, revocable living trusts, bypass trusts, and had even set up durable powers of attorney and advanced medical directives. However, it was a good thing they didn’t get complacent because we were still able to recommend many beneficial strategies. Assuming current estate law and the rate at which their estate was growing, client A and B were projected to have an estate worth $20.1 million by their life expectancy. Under their current plan, they would still owe $9.5 million of estate taxes that would dwindle their value to $10.6 million. We were able to save them $4.86 million of projected estate tax by recommending four ideas.
First, we had them set up a family limited partnership with $3.75 million of their investable assets. This decreased the current taxable value of the estate by $570,000 and effectively decreased projected estate taxes by $1,425,000. It also was an important step in asset protection from creditors, as both client A and B had been under the false assumption that their assets were protected in living trusts. Next, we advised them on a simple gifting program of FLP shares over the next 28 years that would continually remove assets from their estate and save $2.46 million of projected estate taxes and still accommodate their spending level for retirement. We then recommended a charitable remainder trust to place their concentrated stock position. Removing this asset from their future estate saved them $249,000 in projected estate tax, $51,000 in current capital gains tax, and allowed them to deduct $60,000 from income tax. Finally, we recommended survivorship life insurance held in an irrevocable life insurance trust that would replace the value of the assets used for the charitable remainder trust and would be excluded from their future taxable estate. This technique would save them $749,000 in projected estate tax. Our last recommendation was to purchase long-term care insurance to guard against the devastating effect that prolonged nursing home care can have on retirement assets and preserve the value of their estate.
Summary
Clients A and B finally feel they have total control over their finances. They are in the process of implementing all of our recommendations and can now devote their energies toward enjoying retirement. Through our planning, they were able to become fully aware of their financial potential, invest more efficiently, maximize security, and decrease income and estate taxes.
This information is hypothetical and is meant as an illustration only.
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