A Little Bit of Planning Can Make A Big Difference

A little bit of planning can make a big difference. Let us look at the following example to illustrate the difference between a family who has done a little bit of planning versus a family who did not.  Let’s say we have a typical family, as follows:

FACTS:

Husband (Joe) and wife (Alexis) with two adult children (Samuel and Emily) who are both married.  Let’s say Joe and Alexis have a combined net worth of 2.5 million.  This includes the death benefit of 1 million on life insurance on Joe’s life.  The house is worth $400,000.  Joe’s IRA is worth 1.1 million.  Joe’s life insurance will pay 1 million death benefit.  That results in combined estate (for federal estate tax purposes) of 2.5 million.

SCENARIO # 1:

Let’s say Joe and Alexis have a simple Will alone based plan that says all assets go to the surviving spouse and then to the children in equal shares.  The result could be (1) more than $200,000 due to the federal government when the survivor passes away and (2) more than $500,000 lost to an in law in one divorce.  The total net loss could be $700,000 or more.  If both children get divorced later in life, the loss could be $1,200,000 (200,000 loss to federal estate taxes and $1,000,000 lost to equitable distribution in children’s divorces).  That is poor planning.

SCENARIO # 2:             

Let’s say Joe and Alexis create revocable trusts and have tax planning in their trusts whereby the credit amount is put into a tax sheltered trust on first death.  Let’s further say that their plan dictates all assets to children will be given to them in an asset protected trust.  The result could be (1) nothing due to the federal government on survivor’s passing, and (2) nothing lost to divorce. 

So in summary, in SCENARIO # 1 (the poor planning scenario), 28% or $700,000 of 2.5 million of family money was lost to the government and in laws (in case of one child getting divorced).  If both children were to become divorced later in life, the loss could be nearly 50% or $1,200,000.  In SCENARIO # 2, with a little bit of planning, Joe and Alexis could have saved their family up to $1,200,000.  And so the moral of the story is a little bit of estate planning can make a big difference.

Contributed by

Mark F. Winn, PLLC