BUSI 354: Module 5 - Client Interview
Date: November 30, 2020
To: Professor Jantz
From: Justin D. Chandler
Subject: Client Interview w/Andrew and Lynn
Intro
This estate planning session is for a “newly” wedded couple, Andrew and Lynn. The purpose of this
memo is to discuss their blended family’s current financial situation and determine how best to meet
their needs and goals for an estate plan.
Summary of the Interview
Andrew and Lynn became married in December of 2011. Although this marriage is Lynn’s first, this
marriage is Andrew’s second. Prior to his marriage with Lynn, Andrew was married and has two adult
children. Additionally, Andrew’s daughter has two children of her own. However, Andrew’s son is still
in graduate school “trying to find himself” and as a result has never been married or had children.
Unfortunately, in 2010, Andrew’s wife passed suddenly. Owing to their lack of planning, Andrew’s late
wife did not have any life insurance to help cover final expenses and other debts at death. After Andrew
and Lynn became wedded, the first thing they accomplished was the purchase of life insurance policies
on one another’s life. They now live in Lynn’s home, which is nearly paid for because she is a savvy
saver. The home is titled in her name only. Andrew sold his prior home and with the proceeds was able
to pay off the mortgage and other debts related to his late wife’s final affairs.
The reason for their visit with me was to obtain help from a professional to better prepare financially for
any future uncertainties given his recent experience. In addition, given Lynn’s amount of assets that she
has accumulated over the years, she wants to ensure that these assets are given to charities at her death.
Prior to the meeting, I had Andrew and Lynn prepare and bring their most current statement of financial
positions. In the meeting, it was discovered that Andrew has an additional insurance policy through
work, which lists his late wife as the primary beneficiary and the children as a 50% contingent. In their
lifetime, Andrew and Lynn have never given substantial gifts that required them to file a gift tax form.
Andrew paid for his children’s undergraduate schooling and a used car once graduated. Lynn, on the
other hand, purchased a golf cart for her dad. Currently, Lynn donates to a local food pantry and other
charities to create additional tax deductions at year end. Since she does not have any children, she
desires to leave her inheritance to charities at her death.
Client Goals
1. Joint—both need to establish a will.
2. Joint—adequate insurance for each other for final expenses.
3. Joint—get finances in order.
4. Lynn—desires to keep assets separate from Andrew’s assets.
5. Lynn—desires to continue giving charitable donations.
6. Lynn—desires to contribute her assets to charities at death.
7. Andrew—update beneficiary on his work life insurance policy.
8. Andrew—wants to leave assets to his children, but place contingencies on his son’s portion.
9. Andrew—desires to leave an inheritance for grandchildren.
Gross Estate and Probate Estate Calculations
Andrew’s Gross & Probate Estate
Asset Owned Full Value Tony’s Interest Probate Estate Gross Estate
Cash JWROS 65,000 32,500 0 32,500
Cash Husband 2,500 2,500 2,500 2,500
Cash Wife 6,000 0 0 0
Home Wife 416,000 0 0 0
401k Wife 460,000 0 0 0
401k Husband 90,000 90,000 0 90,000
Invest 1 Wife 45,000 0 0 0
Invest 2 Wife 115,000 0 0 0
Term Life1 Husband 500,000 500,000 0 500,000
Term Life2 Husband 40,000 40,000 40,000 40,000
Term Life3 Wife 40,000 0 0 0
Total $42,500 $665,000
Lynn’s Gross & Probate Estate
Asset Owned Full Value Lynn’s Interest Probate Estate Gross Estate
Cash JWROS 65,000 32,500 0 32,500
Cash Husband 2,500 0 2,500 0
Cash Wife 6,000 6,000 6,000 6,000
Home Wife 416,000 416,000 416,000 416,000
401k Wife 460,000 460,000 0 460,000
401k Husband 90,000 0 0 0
Invest 1 Wife 45,000 45,000 45,000 45,000
Invest 2 Wife 115,000 115,000 115,000 115,000
Term Life1 Husband 500,000 0 0 0
Term Life2 Husband 40,000 0 0 0
Term Life3 Wife 40,000 40,000 40,000 40,000
Total $624,500 $1,114,500
Plan/Next Steps
Goal 1
This action will solve for goal.
Andrew and Lynn both need to establish a will; we will need to address this issue
in our next meeting once they decide how to address items such as a designation
of general power of attorney and/or power of attorney for health care.
Goal 2 & 3
This action will give me more insight on how to accomplish the goal.
Andrew and Lynn need to establish a budget so I can best determine the amount
of life insurance coverage they each need. The current amount of coverage was
determined based on Andrew’s experience with his late wife. While that was a
good place to start, I would like to explore whether or not the amount is adequate
given their current levels of income, which at this time is unknown.
Goal 4
This action will solve for goal.
Lynn needs to establish a trust to ensure that her assets are separated from
Andrew. A trust should be established “when there is a split interest in property
(i.e., income interest to spouse with remainder interest to children) and when the
individual has reservations about the heir’s ability to manage, control, or preserve
the assets” (Dalton & Langdon, 2018). Given the value of Lynn’s assets, it would
be wise for her to establish a trust to ensure that her assets go to the charities of
her choosing, rather than Andrew’s children and grandchildren. Additionally,
“placing assets in certain types of trusts can protect them from creditors, marriage
breakdown or from those who might influence beneficiaries[, such as Andrew’s
children]” (Jarvis, 2017).
Goal 5 & 6
This action will give me more insight on how to accomplish the goal.
I need to determine whether or not Lynn wants to leave her home to charity as
well or to Andrew.
I would need to know their current need for the financial assets to determine the
course of action for investment assets.
I will need more information on their monthly budget to determine whether these
assets should be gifted immediately at her death or transferred to a charitable trust
so that Andrew would have the option to receive an income stream; then, at the
end of the trust term, transfer the remaining assets to the charity.
This action will solve for goal.
One option for Lynn’s house would be to hold the asset in a QPRT. In a QPRT,
“the grantor contributes a personal residence to a trust and instead of receiving the
trust income, the grantor of the QPRT receives use of the personal residence as the
income component” (Dalton & Langdon, 2018). This method would remove the
asset from the gross estate. However, “if the grantor dies before the expiration of
the trust term, the fair market value of the residence is included in the grantor’s
gross estate” (Dalton & Langdon, 2018).
Presuming that Andrew will need the income of the assets from the investment
accounts to maintain his standard of living, another option for Lynn’s assets
would be to establish a QTIP Trust. This type of trust would allow Andrew “a
lifetime right to the income of the trust while transferring the remainder interest to
[a beneficiary] of the [Lynn’s] choosing” (Dalton & Langdon, 2018).
Additionally, this method would allow for Lynn to take advantage of the
unlimited marital deduction, though Andrew would not have outright access to the
assets.
Lynn has listed four separate charities for the beneficiary of her 401(k). “If the
desire is to transfer assets to qualifying charities, it is usually wise to consider
transferring tax-advantaged funds (IRAs, annuities) to these charities because
these funds do not receive a step-to fair market value in adjusted basis at the
decedent’s death and are considered taxable income eligible for the Income in
Respect of the Decedent deduction to taxable recipients” (Dalton & Langdon,
2018). However, presuming Lynn has need for the financial accounts, I would
recommend the establishment of a CRUT. Once established, it would accomplish
Lynn’s desire for charitable giving both now and later. When assets are transferred
into a CRUT, the original owner can set themselves as an income beneficiary.
Furthermore, I would recommend this type of charitable trust as “the settlor of a
CRUT may make additional principal contributions after the trust is established”
(Dalton & Langdon, 2018).
Goal 7
This action will solve for goal.
Andrew needs to update the primary beneficiary of his life insurance policy at
work to reflect Lynn as the primary beneficiary, with the children as the
contingent beneficiaries. Since the contingent beneficiaries are named, the
proceeds will not go through probate; however, the proceeds will be included in
his gross estate because of his ownership. “IRC Section 2042 includes the death
benefit proceeds of a life insurance policy on the life of the decedent in the
decedent’s gross estate if, at the decedent’s death, either the proceeds were
receivable by the decedent’s estate or the decedent possessed any incident of
ownership in the policy” (Dalton & Langdon, 2018).
Goal 8
This action will solve for goal.
Given that the bulk of Andrew’s gross estate would derive from the proceeds of
the life insurance policy that he owns at work, I would suggest that he create an
irrevocable life insurance trust (ILIT) with Crummey provisions to transfer
ownership of the two policies that he owns. Once established, the transfer of
ownership of term life 2 would lower his probate estate. Additionally, the transfer
of the term life 1 and 2 insurance policy would remove the assets from his gross
estate. “If the trust owns the policy, the proceeds will not be included in the
insured’s gross estate even though the insured created the trust and set forth the
terms for distribution of trust assets (the death benefit on the life insurance policy)
to the beneficiaries” (Dalton & Langdon, 2018). Another reason for my
suggestion for the life insurance policy be held in an ILIT with Crummey power
is so that Andrew can establish contingencies on the amount allotted to his son.
“Crummey [provisions] are often used as alternatives to Section 2503(c) trusts
when the grantor wishes to keep the property in trust after the beneficiary reaches
age 21” (Dalton & Langdon, 2018).
Additionally, I would suggest that the 401k assets of Andrew have his son’s
portion to be paid to a trust to ensure that the funds are dispersed according to
Andrew’s wishes.
Goal 9
This action will give me more insight on how to accomplish the goal.
During the meeting, Andrew mentioned that he would like to transfer an
inheritance to his grandchildren. I will need to obtain more information to
determine the method Andrew should use to accomplish this. There is a
possibility of using a 529 college savings plan, which would allow Andrew the
ability to provide a gift up to $30,000 per child, assuming Lynn is not opposed to
Andrew using her annual gift exclusion amount (IRS, 2020). Additionally,
contributing to the 529 plan would have less of an impact on the child’s financial
aid (Flynn, 2020).
Alternatively, Andrew could make tuition payments directly to the university, as
these gifts “are exempt from gift taxes and the Generation-Skipping Transfer Tax
(GSTT). Grandparents do not have to file a gift tax form when money is paid
directly to a college, even if the amount exceeds the $15,000 annual exclusion
amount” (Flynn, 2020). However, this option would impact the child’s financial
aid eligibility.
References
Dalton, M. A., & Langdon, T. P. (2018). (12th ed.). Me, Money Education. Estate planning
Flynn, K. (2020, May 7). Tuition Gift Tax Exclusion. Savingforcollege.com.
https://www.savingforcollege.com/article/tuition-gift-tax-exclusion.
IRS. (2020). What's New - Estate and Gift Tax. Internal Revenue Service.
https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax.
Jarvis, K. (2017, June 23). Five reasons to use a trust. FTAdviser.com. https://www.ftadviser.com/tax-
efficient-investments/2017/07/14/five-reasons-to-use-a-trust/.
