Estate Planning 2

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ESTATE PLANNING

Topics 53-73

FRED AND MARY FERRIS

PERSONAL IN FORMA TION

Fred and Mary Ferris have engaged your services for the development of a comprehensive financial plan. Their primary concerns, however, revolve around estate planning objectives.

Fred, age 52, is a one-third owner of an automobile parts supplier in Michigan. The business has survived the cyclical nature of the auto industry through a combination of high-quality parts, just-in-time delivery, and superior cost containment.

Mary, also 52, works part-time at the art institute, mostly to satisfy her aesthetic senses. She expects to continue working until age 60.

This is a second marriage for Fred, whose first wife died at age 32 in a car accident. Fred has one son from that marriage, Ted, age 28, who is happily married but has fmancial difficulties due to his one child, Ned, age 3, who has special needs.

Together, Fred and Mary have two daughters, both in private high school. Felicity is an honors student in her junior year, and Harmony is a sophomore and has musical talent.

Name Relationship Occupation Notes Fred Husband Business O\vner Successful Mary Wife Docent at art institute Charitably inclined Ted Son Retail sales Married; special-needs child Felicity Daughter HSjunior Scientifically gifted Harmony Daughter HS sophomore Musically gifted

Mary has been generous with her time in helping Ted with his special-needs son Ned. Her assistance has solidified her excellent relationship with Ted and his wife Maria, a Canadian citizen. In addition, Mary is quite interested in leaving substantial amounts to the art institute at her death.

Fred's business operates as a C corporation; Fred is an equal one-third owner with Harold Dietz and Gerald Keats. They are seriously contemplating a number of business agreements, including a buy-sell agreement, a non-qualified deferred-compensation plan, and a stock option plan of some kind. All three seek your advice in these matters.

A recent business valuation produced a fair market value of $30 million for the business, with an expectation of 8% annual growth in the next 15 years. As all three owners are in their 50s and want to retire at age 66, they are concerned with successor management.

Fred recently sent a registered letter to Harold and Gerald, indicating his intent that his son Ted should receive his share ofthe business at Fred's death. At this point, Ted is becoming increasingly interested in his father's business as a career.

The owners each draw an annual salary of $150,000 and take equal bonuses, depending on profitability. Bonuses have averaged $50,000 each in the last five years.

Estate Planning (Topics 53·73)

The business has impLemented a 401 (k) plan with a matching contribution of$.50 per dollar on the first 6% of employee contributions. A dozen well-paid factory workers all participate.

Estate Planning ITopics 53-73)

The employees and their families are all covered by an excellent group health insurance plan, as well as group term life insurance equal to their base salary. A separate employer-paid group long-term disability plan also covers all employees for 60% of base pay, with a 90-day elimination period. The group LTD plan is integrated with Social Security and workers' compensation.

ESTATE PLANNING DOCUMENTS

Fred and Mary Ferris each have wills, leaving everything to the survivor. Each will contains a 120-day survivorship clause. In a simultaneous death, the will and state law presume that the wife survives. Ifthere is no surviving spouse, the children ofthe testator share equally. They each named their surviving spouse as the executor.

Fred executed an unfunded irrevocable trust four years ago for the benefit of his children and grandchildren that he hopes to use in the future. There is no withdrawal right in the trust.

Fred and Mary have made no prior taxable gifts.

At Fred's suggestion, Ted and Maria have created standard revocable living trusts with marital and residuary trusts. Large life insurance policies were also purchased on Ted and Maria ($500,000 each), payable to their respective trusts.

LIFE INSURANCE SUMMARY

Insured Owner TYP"e Face Amount Premium Beneficiary Fred Fred Group term $150,000 Employer- Primary: Mary

paid Secondary: Ted Fred Mary Whole life $250,000 $4,200/year Primary: Mary

Secondary: None Fred Fred IS-year terrn $1,000,000 $1,800/year Primary: Mary

Secondary: None

e 2014 K@il' Educational Resources 156 www.keirsueeess.com

Cash and cash equivalents: J Cash value of life ins.: W Short-tenn fixed-inc. fund: J Value fund: J Growth fund: HI Global fund: H SPDA: H2 401 (k) plan: H3 529 plans: H4 Business: H Residence: J Personal property: J Car:H

$ 31,000 36,000 40,000 83,000

110,000 31,000

160,000 225,000 110,000

10,000,000 450,000

75,000 25,000

Total Assets $11,376,000

H=Husband W=Wife

Balance Sheet Fred and Mary Ferris December 31, Last Year

Liabilities

Car loan: H Mortgage: J

Total Liabilities

Net Worth

Total Liabilities and

$ 17,000 228,000

$ 245,000

$11,131,000

NetWOlth $11,376,000

J = Joint tenancy with right of survivorship

IPayable on death: Mary 2Single-premium deferred annuity, issued 7/1/80; the initial premium was $40,000, and the estate is beneficiary. 3Beneficiary: Mary 4Mary is the successor-owner at Fred's death; the average annual return has been 0%.

INVESTMENT DETAIL

Asset Fair Market Basis Projected Purchased Value Growth Rate

Short-tenn fixed- income fund $40,000 $41,000 1% 3 years ago Value fund $83,000 $50,000 7% 2 years ago Growth fund $110,000 $50,000 8% 8 years ago Global fund $31,000 $22,000 6% 4 years ago

Estate Planning (Topics 53-73)

Inflows

Salary: Fred Bonus: Fred Salary: Mary Interest/Dividends Total Inflows

Outflows

Mortgage: principal and interest Real estate tax Homeowners insurance (HO-3) Maintenance/Repairs Food Clothing Utilities Car loan TraveWacationiEntertainment Life insurance

Fred and Mary Ferris Cash Flow Projection

Current Year

$150,000 50,000 25,000

Reinvested $225,000

$ 31,200 6,200

820 8,300 7,800 4,000 5,600 7,200

16,000

Educational funding (daughters' 529 plans) 401(k) plan contribution: Fred

6,000 56,000 16,000 10,000 30,000

Charitable contributions Federal income tax State income tax Federal and state payroll taxes Total Outflows

Surplus

Goals and Objectives (in order of priority)

8,000 10,674

$223,794

$1,206

1. Provide $120,000 of annual after-tax cash flow to the surviving family members at the death of either spouse.

2. Pay the remaining mortgage balance at the death of either spouse. 3. Provide adequate college funding for their daughters. 4. Provide assistance to Ted for Ned's care. 5. Eliminate the federal estate tax at the first death. 6. Reduce or eliminate the federal estate tax at the second death. 7. A void probate at death or incapacity. 8. Secure professional financial assistance for the survivors after either spouse's death. 9. Ensure adequate retirement income from all sources, including the sale of the business interest.