FPLN 460 - Estate Planning Name: Assignment 11-1 Financial Group Project Estate Planning for a \"Modern Family\" 175 Points Jay and Gloria Pritchett Case Jay Pritchett Jay is age 65. He has been retired for five years. A few years ago, he turned his closet fixtures business over to his younger brother, Donnie. Jay has a prior marriage and two adult children from the prior marriage, Mitchell Pritchett (37), and Claire Pritchett Dunphy (40). Both have their own families. Gloria is his second wife. Due to his divorce experience, he entered into a prenuptial agreement with Gloria prior to their marriage. Gloria Pritchett Gloria is age 42. Gloria has had one prior marriage. She has one child by that marriage (her son Manny age 14). She only has limited assets due to raising Manny on her own with minimal income. Recently, Gloria gave birth to Joseph, the only child of this marriage to Jay. Because of Manny's health, Gloria has made out a simple will with 50% of her assets to Manny (in a testamentary trust) and to 50% to her other child, Joseph. Gloria is a Columbian native, and it is unclear whether she has completed the process to become a U.S. citizen. Jay and Gloria Jay and Gloria currently live in a community property state. They completed a prenuptial agreement before they got married five years ago. After they got married, Jay did a revocable trust with QTIP trust provisions. He wants Gloria to be able to use certain assets (especially the house) if she survives him. He is revisiting his estate plan as he has decided he wants all his assets to be divided between Gloria, and his four children (he includes Manny). Prenuptial-Jay All assets owned by Jay (shown on the financial statement) would currently go to his children from his first marriage. His estate plan has not been revised since just after his marriage to Gloria. Assets shown in joint name (new) will go by joint tenancy to Gloria. If Gloria survives Jay, certain assets go into the QTIP trust. Jay's Planning Jay did a revocable trust for stock he inherited and his residence. The business ownership and warehouse pass through his will to his revocable trust. 1 FPLN 460 - Estate Planning If Jay dies first, the following happens (old estate plan): 1. $2,000,000 will be divided between his children at his death. Please note that this section was written prior to Joseph's recent birth, and does not take him into account. 2. $2,500,000 will go into an applicable credit shelter trust. Income only will be paid to Gloria. After 10 years, the remaining trust principal will be paid out to his children equally. 3. The remaining assets will be placed in a QTIP trust for Gloria's benefit for as long as she may live. At her death, the trust principal will be paid out to his children equally (currently, this only names Mitchell and Claire). Jay's Brother Donnie is age 60. Since Jay retired five years ago, Donnie has run down the business. Five years ago, the business generated $200,000 of income for both Jay and Alan. Now Donnie is barely taking $100,000 from the business, and Jay takes nothing. Donnie just can't handle the business alone. Jay has a third party who is interested in buying the business from the partnership and the warehouse from Jay. Jay would like to get what he can from these assets while he can. The warehouse property is in another nearby state (common law). Jay's Children (first marriage) Claire (stay-at-home mom, failed City Council candidate), age 40, married to Phil Dunphy (moderately successful realtor) and has 3 children (Haley (19), Alex (15), and Luke (13)) Mitchell (environmental attorney), age 37, lives with his partner Cameron Tucker (music teacher and part-time clown), and has an adopted daughter (Lily (5)) Gloria's Child (first marriage) Manny (14). As of this writing, Jay has not legally adopted Manny, although it has been discussed. Unfortunately, Manny was recently diagnosed with a degenerative disease. 1 This diagnosis will prevent Manny from living independently as he ages. 1 As many of you may know, this is not true on the TV show \"Modern Family,\" however I needed a way to work in special needs planning in this fact pattern. 2 FPLN 460 - Estate Planning FINANCIALS Death benefit Owner Beneficiary Premium UNIVERSAL LIFE POLICY - JAY $200,000/Total cash value $50,000 Jay Gloria is the primary beneficiary; his children are the contingent beneficiaries. $1,000 per year TERM LIFE POLICY - JAY Death benefit $400,000 * Owner/beneficiary Donnie Premium $500 per year * mandatory cross-purchase arrangement Death benefit Owner Beneficiary Premium WHOLE LIFE POLICY - GLORIA $100,000/Guaranteed cash value $20,000 Gloria Gloria's first husband is still listed as the primary beneficiary; her children are the contingent beneficiaries Paid by dividends/all excess dividends paid in cash MEDICARE SUPPLEMENT POLICY Covered person Jay Type Plan F Deductible $1,000 Premium $1,000 per year NOTE:Jay decided to take an optional high deductible plan to reduce his premium. His health has been excellent. He takes no medication. AUTO POLICY (2 cars) BI/PD $250,000/$500,000/$100,000 Medical Payments $5,000/$15,000 UM $250,000/$500,000 Collision $500 deductible Other than collision $500 deductible Premium $1,500 per year Property Contents Liability Premium HOMEOWNERS POLICY $1,000,000 $120,000 $250,000 $10,000 per year MEDICAL 3 FPLN 460 - Estate Planning Covered person Gloria Physician services (preventive care) No charge Physician services-office $100 co-pay Physician services-surgical $100 co-pay Approved inpatient hospital services $250 per day deductible/$1,000 inpatient deductible Prescription drugs $25 prescription drug card Premium $6,000 per year NOTE:Gloria has some medical problems that require her to take prescription drugs. In general, her health is good. BUDGET Income 401(k) distribution IRA distribution Jay's social security Stock dividends2 Warehouse3 Expenses Income taxes4 Property Taxes Home maintenance Food Clothing Insurance5 Transportation6 $ 40,000 $ 23,000 $ 18,000 $ 24,000 0 $105,000 $ 15,000 $ 10,000 $ 3,000 $ 6,000 $ 2,000 $ 20,000 $ 6,000 2 In order to meet their cash flow needs, they take the dividends in cash. 3 The warehouse cash flow just meets the expenses of upkeep. The building is fully depreciated. 4 Their marginal income tax bracket is 25%. 5 Their insurance costs consist of the following:$10,000 for homeowners; $1,000 for Medicare supplement (Jay); $6,000 for Gloria's medical policy; $1,500 for auto insurance; $1,500 for life insurance. 6 Jay and Gloria buy a new car every three years, keeping the newer car. 4 FPLN 460 - Estate Planning Entertainment/Vacation Medical Gifting to family/Jay's needs Miscellaneous $10,000 $ 2,000 $20,000 $ 5,000 $99,000 STATEMENT of FINANCIAL CONDITION Assets Checking (JTWROS) IRA7 (Jay) 401(k)8 (Jay) Stock9 (Jay's trust) Warehouse10 (Jay) Business11 (Jay) Residence (Jay's trust) Personal Property (JTWROS) Liabilities $20,000 None $500,000 $1,000,000 $4,000,000 $600,000 $400,000 $1,000,000 $100,000 $7,620,000 GOALS AND OBJECTIVES Jay and Gloria have various concerns. Retirement has left Jay at loose ends with himself. He has felt lost since he retired. In addition, he expected his business (the partnership with Donnie) to produce some income. It has not. As a result, both he and Gloria have had to take distributions from their retirement accounts. Their various children (and stepchildren) by prior marriages have been eating away at any spare cash Jay and Gloria have. They would like to help their children and grandchildren more (particularly with College expenses when they can). They would also like to set up a trust for Manny. It is also their goal to leave some portion of their estate to Jay's alma mater. 7 The primary beneficiary is Gloria, with no contingent beneficiary. 8 The primary beneficiary is Gloria, with no contingent beneficiary. 9 The stock was inherited from Jay's father many years ago. The inherited value was $3,000,000. 10 The warehouse is owned by Jay. The building is fully depreciated. The land has a value of $400,000 and a basis of $300,000. The building has seen better days. 11 The business is owned in a partnership formed with Jay's brother, Donnie. The book value of the business is $400,000. The buy-sell agreement is based on the life insurance. 5 FPLN 460 - Estate Planning Jay's estate planning and community property issues have left Gloria concerned. All she has in the event of Jay's death under the status quo are life insurance proceeds and the QTIP trust assets, as she has no independent income. Jay has been talking to various financial planners who have been suggesting family limited partnerships, charitable giving, and other gifting arrangements. Gloria feels left out in the planning and asset distributions. Jay and Gloria are both in good health. Their marriage appears to be working out. Financial arrangements and finances seem to be the biggest problem between them. Action items: 1. Calculate the total of the assets that will pass through Jay's Probate Estate if he dies first. 2. Calculate the total of the assets that will be included in Jay's Gross Estate if he dies first. 3. Based on Jay and Gloria's financial information and family status, provide your recommendations that will accommodate their specific estate plan goals. Provide your rationale and the economic benefits of your recommended estate planning vehicles. Take into consideration the cost of implementing the estate planning vehicles. Your analysis should also include a review of the family's assets and expenses, and how your estate planning recommendations will impact their current budget and expenses. Do not forget that either spouse may predecease the other. 6