* Net of cash flow and pension withdrawals based on minimum required distributions.

** Total tax = Federal Estate Tax attributable to pension and income tax on inherited pension and state death tax attributable to pension

*** Tax schedule based on EGTRRA 2001 and combined income tax rates (state and federal) of 35%, the hypothetical case assumes both deaths occur in 2003 with a $1 million applicable exclusion amount for illustration purposes

Dr. and Mrs. George Olsen (both 70) have lived below their means for most of their lives and have accumulated a tidy nest egg.  As a dentist, most of George’s wealth is tied up in his $2 million IRA; while his wife Angela has set aside the money she inherited in her own $2 million stock portfolio. 

George plans to continue part time in his dental practice and slowly phase out to make more use of his time in retirement.  When he sold his practice to a junior partner, he opted for a salary continuation plan and that will provide a steady, but finite source of retirement income.  With his salary, social security, the few stock dividends, and required distributions from his IRA, the Olsens will live comfortably.  George and Angela both have their IRA and stock portfolio assets invested with allocations that have averaged 10% over the last 25 years, and they expect their investments to continue to grow steadily.

While they have split their estates to take advantage of each spouse’s applicable exclusion amount, their estate planning has been haphazard at best.  Unfortunately, they have also incorrectly willed everything back to each other, effectively recombining their divided estates.  Based on their goals, they want to provide for financial security, but they do not want to enrich their children or provide any disincentive to work or succeed.  As such, they intend to leave each of their two children $1 million as their financial legacy, but the balance of their estate is destined for charitable causes important to the Olsen family. 

Their stockbroker has suggested a stretch IRA as a way to minimize taxes, but their accountant has recommended a different course of action if they really want to benefit philanthropic causes.  The accountant’s plan is to change their IRA beneficiary designations from their children instead to the charities.  By doing do, they will avoid the double taxation inherent in receiving “income in respect of a decedent” (IRD) and pass their income tax liability on to a tax-exempt charity.  By doing so, not only can the Olsens be tax efficient, but their children actually wind up with more tax-free assets too.

Q. - “I've just been given 10 minutes with the attorneys attending a "fundamentals of estate planning" state bar institute teleconference.  If you were me and had just two days to prepare, what would you want them to know about how I can help them meet their clients' needs.”  – Planned Giving Officer

A. – Here’s my quick advice to the Planned Giving Officer

“1. Give away IRD Assets.

 2. Help clients ascertain their charitable interests through values-based questions (i.e., just because the client didn't ask about a charitable gift in their estate plan doesn't mean they're not charitably inclined, they probably didn't ask about a defective unfunded ILIT using Crummey gifts either, but you drafted them one).

 3. New legislation will continue to move the goal posts, especially with retirement assets, so you're always willing to run sample illustrations or refer them to your stable of planning experts to help them solve client problems.”

 Vaughn W. Henry

© 2002 -- Vaughn W. Henry

Gift and Estate Planning Services -- Springfield, IL

217.529.1958 -- 217.529.1959 fax

VWHenry@aol.com

on the web at gift-estate.com

The Olsen family plan evolved from a traditional plan (option 1) where children inherit assets after paying income and estate taxes.  Option 2 is the broker’s charitable plan.  He uses a stretch IRA, with named beneficiaries, passing the heirs the IRD assets but the charity receives its bequest by liquidating Angela’s stock portfolio.  The accountant’s more tax-efficient plan (option 3) calls for passing the heirs their same $2 million legacy.  Angela’s portfolio steps up in basis, and the charitable bequests come first from the IRD assets; as a result, no tax is due.

Navigating the Estate Planning Maze