I begin every client engagement with three things: the family tree, the personal financial statement and planning objectives.
- Name and date of birth for the couple, usually, with whom I am meeting.
- Who’s alive above them (parents, grandparents, and maybe even beyond).
- Who’s alive below them (children, grandchildren, and maybe even beyond)
- Sometimes, siblings, nieces, nephews, depending on the conversation
Personal financial statement.
- The balance sheet: assets (value and how they are titled) and liabilities against each asset; and
- The Income statement: sources and uses of cash flow
Planning objectives: These should be:
- Written in the client’s own words;
- Be measurable; and
- Listed in their order of priority.
Note: Saving taxes is never the objective. That’s a given. If a couple wants to save estate taxes, then just tell them to give away all of their assets to charity. The objective is usually something like, “I don’t want my daughter’s next husband to get a dime of what I built.”
I was meeting with such a couple not too long ago. Reviewing their wills and trusts, I couldn’t help but notice that the first provision was a $250,000 charitable bequest, upon the death of the surviving spouse, to a local hospital that specializes in cancer treatment. I asked, “Who in the family had cancer.” They answered that both of the couple’s moms were treated there.
Reviewing their personal balance sheet, I noticed that they had over $1,000,000 of qualified retirement accounts and IRAs. I asked, “Why are you giving funds to charity under your will that would have passed to your children free of income taxes (due to step-up in cost basis) and then leaving your children ordinary taxable income from your retirement assets?”
Most all charitable bequests are contained in a will or trust. Yet, wills and trusts do not direct the beneficiaries of retirement accounts (or life insurance). They have beneficiary designations.
The best asset to give to charity at death is your retirement accounts, and life insurance.
Here’s what we did:
First, we carved out $250,000 from their existing retirement accounts and established a separate IRA with the surviving spouse as listed as the primary beneficiary; and the named charity (or charitable trust) as the contingent beneficiary. Remember, their goal was for the charity to receive the gift after the death of the surviving spouse. Note: You do not want to have an IRA beneficiary include charities and people. If you do, then the funds must be distributed (as taxable income to the people) within 5-years of the date of death.
Next, we asked the couple if this account would likely be the last money they would touch for retirement income. They agreed that it was. So, we funded this $250,000 IRA with a variable annuity containing a 5 percent guaranteed minimum income benefit (GBIB) rider.
The couple received the $12,500/year as ordinary taxable income (they were both over age 59½). We established a charitable trust (irrevocable) and funded it with a $1,000,000 survivorship life insurance policy with a premium of $12,500. The trust beneficiary is currently that local cancer treatment hospital, but that can be changed to any other charity, foundation, or donor-advised fund (giving them flexibility)