Case Study Ben and Leslie

Leslie and Ben are a married couple in their mid-40’s. Both Leslie and Ben work and, being in their prime earning years at successful jobs, they each have an income of over $100,000 per year. The couple considers themselves very lucky to have two children in high school who are happy and healthy. They even have two beloved dogs to add to the fun! Even though Leslie and Ben are both currently healthy, they want to make sure their children are taken care of if anything should happen to them. They are starting to become concerned that they haven’t done any estate planning yet. 

Leslie and Ben currently own a house worth $650,000, but with $250,000 left on the mortgage. They have $100,000 in a joint bank account and $100,000 in a joint investment account. Leslie and Ben have worked hard to save for their retirement and have accrued $800,000 in their retirement accounts. They also took out large life insurance policies when their children were young. Leslie has a $1 million whole life policy, and Ben has a $5 million whole life policy. They want to ensure that most of their wealth is passed on to their children if something happens to them. Their children are still young, and they want to have a plan in place to provide for them over time while they are still developing financial responsibility. They also hope to put some money aside to care for their two dogs or any other pets they have at the time of their deaths.

Leslie and Ben’s situation is a common one, and they’re right to consider how best to pass their wealth to their children. Massachusetts has an estate tax, also known as a death tax. Leslie and Ben will owe estate taxes if they have over $1 million in assets. Together, Leslie and Ben have a taxable estate of $7.4 million with their assets and life insurance policies.

Without any planning, this means they will owe an estate tax of $691,600! This is $691,600 that will be paid to the government instead of being passed down to their children. 

Since they haven’t done any planning before, Leslie and Ben should start with their “Big 3” documents. They should each have a Last Will and Testament, a Power of Attorney, and a Health Care Proxy. The Will is a set of instructions that address where their property will go after they pass away. A Power of Attorney is a document that names someone else (called an attorney-in-fact) to act for you if you cannot act for yourself. A Health Care Proxy names someone to make health care decisions for you, again only if you ever become incapacitated. As between married couples, each spouse will typically name the other as their attorney-in-fact and health care proxy.

The Will is the best way Leslie and Ben can plan for the future care of their two dogs. They can leave an amount of money to be set aside to be used only for the care and maintenance of the dogs. This money will be left in Pet Trust to be distributed at the discretion of a Trustee, and they can name someone as a caretaker of the dogs.

But what about Leslie and Ben’s estate taxes? While the Big 3 are the essential base documents of any estate plan, they do not provide any estate tax protection by themselves. Fortunately, there are several planning tools that Leslie and Ben can use, that do provide that protection, the most effective for a married couple being the Credit Shelter Trust (CST). What often happens between married couples is that upon the passing of the first spouse, all the assets go straight to the surviving spouse. Though there won’t be an estate tax due, the $1 million Massachusetts estate tax exemption has not been used, and they will end up paying more in estate taxes than if the first spouse to pass had fully utilized the estate tax exemption. This problem is solved with the CST. While the Survivor has access to the money, the creation of the Trust maximizes the $1 million exemption of the first spouse to die by carving the $1 million out and holding it aside. Using the CST to maximize both estate tax exemptions, Leslie and Ben can pass the $1.4 million of equity in their house, bank accounts, investment accounts, and retirement accounts without having to pay any estate tax.

Another great benefit of the CST is that, like other Trusts, Leslie and Ben have the freedom to control how their assets are distributed to their children after their passing. This means the Trustee controls the money while the children are still minors, rather than giving the money directly to the children’s guardian in a lump sum with the hope that the money is all used for their benefit. Leslie and Ben also want their assets distributed overtime when their children reach adulthood as they continue growing in maturity and financial responsibility. Though the Trustee can still have the discretion to distribute funds to them, Leslie and Ben have decided that each of the children can withdraw 1/3 of their respective shares at ages 21, 25, and 30.

Leslie and Ben have well over the $2 million in assets that can be sheltered using the CST. Fortunately, an Irrevocable Life Insurance Trust (ILIT), can be used to remove the life insurance from Leslie and Ben’s estate tax. Leslie and Ben will need separate ILITs, and each will be the other’s Trustee. Once the ILITs have owned the existing policies for 3 years, the $6 million in life insurance will be removed from the taxable estate!

This means that using the CST and the ILITs, the $619,600 in estate taxes will be reduced to ZERO! That is $619,600 that can be passed to Leslie and Ben’s children rather than being paid in taxes!

It’s never too early to consider your estate plan. If you’re in a situation like Leslie and Ben’s, call our office to book an appointment with one of our attorneys who can help you save money in estate taxes and pass more of your wealth to your family!

Call us at 978-657-7437 or book an appointment online here.