Client from Milton, MA
Facts: Dr. A is divorced with two minor children. Dr. B is divorced with two minor children. Both are non-citizens. Dr. A and Dr. B get married and now want to protect their respective assets for each spouse’s children.
Issues clients were unaware of: Massachusetts estate tax takes a bite out of any resident’s estate, but usually the estate tax is deferred until the death of the surviving spouse. However, only spouses who are US citizens are allowed to defer paying estate tax. In addition, Dr. A wants his new spouse, Dr. B., to be in control of his children’s inheritance and not his ex-spouse (and the same for Dr. B). If assets pass directly to the minor children, the guardian of such children (most likely the ex-spouse) will be in charge of their inheritance.
Proposed solution: Each spouse will establish an irrevocable trust and transfer his/her life insurance to such trust. The surviving spouse is named as trustee of such trust. Upon the death of either Dr. A or Dr. B, the insurance proceeds and other assets will be owned by the trustee of the irrevocable trust for the benefit of the children of the deceased spouse. In addition, the trusts may not have mirror image provisions or else the IRS may invoke the “reciprocal trust doctrine” and undermine the tax planning.
Bottom line: we reduced the potential MA estate tax to next to nil and ensured that the ex-spouse of each client has no direct involvement with the finances of the minor children.
Client from Mendon, MA
Facts: Clients own and operate a successful business. The clients, husband and wife, and three or the four children are actively involved with the business. Clients also own substantial tracts of real estate that may someday be developed.
Issues clients were unaware of: Client was concerned about the second generation taking over the business and the impact that a substantial estate tax may have on the viability of the business.
Proposed solution: Through a planned gifting program, clients were able to transfer a certain percentage of the business to an irrevocable trust for the benefit of the children and later grandchildren. The value of the shares of the business were able to be discounted (through a professional business appraiser) by 42% for gift tax purposes, which allowed more shares to be gifted. In addition, the clients sold a block of stock to the irrevocable trust for a promissory note payable back to them (again, the value of the stock was able to be discounted).
Bottom line: A large percentage of the business is owned by a protective trust for the benefit of the children; the business has a much better chance surviving through the second generation and into the third generation.
Client from Worcester, MA
Facts: Clients had a significant estate and two adult children. One child’s marriage was struggling and forecast to end in divorce.
Issues clients were unaware of: The clients wanted to protect the inheritance for their sons, especially the one who was having marital troubles. In addition, the clients owned life insurance in their individual names with death benefits of over 4 million dollars.
Proposed solution: In order to help protect the potential inheritance for their sons, we drafted revocable trusts that incorporated long term discretionary trusts following the deaths of the clients. Each child is the sole beneficiary of his trust, but a disinterested trustee is in control of the trusts to protect against outside threats. Also, the life insurance was transferred to an irrevocable trust so that the death proceeds are not subject to MA estate tax at the deaths of the clients, with the shares for the sons held at the discretion of the disinterested trustee.
Bottom line: The overall estate tax was reduced significantly and the inheritance of the client’s son was protected against a potential ex-spouse.