I have enjoyed sharing hypothetical client case studies with you, prepared as part of my Master of Laws (LLM) degree in estate and tax planning studies. If you have not read the first two case studies in this series, I suggest you check them out:
Case Study Exercise #1: Ms. Smith, Wealthy Retired Widow
Case Study Exercise #2: Ms. Jones, Single Mother of Two
Now, we move onto the third case, which is about Art and Lynn Andrews.
The Client’s Story
Art is 40 years old, and Lynn is 39 years old. They have been married for more than a decade, and they are the parents of 2 children (ages 11 and 10). The youngest child, Jeff, has some learning disabilities, which may require some additional expenses and special education considerations. Art works as an engineer and has steady employment at a local computer company, earning $150,000 per year. Lynn is a partner in a law firm with one other attorney. Last year, Lynn’s net income was $175,000.
The clients’ combined estate consists of the following assets (after liabilities):
• Residence – $1.25 million;
• 401(k) – $250,000;
• Roth IRA – $30,000;
• Stocks and Bonds – $100,000;
• Cash and Savings – $100,000;
• Miscellaneous Personal Property – $20,000;
• Interest in Lynn’s Law Partnership – $500,000
As for debt, Art and Lynn have a mortgage of $850,000. They also have $10,000 in credit card debt and owe $75,000 to Lynn’s parents, who loaned her money to start the law partnership.
Art and Lynn had the following estate planning goals:
- Pay off debt to Lynn’s parents within 3-5 years;
- Save and plan for retirement;
- Save for their children’s education;
- Long-term planning for Lynn’s inheritance (she is an only child and expecting to inherit approximately $5 million when her parents pass);
- Management of debts and liabilities surrounding Lynn’s law firm; and
- Personal asset protection for property.
Review of Existing Estate Plan
Art and Lynn do not currently have an estate plan in place, which is why they are seeking legal advice from an estate planning specialist. They understand the importance of protecting and managing their complex financial assets, while also protecting their children should something happen to them in the future.
As an estate planning attorney, I would review the following key issues when helping Art and Lynn develop their estate plan.
General Estate Plan Strategy
Given their situation, it is highly recommended Art and Lynn create legally sound estate plans. As a married couple, it is smart to have individual plans as well as a shared plan to cover all contingencies. Sadly, approximately 50 percent of marriages end in divorce. Plus, Lynn’s inheritance and legal practice create issues for her side of the finances that need to be addressed carefully and, at least to some extent, separately from Art’s plan and their plan as a couple. It is also recommended that Art and Lynn review and update their estate plans every 2 to 5 years, or with any major life event such as a birth, death, marriage, divorce, new job, move, etc. As an only child, Lynn’s parents might consider their own planning, including forgiving Art’s and Lynn’s debt to them too.
Guardianship of the Children; Disability Planning
First and foremost, Art and Lynn wish to make certain that their children are protected anything happen to one or both of them. Guardians for the children should be named in their Last Will and Testament. Moreover, in case of disability, Powers of Attorney, Health Care Proxy, and HIPAA Releases should be made.
Asset Protection
Most of Art’s and Lynn’s assets are titled under their individual names. They have individual 401(k) and Roth IRA accounts, along with various stocks, bonds and savings. Lynn has her partnership in the law firm. A significant issue we would want to review is how their residence is held. Is it tenancy-by-the-entirety (joint tenancy)? Is it held under only one name? The structure of their title would greatly impact the estate plan and how this real estate asset would be protected and managed within an estate plan if one of them dies or becomes mentally or physically incapacitated.
Probate
Art and Lynn live in California, which has unique probate laws. Your state’s laws should be reviewed carefully, and your planning be consistent with it.
Estate Tax Concerns
Lynn expects to inherit a large amount of money when her parents pass away. This can cause concern that there might be a future estate tax liability, absent advanced planning. And, as indicated above, there may be recommendations for her parents’ estate planning, as well.
Lynn’s Law Firm (Business Planning)
Because Lynn is a partner in a law firm, her estate planning should address key concerns surrounding debts, legal liabilities, business planning, and other issues that could impact her personal assets if something were to go wrong and the right protections are not in place.
Other Estate Planning Issues
There are a variety of other issues to cover in Art & Lynn’s case:
• Life insurance Policies
• Disability insurance
• Savings plans for retirement and children’s education
• General due diligence
Overall, Art and Lynn are still young and in a strong financial position overall. They both have excellent incomes, and they are able to live comfortable lives with their children. Their estate planning is all about planning for an uncertain future and doing what is necessary to keep their financial assets and children protected if something does change.
To read my full legal proposal for this particular case study, download it below.
If you are looking to develop or review/update your estate plan, contact me today for an introductory legal consultation.
