FINC 355 Retirement and Estate Planning Case Study #2 1 Case Study Requirements The FINC 355 Retirement and Estate Planning course has two estate planning cases. The following is Case #2A : Post -Mortem Estate Planning . The c ase study must have a title page and a reference page. (There should be a minimum of three to four references for each case study.) Total page count of each case study should be 5 to 8 pages (1,500 to 2,400 words) . The case studies will be evaluated on the completeness of the recommended solution(s) and the quality of the writte n assignment using the Course Written Paper Rubric provided in the course syllabus. Post -Mortem Estate Planning It is not unusual for someone to to be upset about how assets are distributed. Many of these situations create disputes. The wise financial ad viser and estate planner watches for the following situations. 1. Those in which family members with the same status will not be treated the same, as when one child receives a larger share than another child; 2. Those where a family member who might reasonably expect to benefit will receive nothing, as when a child is disinherited completely; 3. Those where a beneficiary may not like the way in which his benefits will be received, as when assets will pass to a tightly -controlled trust rather than outright to the b eneficiary; 4. Those which involve a blended family, where there are stepparents and stepchildren; and 5. Those in which one or more family members are generally inclined to complain and create problems. Financial advisers careful about aiding clients in pass ing assets directly to beneficiaries that have (1) drug or alcohol abuse, (2) spendthrift habits, (3) disabling conditions, which might create a need for needs -tested government benefits, (4) immaturity , or other personality factors that weaken the beneficiary’s ability to properly handle finances. 2 Conversely, beneficiaries who have lim its on their abilities to be self -supporting may have a real need to receive a larger share of inherited assets than a beneficiary who is well -to-do and s uccessful . The c lient may wish to provide more to the relatives w ith greater needs. Finally, your client may simply not wish to provide assets to individuals who ha ve mistreated the client or from whom the client has long been estranged. If the client rea lly prefers a plan, which creates a heightened risk of post -death disputes to one, which is less likely to result in such disputes, then the financial adviser should ensure that client’s plan reflect s the client’s true desires and intent. However, the fina ncial adviser should inform the client about the options available to help avoid or reduce the risk of post -death disputes . Often clients decide not to take any significant step s to avoid a post -death dispute and others will want to button up their plans a s tightly as possible to avoid disputes . It is the job of the financial adviser to help the client decide wh ich approach is best and meets his (or her ) personal needs and desires. Case Study 2 Financial Planning for Kar en to Avoid Post -Mortem Disputes Karen own s a home she purchased many decades ago just a few houses away from her childhood home. She also owns her childhood home, having purchased it from her parents via a family annuity prior to her father’s death. Karen ’s daughter, J udi and Judi ’s two children live in “Momma and Daddy’s house” ( Karen ’s parents’ home), paying Karen close to fair market rent. Karen live s in her own home . Her son, Da vid , was recently living there with her, but has moved o ut to live with friends. Karen would like Judi to inherit Momma and Daddy’s house, and she would like Da vid to inherit her house. Da vid and Jud i used to be are close , but they aren ’t sure about the idea of living near each other. Kar en ’s home has a mortgage of $ 60,000 . Karen intends to stay in her home for some time, but when she does decide to move to a retirement facility, Da vid is prepared to move in and take over the home. Karen has asked you, her financial adviser, to help her decide the best method for her children to inherit these two homes. D ue to some other family land that may generate significant income (from gas royalty rights), Karen is concerned about her estate tax 3 situation. You have analyzed the potential income tax cost of losing the step -up basis on either or both houses in t he estate. 1. How can you determine that Karen is competent to sign the estate planning documents? 2. Should the homes be put in a trust? Should the homes be put into two separate trusts? 3. If you were to recommend a trust(s) for the homes, what type of trust would you recommend? Should they be written for a certain term? 4. Should Karen consider using a fully funded revocable living trust instead of a will as her primary estate -planning document? Please provide your rationale. 5. Should Karen use an “Terrorem Clause” in her will or trust(s) ? 6. Who should pay the real estate taxes a nd make maintenance improvements on each property? 7. Karen want s to know how she can lower he r income liabilities. A. What are your recommendations for the rental money Karen receives from Judi? B. What are your recommendations for the royalties she receive s from her other land 8. Can Karen make gifts to her children to lower her estate taxes? Please provide details about your recommendations and show your calculations. 9. What possible post -mortem disputes do you envision?