Why You Must Take Charge of Your Estate Planning

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A cautionary tale that reminds us of the importance of establishing and maintaining a comprehensive estate plan.

Danny and Manny – two visionary brothers – opened a small electronics store just as personal computers were starting to really take off in the early 1980s. Convinced that personal computing was the next big thing, they rented a cramped retail space for their first store, The Computer Hut. Their company, Fatherboard, Inc. (an S Corp.), struggled in the early days, but the business grew steadily over time. They expanded to more stores, ultimately becoming a huge computer retailer. Danny’s sons, Jimmy and Jack, grew up in the family business, driving the company’s expansion into new markets. Danny and Manny frequently discussed their plans for the boys to one day own and manage Fatherboard, Inc.

Manny was the financial genius behind the operation, creating and maintaining an estate plan for the security of his family. He insisted on a buy/sell agreement from the very beginning – funded by life insurance – acquiring additional coverage as the value of Fatherboard, Inc. increased. Danny was just the opposite, always procrastinating when it came to financial planning. He acknowledged the importance of having a comprehensive estate plan, but Danny died with only a will, leaving everything to his wife, Fanny. Upon his passing, the buy/sell agreement kicked in, valuing Fatherboard, Inc. at $50 million. The company received $25 million in life insurance proceeds – funds which were subsequently used to purchase Danny’s half of Fatherboard, Inc. for $25 million in cash. As his wife, Fanny inherited this money free of estate taxes, but her heirs won’t be as fortunate. When she passes away, substantial estate taxes will be assessed against the wealth she leaves behind.

Manny wanted to treat his nephews fairly, so he sold half of his Fatherboard, Inc. stock to an Intentionally Defective Grantor Trust (IDGT) for $25 million – making Jimmy and Jack beneficiaries of the trust. The company’s cash flow will be used to pay Uncle Manny $25 million for the stock (plus interest), which will be free of both income and capital gains taxes. Once Manny receives these proceeds from the IDGT – and the stock has been distributed to his nephews – they will each own 25 percent of Fatherboard, Inc., just as their father had intended.

So, here’s the takeaway from this story: (1) You need a comprehensive estate plan to protect your family’s wealth from high estate taxes; and (2) Failing to keep your estate plan updated as circumstances change will ensure that the IRS gets a larger chunk of your wealth once you’re gone. In order to sustain the money you make today, you must create, implement and update your estate plan as circumstances change.

At Werbin Rubin, our personalized approach to estate planning ensures all of your preparations are handled safely and confidentially. As your trusted financial advisor, our focus is on empowering you to provide for your loved ones in a tax-efficient manner while protecting your assets, reducing risk, and complying with federal and state rules and regulations.

The information herein is general in nature and should not be considered insurance, legal or tax advice.  Please consult with an insurance, legal or tax professional for additional information on specific situations.    

Topics: integrated wealth management san jose, estate planning services san jose, certified financial planner san jose, fee based financial advisor san jose

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