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Case Studies and Position Papers from Pearson Financial Services

Every client family has different issues. These case studies and position papers are examples of issues that Pearson Financial Services has handled for its clients. They are brief write ups about how a family’s financial challenges have been solved. Each stoy focuses on the strategy chosen by Pearson Financial Services to best protect a family’s assets and its legacy.

We would be pleased to discuss, in depth, any of the concepts written about in these case studies. All the names have been changed and the numbers are hypothetical, but each story reflects a real client with real issues and successful solutions to their family’s financial challenges.

16 Strategies for Saving Estate Taxes #3
How to Escape Transfer Tax on Appreciation Using a Dynasty Trust
Scare tactics won’t get you to establish a trust, but simple math should.
Read this Article...

16 Strategies for Saving Estate Taxes #2 – Lifetime Gifts
Giving inheritances before you die can help avoid a significant tax bite.
Read this Article...

16 Strategies for Saving Estate Taxes #1 -- Credit Shelter Trusts
Read this article...

When an Income Annuity's Return Matters, Invest with Harvard's Endowment
Wharton Research Shows Income Annuities as Cost Efficient Sources of Lifetime Income
Read this article...

Not Feeling Particularly Charitably Inclined? Think Again.
A trust, a purchase to rescue a camp, a foundation to run it, saves millions
Read this article...

Aging Trends Merge that Support Growth of Family Reverse Mortgages
Read this article...

Coordinated Team Essential to Implement Financial Strategy
Read this article...

Reverse Mortgages Will Become HUGE!!
Read this article...

Income Planning for Retirement

Read this article...

Convert Your IRA to a Roth IRA Now, Before the Budget Deficit Makes This Option Go Away: Pay Conversion Taxes from Non-IRA Assets to Protect Tax-Deferred Investments for Future Generations.
Read this article...

It's Smart to Put Highly Appreciated Property in a Realty Trust.
Read this article...

16 Strategies for Saving Estate Taxes #3
How to Escape Transfer Tax on Appreciation Using a Dynasty Trust
Scare tactics won’t get you to establish a trust, but simple math should.

Shielding assets from legal liability and providing a way to appreciate those assets to a much greater amount (while still meeting the requirements of the generation-skipping tax exemption) benefits you and your family no matter how old or young you are. It should go without saying, that as capricious as life can be, its end is often even less predictable. Scare tactics won’t get you to establish your trust today, but what good is there in waiting? The key to any wealth transfer plan is to begin during your lifetime – the sooner the better. Remember, if you don’t use your exemption you will lose it.

Norma and John Monroe, a couple in their early sixties with children and grandchildren, transfer their assets into two trusts. The trusts hold their two homes valued at $1.2 million total, and about $1 million in other investments averaging about 7.2 percent a year in growth. That’s a total of $2.2 million.

By the time the Monroes are in their early eighties, those assets increase in value to $8.8 million. Good thing they took action when they did! If the Monroes had waited even ten years to establish their trusts, no doubt the value of their homes and investments would have exceeded the four-million dollar exemption ($2 million each generation skipping transfer tax exemption). But by putting their assets in trust sooner, the Monroe upped their exemption from four million dollars to cover the $8.8 million in appreciated assets – a two hundred percent increase!

Even if you don’t expect your assets to grow beyond the allowable exemption in your lifetime, you can still use the dynasty trust while you are alive to make your assets lawsuit-proof and estate tax free-forever. Once your assets are in the “value” of your dynasty trust, they are literally untouchable, except by you. Moreover, if you establish the trust now, it does not have to be funded until after your death. You can hold all your assets for as long as you like and transfer ownership to the trust only when you are ready. There is literally no downside to acting sooner than later.

16 Strategies for Saving Estate Taxes #2 – Lifetime Gifts
Giving inheritances before you die can help avoid a significant tax bite.

Joan and John Allen could and did give $12,000 each every year to their three children. But recently, the couple in their middle 60s, gave away $2 million in real estate to their children, using their lifetime exemption of $1 million each to remove the real estate from their joint estate without taxes.

In so doing, they are on a path to save significant taxes on their estate at the time of their death. If their property grows at 6% for the next 12 years, it could be worth $3 million. If it continues to appreciate for 24 years, it could be worth $8 million. If it had remained in their estate, the 50% estate tax could have been $3 million. However, all of this growth will no longer be within their estate, but owned by their children. The Allen’s recent actions were at the suggestion of their financial advisor. He made the point that passing on inheritances to children before you die are a specific strategy to reduce the amount of estate of death taxes you will pay at the time of death.

Tax planning is essential to preserve the greatest amount of wealth that you can.

16 Strategies for Saving Estate Taxes #1 -- Credit Shelter Trusts

Most couples looking at the end of their lives, make plans leaving everything to each other. If they do not get advice about the importance of credit shelter trusts (CST), they lose vital tax credits at both the Federal and state levels. Credit shelter trusts make certain that assets are titled correctly to protect them from the public scrutiny of probate keeping information about a family's major assets very private.

A simple credit shelter trust has become a significant estate tax saving strategy for couples who do not want to lose the ability to protect up to $4 million of their assets from the Federal estate tax. Each state has its own tax credits that vary widely. The Federal estate tax is due upon the death of person who has assets that exceed $2 million. Current Federal estate tax credits allow individuals to leave assets free of the estate tax, but only up to certain limits of $2 million per person. If the Federal law is not changed, credit will be $1 million in 2011.

If a husband and wife own all of their assets jointly for instance, then on the death of the surviving spouse, that spouse has only their individual $2 million Federal estate tax free amount. So if the estate exceeds $2 million the children will pay a Federal estate tax.

If, however, each spouse had created a revocable trust during their lifetimes and funded the trusts with assets (no joint assets any longer), then at the death of the first spouse to die, his or her trust will shelter up to $2 million estate tax free amount for Federal purposes. In other words, the trust will allow the surviving spouse to be the beneficiary of the deceased spouse's trust, but the survivor will not "own" the trust and therefore there is no estate tax on these assets when the surviving spouse passes away. At that time the surviving spouse's trust will utilize his or her own tax free amounts - the $2 million for Federal (or whatever that amount may be in the year of the surviving spouse's death).

By using trusts to shelter the tax free amounts that are allowed under both Federal and state estate tax law, a couple can shelter $4 million from estate taxation and more under state law. In many cases doubling the tax free amount that can pass to the children eliminates all estate tax consequences.

When an Income Annuity's Return Matters, Invest with Harvard's Endowment
Wharton Research Shows Income Annuities as Cost Efficient Sources of Lifetime Income

A recent Wharton Financial Institution Center study showed that income annuities can assure retirees of an income stream for life at a cost of at least 40% less than a portfolio of traditional stocks, bonds and cash. The study referred to insurance company income annuities, but they are not the only income annuity game in town.

Consider the possibility of making a contribution to Harvard University's endowment, where a charitable remainder trust can be established that creates an income stream (income annuity) watched over by the investment managers who run Harvard's endowment. For the last ten years, they have produced an average annual return of 14%. Harvard's endowment will allow its contributors to recommend where, geographically, the assets that revert to Harvard at the time of death of the contributor. In other words, you can indicate that your assets should support scholarships for students from your region and ultimately have a dramatic impact on a young person's future.

The question becomes one of the value of your income stream. The insurance company uses your lump sum payment with which you buy your annuity in a portfolio that creates your return. Anything left at the time of your death reverts to the insurance company offering no further legacy. But here's the rub. The insurance company income annuity average internal rate of return (IRR) is 3% or less. If you contribute to Harvard, you can potentially increase your lifetime income stream by a significant margin.

Bottom line: don't get carried away by an anticipated onslaught of advertising and marketing from income annuity sales people that the Wharton study will unleash. It's still a good bet to contact your investment advisor. Consider giving to the Harvard Endowment, increase your lifetime income, and change a student's life.

Not Feeling Particularly Charitably Inclined? Think Again.
A trust, a purchase to rescue a camp, a foundation to run it, saves millions

Resistance to charitable giving is often fueled by lack of information about the possibilities that estate planning can create, rather than because the individual or family is inherently ungenerous.

Recently, an advisor met with a George who very clearly stated that he had no desire to be charitable. He held substantial assets, enough that he could give two adult children $4 million each. His current planning, or really lack of planning, created a situation where the IRS would get an additional $4 million in estate taxes.

With other assets, this man planned to buy a camp that both he and his sons had attended, now on the market. He wanted this camp to live on forever, and thought that if he bought it and created an endowment that it could last a long time. The camp covered hundreds of acres on a lake including significant waterfront. It is the kind of property that would be commercially developed immediately if it did not remain a camp.

The advisor pointed out that with a proper estate planning strategy, nearly 3Z(4 of the estimated estate tax and income tax savings could be used to create a trust to own the camp and a non-profit foundation to run the camp. The man had attended this camp as a child and his sons had both attended. Though the land is valued at $3 million, the negotiated sale price was $1.2 million. After purchase, the property could be transferred to a foundation, generating a $1.2 million income tax deduction that he can use during George's lifetime to reduce taxes on a large IRA account. As George determines that he wants to fund improvements to the camp, every dollar he puts into this foundation reduces his future estate taxes. It is George's intention to leave further gifts to support the camp moving forward. Currently, his estate strategy is to leave $4 million for each son, a total of $3 million to buy and refurbish the camp inside the foundation, and only pay the IRS $1 million.

The advisor contacted the Nature Conservancy. This organization is skilled in creating trusts and eager to help protect camps and campgrounds from development because they represent large tracts of woodland and lake frontage that the Conservancy wants to keep green and not developed. They provide guidance and legal assistance to that end.

In addition, the advisor is recommending that George create a ROTH IRA, even though it will create a large initial tax payment. This step will reduce overall estate tax. George and his adult sons are excited with his strategy for buying the camp and the trust and foundation that will oversee its management. All three men will serve on the Board of Directors of the Trust.

Particularly, George is grateful for guidance that has allowed him to pursue his dream of rescuing the camp using dollars that otherwise would have been estate and income tax payments. It turns out that George is, indeed, very charitably inclined.

Aging Trends Merge that Support Growth of Family Reverse Mortgages

Family reverse mortgages are, predictably, going to become a major part of estate planning in the near future.


Think about this scenario that is repeated over and over again in every state and community. Mom and Dad own an attractive, second home or primary residence in a resort community.  There is more than one child in the picture and Mom and Dad are living on a relatively modest retirement income in comparison to the value of their home. Further complications are the very real expectations of the cost of health care and long term care in the retirement years (for a couple from $400,000 to $800,000 during retirement) and the low number of retirees who own  long term care insurance policies.  Add to this scenario the recent estimate that shortly, at least 1/3rd of those living longer than 85 years, will have Alzheimer’s disease requiring expensive in-home care or expensive institutional care.


In an environment where one or both of the spouses are likely to live a life span of nearly 90 years, the cost of uninsured healthcare and long term care will have to come from somewhere.  Fortunately, some of those retirees have children who are doing well. have created investment portfolios, and are interested in keeping the family resort home in their possession.   


Family reverse mortgages, increasingly, will be used to solve this family dilemma.  Just as anyone can create a legal loan, any family can create a legal family reverse mortgage.  It is a legal document, structured exactly as a bank would structure it, including interest paid to the mortgage holder, that allows the child wishing to invest in the parents’ home to support the living expenses of parents through the reverse mortgage.  Each month, the child (or children) wishing to invest in ownership of the parental home can make payments to their parents who can then use this money to cover their health care costs and for needed maintenance on the home.


The family reverse mortgage discussion will bring out the inability of some of the family’s children to buy out the others.  Given the high appreciation experienced in resort communities over the last six to eight years, it is almost always the case that one child can afford to buy out the others, and as difficult as this is for the less wealthy children, it becomes an issue of who can support Mom and Dad during their retirement and making arrangements so that child receivs at least the value of the reverse mortgage and related interest as a reward.


When no child can afford to buy out siblings or buy the house direct to support Mom and Dad, a bank reverse mortgage may be considered.  The market is demanding newer reverse mortgage products.  Put off getting a reverse mortgage as long as possible and you may be surprised by the changes in this industry.

Coordinated Team Essential to Implement Financial Strategy

Providing your family with a coordinated financial team under one roof has become a high priority for wealthy families who want their wealth management professionals in one place, moving toward one strategy.  Too often, wealthy families have advisors working in separate environments.  The accountant is primarily concerned about taxes, the estate planning attorney with the law, and the investment manager with the portfolio.  It simply doesn't work.  An office that can provide you family with successful investment managers, skilled estate planning attorneys, and tax accountants, all with an in depth understanding of your overall goals and legacy wishes, will offer the following services:

Tax avoidance or Abatement

*  Reduce or eliminate transfer (estate) taxes and capital gains taxes.

Money Management

*  Provide superior investment administration with continuous supervision and management

*  Increase the family's long-term wealth

*  Screen financial opportunities presented to family members

*  Consolidate and simplify an efficient, fully integrated wealth-management process

*  Search the world for the right services and products at the lowest possible cost

*  Unburden inheritors from financial responsibilities external to their particular family and career

Estate Planning and Legacy

*  Implement financial and estate plans

*  Protect assets from liability, litigation, and probate

*  Establish inter-generational financial continuity using cutting-edge technology and innovation

*  Help family achieve a sense of significance and satisfaction derived from how assets are used.


*  Provide one consolidated statement for all family brokerage accounts and hold brokers accountable for performance and commissions

*  Take responsibility for entire team working toward an agreed upon goal

*  Care and long term planning for family members who have special needs

Cost Efficient

*  Minimize all expenses and fees


*  Provide financial education to the inheritors of wealth

*  Develop financial assets and earning capabilities of younger family members


*  Maintain absolute confidentiality


Reverse Mortgages Will Become HUGE!!

The biggest banks in the country are entering this business and already have announced fixed rates as low as 6.2% for the lifetime of borrowers.  This will allow homeowners to use the equity in their real estate to pay for uninsured health care costs including long-term care.


Take the Georges.  They are both 79 years old, but Albert has just had to put Jenna into a nursing home because her Alzheimer’s was more than he could continue to manage safely.  He feels certain that their joint assets are not enough to pay for her care and his ongoing expenses.  He came to his advisor inquiring about options for managing the cost of his wife’s care and his living expenses going forward.


Fortunately, for Albert, his home is worth $1.5 million.  It is the worst time to sell for Albert because his resort community is seeing a very long sales cycle for homes in his bracket.  The market will probably come back in three to five years, but Albert’s pressing need is today.

     Albert’s advisor presented four strategies for him to consider:

  • Use all of their liquid assets until they are gone.  The disadvantage is that Albert has no idea how long his wife will live and whether he will be able to pay for her private pay nursing home.  Albert is also emphatic about not wanting to bet his financial security on his wife’s longevity.
  • Annuitize the assets left to provide a regular ongoing income until death.  The disadvantage is that he loses the principal forever.
  • Pay his wife’s bill for five years and transfer the rest of their assets to a trust.  After 5 years his wife will qualify for Medicaid. The disadvantage is that he will lose over $500,000 of their liquid assets which produces the income he needs for his own expenses.
  • Take out a new jumbo reverse mortgage to access equity in his home.  The reverse mortgage can pay all of the expenses for the next 5 years.  At that time, if his wife still needs long-term care, all the liquid assets are protected without the Medicaid spend down requirement.  For Albert, this option had the fewest disadvantages.

Lifetime Income Planning Protects Wealth from Risk

Lifetime income planning (LIP) is important to all families who have lived within their means and are now facing important decisions about how to make their savings and investments meet their future financial needs and lifestyle desires.  Lifetime income planning employs strategies that protect your wealth from risks associated with longevity, inflation, stock market performance, excess withdrawal, and health care costs


LIP strategies are designed to take into account a number of areas that wealthy families rarely have organized by one team of advisors who communicate closely.   In many cases, wealthy families have a group of advisors who rarely if ever communicate.  This kind of advice is called “silo” advice and is not in the best interests of a comprehensive lifetime income plan.


There are three key strategies that your comprehensive financial team must address to create a lifetime income plan that will work with your own circumstances:

•  Simplified and cost-effective asset management

•  Legacy estate planning and wealth transfer

•  Long term planning for real estate and income taxes


Find a financial advisor who can keep all of these functions under one roof and your lifetime income planning strategies will become a reality and make more sense to you and to your family. 

Convert Your IRA to a Roth IRA Now, Before the Budget Deficit Makes This Option Go Away: Pay Conversion Taxes from Non-IRA Assets to Protect Tax-Deferred Investments for Future Generations.

The tax bill signed by President George W Bush on May 17, 2006 still represents the greatest tax break ever penned for those with substantial income and IRA accounts. However the war budget recently released means that the government will again revisit this “gift” and it may go away. This once-in-a-lifetime opportunity has occurred that now makes converting your big IRA plan to a Roth IRA a strategy that must be considered. Experts believe that the value of conversions of IRAs to Roths are in the category of “best kept secrets” for high net worth investors.
Do it now, they say, before the Government changes its mind and cuts off this “gift”. The benefits are multiple:

1. Converting to a Roth means paying tax now in what could be the lowest rate of your lifetime.
2. The Roth conversion allows investors to extend, or stretch a Roth IRA’s tax-free benefits for many years by naming their children and grandchildren as beneficiaries.
3. The Roth conversion reduces future estate or “death” taxes.
4. The largest possible amount of assets could be left tax-free for your heirs when you use assets outside the IRA to pay the taxes due at conversion.

It is unlikely that the Roth conversion opportunity will remain intact. The current budget deficit, war in Iraq, and extensive costs of homeland security will soon require this “loophole” be closed, because the government loses taxes with every conversion.
In these examples George Gardner, age 79, has a Roth IRA valued at $4 million with a growth rate of 7%:
Roth distributions are not required until death. George wants to leave the Roth to twin sons, Harry and Henry, both age 40, so he splits the account into separate Roth IRAs for them. Minimum required distributions over the lives of Harry and Henry after George dies, based on the IRS Uniform Lifetime Table equal $24,320,172.00. George could also leave part of his Roth IRA to his newborn grandchild. If Mr. Gardner split the Roth into thirds, distributions over the grandchild’s life expectancy would pay an astounding $117,612,555.00, income tax free. George could leave quite a legacy.


It's Smart to Put Highly Appreciated Property in a Realty Trust.

Titling highly appreciated real estate to a realty trust is a smart and vital action if you want control in how your assets pass to the next generation. There are numerous advantages to be considered:

  1. Real estate not in a trust will go through probate. If your family's estate is handled by a bank, banks' fees start at 5% of the value of the probate real estate -- a very large and unnecessary fee. The bank's charge for probate of non-real estate assets is 2.5%. Real estate in a trust does not require probate of any kind. It immediately passes to the beneficiaries named in the trust.
  2. The average delay of probate is 18 months; with a trust, there is no probate and no delay.
  3. During the 18 months of probate, beneficiaries do not have control of the real estate. With a trust, beneficiaries have immediate control.
  4. A trust is private. No one can go to court and read your public probate records to find out how your assets were divided and who are the new owners of your property.
  5. A trust can provide protection for generations from professional liability and divorce on the part of your children or grandchildren.

Recently, after the death of her husband, Jane, 78, sole beneficiary of her husband's estate, sought advice on disposition of the couple's assets. She was worried about the impending divorce of her daughter, Vanessa, an only child. Fortunately, Jane's advisor helped her understand that if the assets she intended to direct to her daughter were not protected by a Trust and Jane died, then a full half of all the assets she intended for her daughter could be at risk in a division of marital property during a divorce. Jane proceeded to immediately establish a trust and is now assured that her wishes and those of her deceased husband to give their daughter her inheritance will be met. Inside the trust, Vanessa's inheritance is unassailable in divorce proceedings.

Contact us to begin charting your best course to a financially secure tomorrow