BUSI 489 Week 6 Targeted Financial Plan 6 Example

Targeted Financial Plan 6: Estate Planning for the Whitaker Household

Goals

The Whitakers' estate planning goals are simple and serious: if both parents died, their children should be raised by Grace's sister and her husband, the children's financial needs should be met until adulthood and through college, and the money should not pass to the children outright at 18. If one spouse became incapacitated, the other should be able to manage finances and medical decisions without court involvement. Their estate, roughly $368,000 in net worth plus life insurance, is far below the federal estate tax exemption, and Virginia has no estate tax, so taxes are not a concern.

How Each Asset Would Pass

Analysis

Three problems stand out. First, Daniel's 401(k) still names his mother, from a form completed before his marriage. Retirement accounts pass by beneficiary form regardless of what a will says, so if Daniel died today, $142,000 meant for his family would go to his mother. Federal law for workplace plans generally gives a spouse rights to a 401(k), but relying on that protection is not a plan, and the form should simply be corrected.

Second, the life insurance names the minor children as contingent beneficiaries. If both parents died, minors cannot take legal control of a large payout, so a judge would probably name someone to hold and manage the funds under the court's oversight, with costs and reporting, and each child would receive the remainder outright at 18. An 18-year-old inheriting several hundred thousand dollars with no structure is the outcome most parents fear and few plans prevent.

Third, without powers of attorney and health care directives, if Daniel or Grace were incapacitated by an accident, the other might need a court-appointed guardianship or conservatorship to manage accounts in the incapacitated spouse's name or make some medical decisions.

Recommendations

• Wills for both spouses, naming Grace's sister and her husband as guardians of the children and creating a testamentary trust for the children.
• Name the trust as contingent beneficiary of all life insurance and retirement accounts, with each spouse as primary beneficiary of the other's.
• Correct Daniel's 401(k) beneficiary form now, and add contingent beneficiaries to Grace's IRA.
• Have the trust distribute for health, education and support, with the remainder paid in stages, such as one-third at 25, one-third at 30 and the rest at 35.
• For each spouse, a durable financial power of attorney and a medical directive that appoints someone to make health decisions if the spouse cannot.
• Name a successor owner for each 529 plan.
• A letter of instruction listing accounts, passwords stored securely, wishes for the children's upbringing and funeral preferences.

Grable et al. (2012) and Lytton et al. (2012) stress that documents must be drafted by an attorney licensed in the clients' state, and the plan's role is to identify needs and coordinate them with the rest of the plan. The estimated cost of the documents, about $2,500, can be paid from the emergency fund build-up once the credit cards are cleared.

Treating the Children Fairly

The Whitakers asked whether the trust should treat their children equally if one later needs more help. McGarry (1999) found that parents' gifts during life tended to go more to children with lower incomes, while their intended bequests were usually divided equally. The trust can allow for both: equal shares at the end, with the trustee permitted to make unequal distributions for a child's special needs during the trust's term.

A Christian Perspective

Proverbs 13:22 commends the good person who leaves an inheritance to his grandchildren (English Standard Version Bible, 2001/2016). For a young family, the most valuable part of that inheritance is not money but care: naming who will raise the children and ensuring that what is left for them is managed wisely. Estate planning is an act of love that spares a grieving family from decisions made in court. It also gives the Whitakers a chance to consider whether part of their estate should support the church and causes they give to now, so that their generosity continues beyond their lives.

References

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Grable, J. E., Klock, D. D., & Lytton, R. H. (2012). The case approach to financial planning: Bridging the gap between theory and practice (2nd ed.). The National Underwriter Company.

Lytton, R. H., Grable, J. E., & Klock, D. D. (2012). The process of financial planning: Developing a financial plan (2nd ed.). The National Underwriter Company.

McGarry, K. (1999). Inter vivos transfers and intended bequests. Journal of Public Economics, 73(3), 321-351. https://doi.org/10.1016/S0047-2727(99)00017-1