Cutting your taxes by 60 percent sounds like a dream. Yet, thanks to financial planning, Sam and Clare Minot of Fairfax will see their taxes decrease from $42,523 this year to $17,434 in 1981. The plan, which cost about $1,400, also provided for their children's college education, their retirement and his and her estates.
The Minots (not their real name) and their financial problems were the subjects of a day-long seminar sponsored last week by the Washington chapter of the International Association of Financial Planners. Despite fictitious names, their case is real, although it was augmented by elements of other cases to offer the planners more of a challenge.
"It was a dream case," said one; "they had the money." Indeed, although their $136,400 annual combined income and $903,000 in assets are not typical of area residents, they are not uncommon. Neither are a second marriage, children from previous marriages and a dependent disabled relative.
As we come in on the story, Sam, a 51-year-old widower, has just married Clare Simmons, 36, after her divorce. His daughter Anna, 20, is in her final year of college. Peter and Susan Simmons are 9 and 5 respectively. Jane Minot, Sam's disabled sister, is totally dependent on her brother Sam for her $400 a month maintenance.
Sam is a partner in a trucking company and earns $85,000 annually. Clare's salary as a bank executive is $30,000. Currently $48,000 in federal taxes is being withheld annually from their combined salaries.
The Minots have separate checking and savings accounts. Their savings are in passbook accounts, certificates of deposit and money market funds. Clare's former residence is being rented out. In addition, Clare has inherited $80,000 in stock, currently in trust and yielding 4 percent a year. She also has a one-third interest -- $100,000 -- in a family garbage collection business that shows no growth.
Sam's house is currently worth $175,000; it was purchased for $50,000 in 1965 with a 5.5 percent mortgage. Sam would like to retire at age 60 when his partnership interest of $285,000 will provide him with 16.5 percent liquidation upon retirement with the balance due in installments at 8 percent.
The Minots' main problems, according to a panel of financial planners, are these: their largest holdings cannot be easily converted into cash, the majority of their assets are taxable and they aren't carrying enough debt, just 19 percent. Consequently, the panel made the following recommendations:
Shift Clare's savings and incentives plan, currently invested in bonds and money market certificates, to common stocks or real estate, equity participation to generate long-term capital gains.
Sell Clare's rental property, her garbage collection interest and her equity portfolio, generating an $8,000 long-term capital loss.
Refinance Sam's home for $140,000 at 14 percent for interest deduction and funds to invest. Incorporate his partnership.
Their assets should remain separate. For Clare, who has $109,500 to invest, the panel recommended putting $500 into a checking account, $2,000 into a money market fund for emergencies and applying for a $10,000 line of credit, also in case of an emergency. Investments should include $25,000 in growth mutual fund, $15,000 for limited real estate partnership and $5,000 in an oil and gas shelter. She should put $20,000 in escrow in a money market fund to invest in a tax shelter next year, and $2,000 in escrow to pay capital gains tax on the sale of the rental property. She should provide $40,000 to establish a trust fund for her children.
For Sam, who has $106,500 to invest, the panel recommended the same checking and emergency fund, plus a $20,000 line of credit. His Individual Retirement Account worth $6,000 should be shifted to an aggressive growth fund. He should put $8,000 in a real estate limited partnership and put another $40,000 in escrow to buy a shelter in 1981. A $25,000 trust should be established for his sister. The remainder should be invested in two growth funds.
Several planners in the audience suggested shelters to reduce the Minots' 1980 taxes by $30,000, but the panel concluded not enough good shelters remain available this year.
The panel's insurance representative suggested Sam's coverage should be increased from $60,000 group term to $75,000 to $100,000. His disability insurance should be doubled to provide $4,000 a month income. Clare should carry $100,000 in life insurance, up from $45,000, and $2,000 a month disability insurance.
The panel's lawyer advocated a post-nuptial agreement whereby Sam waives his right to Clare's estate. In case of divorce within a specified period, the separate property that each brought into the marriage would remain separate, regardless of the form it has assumed. In drawing up new wills, Sam should have a so-called A/B marital deduction and trust arrangement to minimize estate taxes. The A portion is left to Clare outright. The B portion should be left in trust for Anna, Peter and Susan.
Such a plan from a fee-only planner was estimated at $1,200 to $1,600. The price would vary if commissions were involved.