Portfolio CHECK-UP

Thomas R. Kosky, MBA

Physician's Money Digest, September30 2004, Volume 11, Issue 18

Name:Robert Schafer, MD

Residence:North Florida

Age: 66;spouse, 67

Family:Grown children

Years in practice:33

Type of practice:Anesthesiologist

Annual income:$170,000

Investment savings:University 403(b), Government 457 Deferred Comp, IRAs, and nonqualified money.

Dr. Schafer's main concern:

Financial concern:Dr. and Mrs. Schafer are considering retirement withinthe next year or so. If he and/or his spouse,Audrey, live another 30 years, will they have enough money saved for acomfortable retirement? With the recent market volatility, both Dr. and Mrs.Schafer have somewhat tempered their expectations relative to long-termrates of return and their overall investment strategy. The result is that if Dr.Schafer totals up his financial assets, he has just in excess of $3.7 million.Even if he desires to retire on 100% of his current income (ie, pretax), he willbe able to do so and live comfortably during retirement. In addition, Dr.Schafer only has to generate a 5% net pretax rate of return on his assets toaccomplish his goals. This is assuming an annual cost of living adjustment (ie,inflation rate) of 3%.

On the other hand, if Dr. Schafer totals all his assets (ie, financial, tangible,and real estate assets) less his obligations, he has a potential estate tax issue.His estate is worth nearly $4.5 million. Admittedly, the exclusion amount, forestate tax purposes, gradually increases through 2009, is repealed in 2010, butreverts back to $1 million in 2011 .

As their estate is projected to increase gradually in future years and leveloff at about $6 million, the Schafer's estate has a potential estate tax liabilityof approximately $1.8 million.

The Finance Professor's Solution

Dr. Schafer should consider establishing an irrevocable life insurance trustfunded with a second-to-die life insurance policy that is not part of hisestate. The proceeds of which, upon the death of the second spouse, maybe used to pay the estimated estate taxes due, and the entire estate willflow directly to their heirs at the death of Dr. and Mrs. Schafer.

For more information, call Mr. Kosky at 800-953-5508or visit www.assetplanning.net.

Thomas R. Kosky and his partner, Harris L. Kerker, are principals of the Asset

Planning Group in Miami, Fla, specializing in investment, retirement, and estate

planning. Mr. Kosky teaches corporate finance in the Saturday Executive and

Health Care Executive MBA Programs at the University of Miami.