Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” can be found on Amazon.

The COVID-19 pandemic has resulted in a massive national deficit, and the federal government could try to rectify some of this by altering estate tax laws. Your high net worth clients might be worried by this. What are some legal ways they can protect their assets for their heirs?

“Where will the money come from? Hopefully not me.” One of the consequences of the pandemic has been the large amount of debt the federal government has created because of the relief payments made to individuals and businesses. The books will need to be balanced. Changing the rules on estate taxes might be part of the solution. This will have wealthy clients concerned. How can they protect their assets for intergenerational wealth transfer?

First, some background: Spouse-to-spouse transfers usually don’t have consequences on the federal level. This is true for most states too. Problems develop when the surviving spouse passes away and their estate is divided among beneficiaries. For 2020, the federal gift and estate tax exemption is $11.58 million. Amounts over this are taxed at 40 percent. States also want their share, but their thresholds are often much lower. Your client with a net worth above $11.58 million is concerned, especially if hard assets like farmland or urban real estate are involved. Clients with a net worth under $11 million worry the threshold will be lowered dramatically.

Eleven Steps Clients Can Take to Facilitate Intergenerational Wealth Transfer

Estate planning is complex. Developing a solution is often a combined effort involving the client and their accountant, estate attorney, financial planner, financial advisor, and insurance agent. You may be playing more than one of these roles. This should be a benefit you can supply as an advisory service, not casual advice you are expected to dispense for free.

Simple Steps Clients Can Take

1. Gift Assets Now: The estate tax exemption also counts for gifts made during your lifetime. Giving shares of stock as a gift to your heirs now can be a good strategy. That way, the shares are out of your estate.

2. Use the Annual Gift Tax Exclusion: The above example is for large sums. The IRS allows individuals to make multiple gifts, up to $15,000 for each recipient, without triggering the gift tax. This means a couple can jointly give another person $30,000 in total. There is no limit to the number of individuals who can receive these gifts from you. This is ideal for wealthy individuals who have many children and grandchildren. It’s a great way to fund future college educations.

3. Spend Retirement Assets First: Many clients have retirement assets. It seems logical to spend these only as a last resort. However, it's better to draw down those assets first. If you die with substantial retirement assets and have no named beneficiaries, the funds are subject to tax as ordinary income when they leave your IRA to become part of your estate. Your estate is then subject to taxes if it exceeds thresholds, so these funds are taxed twice.

4. Give Gifts to Charity: If you list bequests for specific charities in your will (estate plan), those gifts reduce the overall value of your estate. This might be useful in bringing the total estate valuation below a specific threshold. Top of Form

Steps Involving Other Professionals

5. Set Up a Life Insurance Trust: The policy is out of your estate. It needs to be out of your name and in the trust for at least three years. Premiums are paid by the trust, not the individual. This keeps the proceeds from the policy out of your estate, reducing the taxable amount.

6. Obtain Second to Die Insurance: This can be a good vehicle for the life insurance trust. Two people, often spouses, are named on the insurance policy. It only pays off after the death of the second named individual.

7. Establish a Trust: You gift assets to a trust. The value is counted at that moment towards your estate and gift tax exclusion. Future appreciation after transfer isn’t your problem because the assets are out of your name. The key word with trusts is "irrevocable." You can’t change your mind and decide to spend the money. This is where you and your client get the lawyers.

8. Look into Key Man Insurance: The primary purpose is to create liquidity to allow the deceased partner’s heirs to be bought out. It’s a life insurance policy owned by the company. Upon the death of a partner, it pays out. The heirs receive money instead of an illiquid asset.

Complex Strategies

9. Relocate to a State with Low or No Estate Taxes: Your client might have earned their wealth in New York, New Jersey, or Connecticut. These are states where the estate tax bill can be substantial. People often establish residence in Wyoming, Florida or Nevada for this reason.

10. Set Up a Family Limited Partnership for Your Business: You take on family members as limited partners in your business under a new structure. As the general partner, you still run the business, but your ownership stake decreases because the limited partners have ownership stakes too. You could gift money ($15,000/$30,000, as indicated above) to help fund family member purchases. The business stays in the family, but you own a smaller proportion for estate tax purposes.

11. Open a Qualified Personal Residence Trust (QPRT): If you can put life insurance, stocks and other financial assets into a trust, why not real property? You can. The trust has a term, and you gift your home to it. That way, it’s out of your name and your estate. You live in the house rent free. When the term ends, the trust’s named beneficiaries get it. But, there is a drawback: If you die before the trust ends, the house goes back into your estate.

These are legal ways wealthy families have been able to keep wealth intact for generations.

Click here to read more articles written by Bryce Sanders.

Disclosures:

This document is provided for informational purposes only by Dunham & Associates Investment Counsel, Inc. solely in its capacity as a Registered Investment Adviser and should not be construed as legal and/or tax advice. Dunham & Associates Investment Counsel, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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