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?

One of the consequences of the COVID-19 pandemic has been the large amount of federal debt created from the relief payments made to individuals and businesses. The books will need to be balanced, and changing the rules on estate taxes might be part of the solution. Estate tax changes will have wealthy clients concerned.

In the content below, we discuss who should be concerned and explore a variety of strategies to facilitate and protect intergenerational wealth transfer planning.

Should All Wealthy Clients Be Concerned?

First, we must consider who estate tax changes apply to. Spouse-to-spouse transfers usually don’t have consequences on the federal level, and this is true for most states as well.

Problems develop when the surviving spouse passes away and their estate is divided among beneficiaries. For 2020, the federal gift and estate tax exemption was $11.58 million. Amounts over this are taxed at 40 percent. States also want their share, but their thresholds are often much lower.

Clients above and below the $11.58 million threshold might be concerned. Clients with a net worth above $11.58 million are likely worried, especially if hard assets like farmland or urban real estate are involved. Clients with a net worth under $11 million may fear the threshold will be lowered dramatically.

11 Steps Clients Can Take to Facilitate Intergenerational Wealth Transfer Planning

Estate planning is complex. Developing a solution is often a combined effort that involves the client and their accountant, estate attorney, financial planner, financial advisor, and insurance agent. You may be playing more than one of these roles. You can supply this benefit as a paid advisory service, not casual advice given for free.

Simple Steps Clients Can Take

1. Gift Assets Now

The estate tax exemption also counts for gifts made during the client’s lifetime. Giving shares of stock as a gift now can be a good strategy. That way, the shares are out of your client’s estate.

2. Use the Annual Gift Tax Exclusion

The annual gift tax exclusion 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. This strategy is ideal for wealthy individuals with many children and grandchildren. For example, gifts are a great way to fund future college educations.

3. Spend Retirement Assets First

Many clients have retirement assets. At first glance, it may seem logical to spend these as a last resort. However, we recommend drawing down these assets first. If your client dies with substantial retirement assets and have no named beneficiaries, the funds are subject to tax as ordinary income when they leave the client’s IRA to become part of the estate. The estate is then subject to taxes if it exceeds thresholds, resulting in funds taxed twice.

4. Give Gifts to Charity

If your client lists bequests for specific charities in their will (estate plan), those gifts reduce the overall value of their estate. This might be useful in bringing the total estate valuation below a specific threshold.

Steps Involving Other Professionals

5. Set Up a Life Insurance Trust

Setting up a life insurance trust removes the policy from your client’s estate. The policy needs to be out of your client’s 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 client’s estate, reducing the taxable amount.

6. Obtain Second-to-Die Insurance

Second-to-Die insurance can be a good vehicle for the life insurance trust. Two people, often spouses, are named on the insurance policy, and it only pays off after the death of the second named individual.

7. Establish a Trust

Your client gifts assets to a trust. The value is counted at that moment towards your client’s estate and gift tax exclusion. Future appreciation after transfer isn’t your client’s problem, because the assets are out of their name.

We must note that the key word with a trust is "irrevocable." Your client can’t change their mind and decide to spend the money. This is where lawyers are involved.

8. Look Into Key Man Insurance

The primary purpose of Key Man insurance is to create liquidity to allow the deceased partner’s heirs to be bought out. The Key Man is 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. If estate taxes become too heavy of a burden, your client may choose to establish residence in Wyoming, Florida, or Nevada.

10. Set Up a Family Limited Partnership for Your Business

To set up this partnership, your client takes on family members as limited partners in their business. As the general partner, your client still runs the business, but their ownership stake decreases because the limited partners have ownership stakes too. Additionally, your client could gift money ($15,000/$30,000 as indicated above) to help fund family member purchases. Utilizing this estate tax strategy, the business would stay in the family, but your client would own a smaller proportion.

11. Open a Qualified Personal Residence Trust (QPRT)

If an individual can put life insurance, stocks, and other financial assets into a trust, why not real property? They can! The trust has a term, and your client gifts their home to it, removing the home from their name and  estate. Your client lives in the house rent free. When the term ends, the trust’s named beneficiaries receive it. However, there is one drawback to this strategy. If your client dies before the trust ends, the house returns to their estate.

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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.