A widely cited 2022 Spectrem Group study revealed that 93% of clients sought estate planning advice from their financial advisors—yet less than one in four (22%) felt they were receiving it. Three-and-a-half years later, I don’t think we’ve moved the needle much. eMoney research shows that less than two in five advisors (38%) are comfortable talking about estate and legacy planning.
There are many reasons for this. Many advisors lack knowledge about estate planning and don’t know where to find it. So, I can understand not wanting to look foolish or uninformed in front of their clients. But too many advisors have told me they think it’s someone else’s job to handle estate planning. Or sometimes, they think their client’s net worth isn’t high enough to warrant comprehensive estate planning. Think again.
It may be an estate attorney’s job to draft the documents, but it should be a true wealth advisor’s job to implement the plan and regularly review it with clients to see if changes need to be made. In terms of not having sufficient net worth, I don’t buy that either. If a client has enough assets to afford your fees, they have enough assets to require estate planning and other protections. Finally, there’s this bottom-line mindset: “I get paid (and measured) for managing money, so I don’t care about the rest if I don’t get paid for it.” That’s rather shortsighted and not the way to build long-term relationships.
Why You Need to Crunch the Numbers
Most advisors talk about the probability of a client’s plan being successful. But have they factored in estate planning? Many (younger) clients may not have a taxable estate today. But if their assets keep growing at the current trajectory, they could have one down the road. And that’s regardless of what tax policy throws at us. Or maybe you have clients afraid to make gifts to an irrevocable trust because they fear they won’t have enough money to live on. So how do you prove to them that they do have enough? If you don’t crunch the numbers, it’s all just guesswork.
You need to explain to clients: “Here’s where your estate is today. If inflation grows by the rate we’re projecting, assuming the government doesn’t make any massive overhaul of the taxes, then here’s what it’s going to look like with your projected asset growth and accumulation rates against your spend. Are you going to have more than the taxable amount?”
We have a 40-something client whose Nvidia stock alone has appreciated by $30 million in 2025. Imagine what her estate will be worth when she reaches retirement age. I’m sure many advisors have clients in a similar situation. As a planner, are you willing to run those numbers instead of worrying about how you gather assets to manage?
Next, will your clients have the cash they need to live on if they give assets to a trust for tax purposes? When doing retirement cash flow projections, what happens if you carve off the cash flow from a segment of their assets? Will they still have enough money to live the lifestyle they desire? If a client hasn’t funded their trust because they fear running out of money, it’s your responsibility, not the estate attorney’s responsibility, to educate them.
Then there’s the issue of preparing your client’s heirs to receive their potential windfall. Even if someone’s estate is only worth $8 million today, hence not taxable, does it make sense to leave $8 million outright to a 35-year-old child to get it out of their estate? Some 30-somethings are mature enough to handle that kind of sudden wealth; many are not. Make clients aware of alternative distribution strategies such as breaking down the transfer into a series of five-year installments or making the distributions contingent on reaching certain life milestones such as consistent employment, marriage, family formation and first house purchase. This way, you’re not only protecting your client’s children, but their grandchildren, great-grandchildren and great-great-grandchildren from creditors, predators and future taxes.
Just because a client’s estate isn’t (federally) taxable today doesn’t mean you shouldn’t plan with them. Fourteen states now have state estate taxes, and the thresholds are generally lower than the current $14 million federal estate tax threshold ($28 million for married couples). For instance, the state of Washington just lowered its exemption to $3 million, and the estate tax rate goes as high as 35% for estates exceeding $9 million. Affluent Washington state residents could be looking at up to 75% combined tax on their estates if they don’t do any planning. Minnesota’s estate tax exemption is only $2.5 million, and in Illinois, it’s only $4 million. Connecticut’s exemption limit is the same as the federal ($13.99 million), and Connecticut has imposed a 12% flat tax on top of the federal. That means some wealthy residents of the Nutmeg State are paying an effective rate of 52%.
Advisors ask me all the time about using off-the-shelf estate planning software to help them. I remind them that there is no one-size-fits-all solution. Even clients who aren’t ultra-high-net-worth individuals have lots of complexity in their lives. Everyone has different goals and desires. It’s very difficult to think through some of these issues without talking to somebody who’s a skilled professional—an empathetic human who can talk you through difficult situations, such as having one child who is less trustworthy and financially responsible than your other children.
Or suppose a client has significant holdings in large, qualified plan assets that they’re never going to need. Without the right planning, those assets could become a burden to their heirs. The plans aren’t portable from an estate planning perspective, and the kids are no longer allowed to stretch the distributions beyond a 10-year period. Further, the money is taxed as ordinary income, and it counts toward the estate for estate tax purposes. Also, once the money is in the heirs’ estates, they’re more likely to be forced into a higher income tax bracket and could be subject to estate taxes of their own.
There are elegant solutions to deal with qualified plans, but that requires conversations with a skilled (human) practitioner who can understand the nuances and family dynamics. Again, you need to crunch the numbers to show your client they don’t need the money from a qualified plan. That way, you can propose alternative solutions.
Real World Example
One of our clients is in a happy second marriage to a younger working spouse. Our client has accumulated $8 million in his various qualified plans, and he and his spouse live very comfortably. After crunching the numbers, it’s clear they will never need to tap into the qualified plan assets to support their lifestyle. We applied one of our solutions to leverage the value of the qualified plan funds, which allowed us to reduce their income tax burden significantly and to move a large portion of the assets out of the estate in a very tax-efficient manner. We couldn’t have implemented this strategy without showing the logic to our client with detailed numerical illustrations.
My final argument for the human-based, analytical approach is that it’s not a bad idea to develop relationships with a skilled estate attorney or two. They can be a great source of referrals. The ball is in your court.
#Estate #Planning #Isnt #Lawyers