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Saving The Heirs Of The Boomers

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NU Online News Service, April 2, 5:58 p.m. – Most financial planners think baby boomers will have problems passing their assets on to heirs, because a high percentage of their money is accumulating in retirement accounts set up without provisions for estate taxes.

Cogent Solutions, Princeton, Mass., a developer of wealth-conservation software for financial planners, presents that conclusion in a report on a recent survey of 400 planners about “income with respect to decedent” troubles.

IRD items are the items in a client’s estate that are subject to significant taxes at the time of the owner’s death.

Cogent found that 94% of the planners believe IRD losses could become a major headache for their wealthy clients and the heirs of those clients.

More than three-quarters of the clients’ savings are held in individual retirement accounts and other qualified accounts that are vulnerable to estate taxes. Meanwhile, 71% of the planners say their clients are afraid to do anything about estate planning because of uncertainty over the future of the federal estate tax laws.

No matter how much uncertainty there might be in Washington, a planner has to make sure clients’ heirs will have enough ready cash to pay the estate taxes, according to Dwight Davenport, Cogent’s chief executive. Otherwise, Davenport warns, IRD losses will deplete the clients’ estates and damage the planner’s reputation.

“If a person dies leaving an estate with such a huge estate tax that only the decedent’s qualified plan can pay it, you leave [the heirs] with huge IRD losses,” Davenport says. “Where are they going to get the money? Don’t leave your clients in position of having to liquidate the decedent’s qualified plan to pay the taxes.”

Helping the wealthy client conserve the cash can turn the heirs into future clients, Davenport adds.

“Let’s say an heir has to liquidate $150,000 out of a decedent’s IRA to pay estate taxes,” he says. “Actually, he has to pay $176,000, because he needs to pay the tax on that $150,000 as well. If he were a 50-year-old male who could stretch that over a remaining 33-year life expectancy, that $176,000 ultimately could be worth $1.2 million to him.”

Providing enough liquidity to help the heir pay the taxes without losing the $1.2 million is critical, Davenport says.

Davenport recommends that planners show the boomers how to use life insurance and other financial products to pay estate taxes today, while the boomers are still in their 40s and 50s.

“There’s a real opportunity in wealth transfer, and those that are out in front on the issue are going to lead the industry in the future,” Davenport says. “In light of the current uncertain economic environment, it’s a great time to reinvent yourself for clients.”