As the U.S. economy teeters on the edge of a recession, advisors who cater to the affluent might rightfully question whether their clients’ estate plans–and the fortitude these clients will need to keep their plans current–will be able to withstand the financial shock. The short answer: It depends on the individual’s net worth and on how narrowly focused the estate planning objectives are.
For most affluent individuals–those with $10 million or more in investable assets–the financial developments of recent months have had at most a marginal impact on estate plans and interest in planning generally. Irrespective of the forces buffeting the markets, experts tell National Underwriter, the high net worth will need to tend to their legacies for both tax and non-tax reasons.
If, as is widely expected, Congress enacts legislation freezing the lifetime exemption and top tax rate at or near the amount slated to take effect next year under the 2001 Economic Growth Tax Relief Reconciliation Act of 2001–$3.5 million and 45%, respectively–then individuals holding assets above the lifetime cap (or, in the case of spouses, above $7 million) can expect a tax hit.
And, sources emphasize, estate planning will remain de rigueur for all the popular non-tax benefits: the ability to pass on assets at the desired time, free of costly and time-consuming probate court proceedings; to protect one’s family while carefully calibrating the financial needs and interests of a spouse, children or other beneficiaries; and to establish a lasting legacy by contributing to charity.
“The high net worth typically are not subject to the vicissitudes of the market,” says Janice Forgays, a vice president of advanced markets at Sun Life Financial, Wellesley Hills, Mass. “They tend to be more recession-proof. They realize they have estate planning needs and are committed to staying the course.”
Rick Blaser, an advanced sales consultant for Hartford Financial, Hartford, agrees. “Regardless of the political, tax and economic environments, highly affluent clients can expect to pay an estate tax. So they’re very much active in planning mode.”
Less active are those on “the estate planning line:” individuals whose net worth hovers around the current lifetime exemption of $2 million. Uncertainty as to the final disposition of the estate tax, observers say, is prompting some clients to hold back on planning. But sources also point to depressed economic indicators as a factor contributing to reduced planning among individuals who are chiefly focused on tax-avoidance. Clients who stood to pay an estate tax in 2007 could now be below the lifetime exemption limit because of substantial declines in their investment and real estate holdings.
“People are less likely to do estate planning if they’ve been at or below the lifetime exemption limit, and are now significantly below the limit,” says Jim Tyrpak, a chartered financial consultant and president of the Society of Financial Service Professionals, Newtown Square, Pa. “Some folks, because of tax considerations, are saying ‘the estate tax doesn’t impact me, so I won’t deal with it.’ Others are lengthening the process for both tax and non-tax reasons.”
Tyrpak is not alone in this view. A Phoenix Wealth Survey released in May 2008 reports that about 22% of the high net worth market has delayed estate planning. For individuals worth $3 million or more, that figure rose to 42%. Another 42% of respondents say they have an estate plan, a percentage that’s remained generally flat in recent years.
The various economic factors that may be discouraging tax-oriented clients from doing estate planning can, paradoxically, be strong motivators among those who take a broader view about the benefits of planning. Tyrpak observes that clients who have experienced significant losses in real estate and equity markets are actually more likely to pursue planning to replace assets that have diminished in value.
Enter life insurance. Advisors say many of the high net worth are buying large policies to fund an irrevocable life insurance (or wealth replacement) trust to offset losses resulting from the current downturn, thereby assuring the financial futures of estate plan beneficiaries. Many are also turning to insurance to safeguard assets from creditors, protection that is assured under many state statutes.