Comprehensive estate planning may be an important and effective exercise for many prospects and clients, but the process can be as long and arduous as the term suggests.
A client often has particular assets, such as investments that were inherited or savings that were never used, informally “earmarked” to pass on to children or grandchildren at death. However, the client may not have solidified his wishes with a will or beneficiary designations.
Many clients tailor their planning efforts using only the assets they have accumulated. Addressing a client’s estate planning goals, one asset at a time, can open discussion on the issue and enable the client to focus on specific results and take action sooner.
Ask clients if they expect to use an asset or transfer it. If they choose to transfer it, ask them to consider a financial tool that efficiently and effectively transfers wealth.
Often, clients do not manage assets to maximize value for their heirs. During accumulation, current income tax or annual maintenance charges may inhibit asset growth. Upon transfer, probate costs and estate taxes can compromise value.
Using proceeds from the sale of assets to purchase life insurance may help increase value for heirs. The transaction may reduce current income taxes, eliminate maintenance charges and avoid probate. The purchase also can be structured to reduce estate taxes.
Alternatively, a client may purchase an immediate annuity contract and use the immediate annuity payment stream to purchase a life insurance policy. For estate tax planning, consider making a gift of the annuity payments to an irrevocable trust each year. The trustee may then use these gifts to purchase the life insurance policy and keep insurance proceeds out of the estate.
Income Stream Transfers
Qualified retirement plans and IRAs are designed to accumulate wealth. They also can be structured to create an income stream for the owner, the owner’s spouse and for another named beneficiary, such as a child or grandchild.
Some clients wish to limit current distributions (along with the current income tax) and maximize an income stream for the life of the named beneficiary. Too often, the income stream advantages are lost because transferred values are greatly reduced by federal estate tax, state death tax and income taxes the beneficiary owes on distributions.
Help your clients leverage a more efficient income stream by explaining the advantages of life insurance. Using lifetime distributions, your client can make gifts in trust to purchase life insurance.
The proceeds are received income tax-free and may be available to pay estate taxes due on remaining plan accumulations. That allows more dollars to pass to the beneficiary.
Some clients have an interest in giving a particular asset to charity. However, doing so during life or after death may deprive family members of the asset.
Life insurance can preserve an asset for a family while still providing a substantial donation to charity. Clients may welcome the option to make small, annual premium payments for a life insurance policy that will provide a benefit to charity upon death.
Survivorship life insurance may be a cost-effective way to provide a significant gift for charity and preserve an asset for family.
Business Interest Transfers
When the asset is a business interest, single asset estate planning is imperative. Clients who own a business interest usually have a strong opinion on what should happen should they die while owning it.
Often, one or more business partners, key employees or family members are chosen to continue the client’s work in the business. However, competing goals, such as income replacement for dependents, estate equalization between heirs, estate tax funding or key person replacement needs can cause disruptions.
Business owners will appreciate the focus that single asset estate planning brings to this all-important asset. Talking business owners through the goals of a transfer, the possible problems and the use of life insurance to manage risks will help them make important estate planning decisions. Owners can then take action to facilitate the efficient transfer of the business and take care of the needs of the family.
Focusing a client on estate planning for particular assets can create action in a process that may otherwise be too daunting. Try talking to clients about their goals, asset by asset, to accomplish immediate results and improved cash flow for their family.
Paul J. Farrell, J.D., CLU, is assistant vice president-advanced sales for Jefferson Pilot Financial in Concord, N.H. He can be reached via e-mail at [email protected].
Focusing a client on estate planning for particular assets can create action in a process that may otherwise be too daunting