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.