When it comes to deciding how best to transfer one’s assets to the next generation, no age is too early start. So say observers who have watched the number of pre-retirement boomers engaged in estate planning steadily rise in recent years. And advisors would do well to take notice, they say.
“Over 50% of people asking for estate planning advice [are] 10 to 15 years from retirement,” says Edmond Walters, founder and CEO of eMoney Advisor, Conshohocken, Pa. “If you’re not positioning yourself as an advisor to fulfill their wealth transfer needs, then you’re going to be out of a job.”
Why are boomers engaged in estate planning earlier than in years past? Sources interviewed by National Underwriter credit in part the financial press and the proliferation of financial planning seminars with raising boomers’ awareness about the value of estate planning. A second reason, experts say, is that boomers want to avoid the mistakes of their parents.
Many have watched with anger or disappointment the consequences of inadequate–or completely absent–planning by their elders: Funds once earmarked for the next generation redirected to pay for a parent’s long term care, disputes over the disposition of wealth thrown into probate court, and adult children or grandchildren receiving inheritances much later in life because of a parent’s unexpectedly long life span.
“We’re at a point now where the average age upon receiving an inheritance is greater than the average age at retirement,” says Edward “Foss” Hooper, a chartered financial consultant and principal of Hooper Law Office, Appleton, Wis. “We have people retiring in their 50s who may be in their 60s or 70s when they inherit. And if some of these boomers make it to their 90s, their children will only receive an inheritance when they reach their 70s.”
Often, the windfall received from a parental bequest is what triggers the estate planning. Or boomers will wrap the legacy planning in a comprehensive financial plan encompassing retirement, charitable, disability and tax planning, among other objectives. Either way, sources say, the earlier planning has two advantages: (1) Boomers have more time to refine objectives regarding the ultimate disposition of assets; and (2) securing life insurance to fund estate planning goals will be less of an issue, both in terms of mortality costs and insurability.
Observers note, too, that clients generally have progressively greater difficulty dealing with estate planning issues as they age. One result, says Dan Gasink, an estate planning attorney at Ferris & Associates, Williamsburg, Va., is that they tend to rely on, and be unduly influenced by, certain children when making decisions. They tend also to make those decisions based more emotional rather than rational reasons.
To be sure, doing estate planning earlier in life is not without pitfalls. Daniel Ahmad, a financial planner and principal of QFN, Roseville, Calif., says middle-age clients generally are more inclined than their elders to want to keep control of assets. That’s potentially a roadblock to trust planning, which requires giving up such control. And if the wealth to be passed on fluctuates widely in value, facilitating a smooth transfer (not to mention retirement and other financial planning objectives) could become problematic.
“Younger boomers typically have more volatility relative to their net worth,” says Gasink. “This year, their business might be worth $3 million, the next year $6 million and the following year $1 million. These changes may require more upkeep and abrupt changes in planning techniques.”
Which estate planning techniques do boomers favor? Sources say the right strategy will depend on the client’s unique financial situation and goals. But given that many boomers undertaking legacy planning are still in the asset accumulation phase, a strategy that minimizes (or defers) current income and/or capital gains tax while also advancing estate planning objectives is frequently the popular approach.
Ahmad notes, for example, that many of his clients with highly appreciated assets favor using 1031 tax-deferred exchanges, tenant-in-common (TIC) real estate investments and standard irrevocable trusts as vehicles via which to defer capital gains on those assets and, thereby, boost current income. The increased cash flow can then fund premiums on a large life insurance policy to pay estate taxes.
Observers acknowledge that continuing uncertainty about the future of the estate tax can make legacy planning difficult. But they emphasize that tax considerations alone should not be the basis of estate planning.
“Yes, clients need proper tax planning,” says Hooper. “But to try and base estate planning strictly on taxes is a big mistake. The estate plan has to be oriented to the family, providing for the needs of family members and, secondarily, handle the taxes.”