What many of our clients do not realize is that they — even if they haven’t started planning an investment strategy — have an estate. This estate does not have to be expansive, but it must be part of a plan where your clients’ possessions are distributed to beneficiaries. Estates all have one thing in common: our clients cannot take them with them when they die.
When it comes to helping our clients with estate planning, I like to encourage other advisors to think of their clients as planting an acorn they hope to harvest into the best oak wood 50 years down the road. This type of investing and planning should never be approached as if our clients are farmers planting corn in May and planning to harvest a few months later.
A relatively small percentage of Americans will face federal estate planning challenges. A family worth more than $10.2 million will need to take different steps in the planning process to ensure their loved ones are able to pay the taxes on any inheritance left behind. The 99 percent of Americans who do not have to worry about the federal estate tax do, however, need to be concerned with their state inheritance or estate tax laws. The problem that arises in both of these scenarios is that, until recently, there was no permanent and predictable law that could be used to make long-term investment decisions.
Organizations in the life insurance profession, such as the Association of Advanced Life Underwriting (AALU), have advocated to Congress that Americans need and deserve to have a permanent, predictable estate tax law, allowing advisors and their clients to craft tailored financial plans. Thus far, there have only been temporary laws in place, meaning the taxes and/or benefits could easily change. The recent fiscal cliff debate sparked many interesting conversations, one of them being the need for a permanent estate tax law that is clear and not subject to a sunset in a few years’ time. In general, the life insurance profession deserves immense credit for its consistent and persistent communication with Congress, which enabled a permanent law to be enacted.
The importance of life insurance
All Americans need to think about the legacy they plan to leave behind when they die. For most of our clients, taxes will not play into this too extensively. However, all should approach this planning with ideas about what they hope their future generations will look back and remember them by. For some of our clients, this may mean ensuring family possessions — land, family heirlooms, a business, etc. — can transfer to the next generation and continue the story. Other clients may strive to guarantee they treat all loved ones equally, providing a business inheritance to one and a monetary inheritance to others.
One thing we must convey to our clients is the detriment that can be caused by leaving our loved ones behind with unresolved business matters or significant amounts of debt. This type of planning, more often than not, leads to a conversation surrounding the life insurance product — the unique financial tool that can turn into liquid cash when needed most. This cash can then be used to accomplish previously discussed goals, including paying taxes and/or debts, covering unresolved business matters, completing unfinished projects or donating to a charity. It is imperative we do not leave this feature of life insurance out of the conversation when communicating with our clients.
One last life insurance characteristic we need to convey to clients is the rate of return they will receive in two distinct circumstances. When addressing the death benefit of a life insurance policy, we can assure our clients that, if they leave life too early, the rate of return is unparalleled. On the other hand, if your client is fortunate enough to live well past his or her life expectancy, the rate of return is still as competitive as a conservative investment.
With this new, permanent estate tax law in place, there is no excuse to not be communicating with our clients about estate planning. Thanks to the many advocates in our profession, we now have certainty to help our clients and their families make long term plans — like planting an acorn and turning it into an oak tree. This new law helps advisors immensely, as it makes it easier to suggest options to help our clients build their own tailored financial strategy.
For more on the new estate tax, see: