Making inroads with baby boomers in the estate planning realm requires not only a firm grasp of the estate and legacy issues that tend to challenge them most, but also a strong working knowledge of the strategies to help them address those issues.
As an accredited estate planner (AEP), Bay Area advisor Stephen F. Lovell has spent a quarter-century sorting through estate and legacy issues with clients and families from multiple generations.
And Lovell says he finds baby boomers, his own generation, to be especially receptive to the estate planning process and all it entails.
Boomers “tend to more readily accept the idea of estate planning, particularly compared to the older generation that preceded them,” says Lovell, who heads Lovell Wealth Legacy in Walnut Creek, California. “I find they’re more inclined to want to organize their lives, to want to do something about planning their estates while they’re alive, and to accept guidance on what they need to do to plan.”
The number of boomer candidates for estate planning guidance swells daily, with an estimated 10,000 members of that generation due to hit the traditional retirement age of 65 each day for roughly the next 15 years. So if you’re an advisor seeking to grow the estate planning side of your business, baby boomers represent a logical starting point.
Indeed, according to a 2014 survey conducted by WealthCounsel, boomers represent a majority — 52 percent — of the clients handled by the organization’s estate and business planning attorneys.
Here’s a look at nine areas where estate planning action for boomers is especially hot.
To address privacy and probate concerns.
Protecting the assets in an estate from probate is first and foremost on the estate planning priority list for many baby boomers, says Ben Barzideh, a wealth advisor at Piershale Financial Group in Crystal Lake, Illinois. That’s mainly due to a probate process that can be confusing and slow, if not downright archaic, in many states, he says.
Thus, it’s important to consider moving certain assets, such as life insurance policies, a home, bank CDs and holdings in taxable investment accounts into a vehicle such as a revocable living trust so they reside outside the estate — and outside the reach of probate.
Privacy concerns are another factor driving boomers to consider vehicles such as revocable trusts, which they’re increasingly using in tandem with “pour-over wills,” says Meg Muldoon, assistant vice president of advanced sales at Penn Mutual Life Insurance Company. A pour-over will directs that certain assets transfer to a trust when the owner of those assets dies. And since pour-over will and related trust documents are private (not necessarily filed in probate court), “relatives can’t go down and look at them if you don’t want them to,” she notes. That can help defuse potentially messy family estate-distribution situations.
To reckon with estate taxes at the state level.
With the current federal estate tax exemption at $5.34 million for individuals and double that amount for married couples, avoiding the federal estate tax threshold is not an issue for most people, acknowledges Barzideh.
Nowadays, estate planners and their boomer clients are more concerned with state estate tax thresholds, which merit attention in certain states because they are significantly lower than the federal threshold — $1 million in Massachusetts, for example.
Trusts may also be a solid solution to address state estate taxes. Disclaimer trusts underpinned by a life insurance policy such as whole life or indexed universal life are particularly popular in that context, for the flexibility and control they offer, says Muldoon. “The beauty of the disclaimer trust is that in most states a spouse, in addition to being the beneficiary [of the trust], can also be the trustee.” Thus, the surviving spouse/beneficiary in a couple with a disclaimer trust can, for example, decide to take assets from their deceased spouse or disclaim them so they go to the trust to eventually pass to their children.
For basic estate protection.
Baby boomers who figure their estate will be large enough to be subject to some sort of estate tax (state, federal or both) often turn to a survivorship life insurance policy to provide liquidity (via the death benefit) to cover those taxes, as well as the deceased’s debts, final expenses, etc., so they don’t have to dip into estate funds to do so.
Sometimes that life insurance policy resides in a vehicle such as a credit shelter trust, says Barzideh. And in certain cases, he notes, it makes sense to set up such a trust for each spouse to house certain assets. An irrevocable life insurance trust (ILIT) also provides very powerful estate-protection benefits, he notes, due largely to the leveraged dollars provided by the life insurance policy that underpins the ILIT. An ILIT can also protect assets from legal challenge.
To cover the risk and potentially high cost of a health care or long-term care need.
A 55-year-old couple retiring in 10 years will pay an average of about $464,000 in lifetime retirement health care costs, according to a 2015 report from HealthView Services. That, coupled with the growing likelihood of needing care as life expectancies continue to lengthen, puts a premium on protecting an estate from a potentially massive drawdown to cover a health care or long-term care (LTC) event, says Lovell. “You need some kind of pool of money to cover those costs, and insurance is an efficient vehicle for providing it. It’s the least expensive way to cover that risk.”
A new breed of hybrid life insurance and annuity products are designed to do just that. These asset-based or linked-benefit products afford the contract-holder access to funds to cover health care or long-term care expenses. Some are also more accessible from a medical underwriting perspective. And some are configured so if the policyholder ultimately doesn’t exercise the policy’s long-term care benefit, that money stays inside the policy to eventually pass to beneficiaries on a tax-favored basis.
While LI+LTC products are proving especially popular, new products are also hitting the market on the annuity side, including Genworth’s IncomeAssurance Immediate Need Annuity, a medically underwritten single-premium immediate contract unveiled in February that provides guaranteed lifetime monthly payments to people age 70 or older with adverse health conditions. It just so happens the lead edge of the boomer generation turns 70 this year.
To manage inherited IRAs.
The rules around IRAs that pass by inheritance from one generation to another can be convoluted, particularly with regard to taxation, Lovell says. To avoid unnecessary taxation of inherited IRAs, it’s vital to take pains to preserve the so-called “stretch” option, whereby assets in certain retirement accounts can pass on a tax-deferred basis to children and grandchildren.
To scratch the charitable itch.
A couple of maneuvers are worth considering for boomers who want to leave a charitable legacy. One is to establish a trust, such as a charitable remainder trust that, if properly designed, can provide income to a beneficiary, along with an income tax deduction to the person putting assets in the trust, and later leaving assets to a charity, Barzideh explains. Highly appreciated assets such as stock positions are good candidates to transfer to a CRT, as neither the donor nor the charity will be on the hook to pay capital gains taxes on those assets when they’re eventually sold.
Another way to reduce the tax exposure of an estate, according to Barzideh, is by taking advantage of IRS rules (made permanent last year) that allow distributions to be made directly from a qualified retirement account, such as an IRA, to a charity. Instead of taking a required minimum distribution once they hit age 70.5, the owner of the qualified retirement account can specify that the distribution be made to a charity, thus avoiding income tax on the RMD amount.
To cope with the complexities of a blended family.
A qualified terminable interest property (QTIP) trust can be handy for clients who have children from a previous marriage, providing a tax-favored vehicle “to make sure your money goes to your kids, not to a second spouse or their kids, if that’s your wish,” explains Barzideh.
To keep a business (or other illiquid asset) whole.
For people whose estates include illiquid assets such as a business or real estate, heirs can use the proceeds from a life insurance policy to pay estate taxes instead of having to sell the business or real estate holdings to raise proceeds for that purpose. In a similar context, life insurance can also be used as an estate-equalization tool, where the proceeds from a policy make it possible to divide an estate more equitably among several adult children, for example, instead of otherwise trying to find an equitable way to divide an illiquid asset such as a business or real estate among those children.
For legacy planning.
Vehicles such as spousal limited access trusts (SLATs) are increasingly popular among boomers who want to pass assets to children and grandchildren, according to Muldoon. Such a trust typically owns a life insurance policy on one spouse’s life, so the death benefit passes tax-free, with protection from creditors. Flexibility also makes SLATs appealing, she explains, as the trustee can be directed to make distributions to the spouse, and later to distribute shares of the trust to children and/or grandchildren.
From trusts to life insurance to stretch IRAs, mastering estate planning maneuvers such as these opens doors for advisors in the mainstream boomer market. For as Barzideh points out, “You don’t need to be a multimillionaire to take advantage of these things.”
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