For many financial advisors, as generations shift and wealth changes hands, it will be a business building opportunity.
For others, it could lead to a loss of assets. This means proficiency in wealth transfer is more important than ever. Developing expertise in this area not only helps ensure that your clients’ retain more of their wealth — it can also help your firm can attract and retain your clients’ heirs.
According to Jefferson National’s latest “Advisor Authority,” a comprehensive study of 1,400 RIAs, fee-based advisors and individual investors conducted by Harris Poll, attracting and retaining heirs is a top practice management concern and one of the most important drivers in advisors’ pursuit of greater profitability. The most successful advisors — those who earn more and manage more AUM — are even more focused on attracting and retaining clients’ heirs as a means of prospecting and adding a younger generation of investors.
Generations shift and wealth changes hands
Peaking at 78.8 million in 1999, the baby boomers’ presence has radically changed the financial services industry. Many RIAs and fee-based advisors have found success by catering to boomers’ financial needs as they accumulate wealth for retirement. Roughly 10,000 Boomers will turn 65 every day until 2029 according to the Pew Research Center. Much of their wealth will be earmarked for the next generation.
And as more boomers are exiting the workforce, Gen X investors are entering their prime earning years, projected to peak in 2018 and to outnumber boomers by 2028, according the U.S. Census Bureau. An even larger shift is taking place as the number of millennials is on pace to surpass both boomers and Gen X — and will remain the largest cohort for the next three decades.
The transfer of wealth to these younger generations must be managed with care. Without an estate plan for the effective transfer of wealth, your clients’ heirs may be subjected to a number of challenges, such as probate, creditors, lawsuits, judgments and legal fees — all of which can compromise the value of the legacy that you and your client worked hard to create. The wrong plans could trigger losses for your clients, their heirs and your firm.
Wealth transfer is especially relevant for the growing number of high net-worth households. According to the survey “U.S. Trust Insights on Wealth and Worth,” published by Bank of America, there are now nearly 2 million households in the U.S. with investable assets of $3 million or more. And while nearly six in 10 wealthy investors believe it is important to leave a financial legacy to the next generation, this study shows how the goal does not always translate into action, as 72 percent of high net worth investors surveyed do not have a comprehensive estate plan.
As wealth changes hands, it can have a tremendous impact on the success of your firm. (Photo: iStock)
Foundation for your firm’s future
Recent studies across the industry have revealed the massive challenge advisors face in retaining clients’ heirs. According to a number of recent studies, between 65 percent to as much as 95 percent of heirs fire their spouses’ or parents’ advisor after receiving an inheritance. Heirs leave because no one was thinking about them. It’s that simple.
In the face of these overwhelming odds, it is clear that advisors must take a more holistic — and more family-centric — approach to financial planning in order to attract and retain clients’ heirs. Wealth transfer and estate planning is one way to engage the entire family, to successfully deepen the relationship with clients, as well as with their spouse and their children. Every member has a vested interest. It is crucial to help your client leave an enduring legacy for future generations. It is crucial for heirs to retain more wealth in the future. And it is crucial to help your firm secure a future generation of clients.
Related: Cultivating clients: millennials
Innovative solutions for wealth transfer
An effective estate plan can create clarity and control around the transfer of wealth and distribution of assets. It helps clients decide how assets will be used to care for family members who are minors or disabled, determine which charitable organizations will receive a share of assets, and who will be responsible for overseeing other decisions related to the estate.
In addition to these traditional “governance” issues, tax planning and preservation of assets are becoming increasingly important. To maximize outcomes for clients and their heirs, your expertise in holistic financial planning and investment management is essential. You can partner with an experienced estate planning lawyer and tax planning expert to develop the most effective estate plans and wealth transfer strategies.
As you and your clients navigate the challenging dynamics of ongoing volatility, record low-yields and higher taxes, there is a growing demand for innovative wealth transfer solutions — simple, transparent and low cost. One solution adopted by more RIAs and fee-based advisors is a new category of Investment-Only Variable Annuity (IOVA). Designed to maximize tax deferral with lower costs, no commissions and a broad choice of underlying funds, IOVAs can provide the competitive advantage, whether for funding trusts, stretching assets or charitable giving.
Trusts are one of the most widely used solutions for wealth transfer, especially for high net worth and ultra-high net worth clients. (Photo: iStock)
A new take on funding trusts
Trusts can offer many advantages, helping to reduce estate and gift taxes, avoid probate, and protect assets from creditors and lawsuits. According to a 2015 survey by Jefferson National, nearly three-fourths of advisors use trusts as a vehicle for wealth transfer. And 47 percent of advisors say that trusts are their primary wealth transfer vehicle, substantially outpacing all other options.
The survey also illustrates that the vast majority of advisors (97 percent) consider tax consequences when looking at vehicles to use for wealth transfer, and 84 percent say it is important or extremely important to use a vehicle for wealth transfer that helps manage long-term tax consequences. But tax rates on trust income are high — even at very low thresholds. In 2016, the maximum tax rate of 39.6 percent comes into effect at just $12,400 of trust income, compared to $415,050 of income for an individual taxpayer.
One strategy that is becoming increasingly popular is funding a trust through an IOVA. By using an IOVA, trustees can control the timing of income distribution from the trust — and control when taxes are paid on that income. IOVAs can maximize tax-deferred growth during the accumulation phase with a broad selection of funds and complete control of assets. They are easily transferrable to a named set of beneficiaries. And unlike traditional variable annuities, IOVAs eliminate the layers of asset based fees, complex insurance guarantees and commissions that make most traditional variable annuities unsuitable for use with trusts. With all of these advantages, eight out of 10 advisors agree an IOVA would better serve a client’s trust than a traditional variable annuity.
A simple solution for stretching assets
For clients who seek a less complex solution to stretch income over their heir’s lifetime, many IOVAs offer a Non-Qualified Stretch payout option. It provides a simplified solution for clients to transfer and distribute wealth — without the cost and complexity of other legacy planning solutions. There are multiple benefits. Clients’ heirs can avoid the high taxes of a lump sum payout, instead taking annual distributions to spread the tax liability out over years, decades or an entire lifetime. And heirs can protect and build more wealth by leveraging more years of tax-deferred compounding to maximize accumulation.
For clients who seek an additional level of greater control over how that wealth is distributed to heirs, the Restricted Stretch payout option is another type of Non-Qualified Stretch. The Restricted Stretch allows the client to restrict distribution options, so that beneficiaries can take only the required annual minimum distributions (RMDs). In this way, clients can create predictable income streams for heirs, while limiting the amount of the withdrawals, to help ensure their wealth is more likely to last for the heir’s entire lifetime.
Traditional charitable legacy planning can be inflexible and complex. (Photo: iStock)
A unique approach to charitable giving
Traditional charitable legacy planning, such as private foundations, donor advised funds and pooled income funds, can be inflexible and complex, and very costly to create and maintain. While these structures provide an immediate tax write-off for highly appreciated assets, they typically require assets to be gifted irrevocably in exchange for current period tax deduction. There are other drawbacks, including limits as to how much clients can deduct.
A solution with greater control is to designate a charity as a beneficiary of an IOVA through a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT). Not only do clients reduce taxation of highly appreciated assets and take a tax deduction for charitable contributions the year the NIMCRUT is established, they also retain full ownership, access and control of assets, including investment selection. They retain an ongoing stream of income, while controlling the timing of income distribution until it is needed. They maximize their bequest by deferring ongoing investment gains and income through tax deferral, and ultimately gains are passed tax-free to the charity or foundation at the time of the client’s death. In addition, the NIMCRUT is revocable, giving clients the flexibility to remove one charity, add other charities, or adjust the contribution amount.
Build your business — and your next generation of clients
As this tremendous transfer of wealth takes place — first to boomers, then to Gen X, then to millennials — it is important to develop effective estate planning and wealth transfer strategies for your clients and their families. With an effective approach to wealth transfer, you can help clients accumulate more wealth — and then safeguard it for their heirs. And using a low-cost Investment-Only VA, for funding trusts, stretching income or charitable giving can offer measurable benefits for many clients. _e longer tax obligations are deferred, the longer the assets can build upon themselves and compound. IOVAs help control how much is paid in taxes — and when those taxes are paid — to reduce the tax burden and retain more wealth for clients and their beneficiaries.
Don’t wait for clients to bring up their concerns about wealth transfer. With many studies showing that up to 90 percent of heirs fire their spouses’ or parents’ financial advisor after they receive an inheritance, it’s important to take action. Research shows that the most successful advisors make attracting and retaining heirs a top priority. Build a multi-person engagement team to match clients and heirs with counselors of the appropriate age. Take a more family-centric approach to planning. By offering a more holistic approach to estate planning and wealth transfer, you can attract and retain more of your clients’ heirs — and bring on your next generation of future clients.
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