Estate Planning in Uncertain Times
A New Administration, A New Tax Plan, and New Reasons to Revisit Estate Planning, Life Insurance, and Annuities
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”
These were the words that Benjamin Franklin wrote in a letter to French scholar Jean-Baptiste Le Roy back in 1789 during the humble beginnings of our democratic republic. Franklin’s astute understanding of the road ahead still rings true to this day and, in some ways, is more prescient than ever. 2021 has ushered in a new president who has promised broad changes to taxation in the United States. Recently, President Biden has promised to deliver the first tax increase in over 30 years, with implicated changes to the Corporate Tax, Estate Tax, and others. How will this affect your clients’ hard-won assets, and what can you do to help them navigate the brackish (or should we say, bracket-ish) waters that lie ahead?
What History Tells Us About Changes to the Estate Tax and Their Effect on Estate Planning
This article is not an indictment on change. As a matter of historical record, the current administration’s changes are not necessarily new to taxation in the United States. Each new ideology that occupies the Oval Office and the Congress has endeavored to leave its mark on federal revenue and on the net worth of American pocketbooks. Since the inception of the modern estate tax back in 1917, various American legislative bodies have raised, lowered, and even temporarily eliminated the Estate Tax.
The constant fluctuation has forced wealth advisors and life insurance agents to remain nimble on behalf of their high-net-worth clients. Under the current tax code, heirs of estates valued at $11.7 million are subject to the tax and all estates with a lower valuation are exempt. This figure was established during the Trump administration and represented a more than doubling of the exemption from the Obama administration. What matters here is not who is responsible, but rather how we can assist our clients in managing their legacy while safeguarding their heirs from tax burdens that they cannot support. Life insurance and its tax-friendly tools are a great place to start.
Tax-Free Death Benefits to Offset Estate Taxes
As far as an advisor is concerned, the dramatic lowering of the Estate Tax exemption should represent an opportunity. While President Biden wants to return the Estate Tax to levels last seen in 2016, there are some in Congress who are calling for an even lower exemption of around $3 million. While this may never come to pass and will require intense debate on the House and Senate floor, the possibility is an opportunity to talk to more clients about how they should best prepare for any eventuality.
Clients earning less than $200,000 annually can achieve a $3 million retirement by the age of 65 with conservative investments and a matching 401k. In fact, this is possible with even less money according to Motley Fool. What this means is that should the Estate Tax climate fall to a $3 million exemption, you will have more clients that require creative life insurance tools to help their heirs offset the tax burden. Either way, the volatility presents opportunities for the savvy agent to help more clients protect their heirs and their assets no matter what the future holds in store. The long-term future of the Estate Tax could very well place middle-earning clients in the crosshairs of federal revenue.
Hyper-Inflation: Imaginary Boogeyman or a Boon to Annuities?
In addition to the changes that may be brought on by a new tax code, there exists the possibility of our nation entering an inflationary period the likes of which we haven’t seen since the 2008 housing crash. The deadly Covid-19 pandemic appears to be, mercifully, slowing down. However, the economic impact to our nation combined with the $5.3 Trillion in stimulus packages enacted by Congress have the potential to create an inflationary or even hyper-inflationary economic environment in the United States.
While we all hope to avoid such an economic crisis on top of what we have already endured, the results of inflation will be on the minds of our clients and fixed-rate annuities may become more attractive should this perfect-storm occur. Market volatility in common circumstances often leads people to the zero-is-my-hero indexed based annuities. However, in an inflationary period, it is likely that fixed annuities will rule the day. In either event, the tax-deferred benefits of annuities in general, as well as the peace of mind that a fixed annuity could bring might open the door to new clients seeking stability in an uncertain market.
The Message: Time is On Our Side
When talking with our clients, it is important to temper a sense of urgency with rationality. Time is on our side. While changes in the tax code may increase the burden on their estate and the possibility of inflation may alter everything from the cost of living to overall market performance, it is essential that we provide sound, rational guidance. Peace of mind doesn’t start with the purchase of a policy, it starts with a conversation about our clients’ goals and their needs. Our clients depend on us for our expertise. Trust Financial aims to be your partner to help keep you up to date on the leading-edge solutions that will allow you to improve outcomes for your clients and your career. Death and taxes may be inevitable, but so is our ability to prepare for success.
