Leaving Behind a Financial Legacy for the People You Love
February is Insure Your Love Month in our industry. Romantic quips aside, it is a reminder that the beating heart of any life insurance or wealth management strategy is a plan to care for the people you love when you are no longer with them. Leaving behind a financial legacy for your family and loved ones is at the forefront of many of your clients’ minds in these uncertain times. While the Covid-19 virus is hopefully on its way out of our lives, a new administration and the changes that it may bring present an opportunity to speak with your clients about their wealth management position. Changes in everything from annuities, life insurance premiums, and estate taxes are back on the table, and now is the time to ensure that your clients and their loved ones are protected in any eventuality. Today, we will discuss the importance of preparing for changes to the estate tax and how you can best serve your wealthier clients moving forward.
Estate Taxes Have Long Been a Target for Presidents of all Stripes
The Estate Tax refers to the ability of the federal government (and, in some cases, the local state government) to impose taxes on the wealth that you leave behind when you die. The Estate Tax was hardly a novel idea as it existed in one form or another since Ancient Egypt, through the Roman Empire, in feudal England and France all the way up to today.
Historically, it was none other than President Teddy Roosevelt who began, in earnest, the establishment of an estate tax (also known as a Death Tax) at the turn of the 20th century. At the height of the Industrial Revolution, it was widely unpopular among the business titans of the day. In spite of fierce opposition, the measure passed and eventually became the law of the land. Since then, it has remained a permanent fixture of our nation’s economy and IRS tax codes.
How Does a New Administration Affect the Estate Tax and What does it Mean for Your Wealthy Clients?
Like most taxes, the Estate Tax can be overly complex. Each Administration, Congress, and Senate has the ability to adjust the amount of tax applied to an estate and this amount tends to fluctuate from one administration to the next based on their philosophies. For your clients who would be adversely affected by this tax, preparing their estate before their death is paramount to passing as much of their wealth as possible on to the people they love.
At the moment, an estate is allowed to exempt the first $11.7 million dollars of their estate from taxes. This means that all money and assets beyond this amount can be taxed at a top rate of 40%. It was not always this way, and it is likely to change again with the new administration.
In 2007, the exemption was for the first $2 million. In 2017, the exemption was for the first $5.49 million dollars. The previous Administration was able to raise the amount to the current $11.58 million. While we do not know what the current Administration and Congress will do, if history is a guide, the exemption will likely be lowered. This can represent serious money for the heirs of those your client leaves behind.
Now is a prudent time to discuss estate planning with your clients! With unknown changes on the horizon, there is still a window for them to make decisions that could affect the financial legacy they want to leave to their loved ones. Let’s take a quick look at some of the ways you can help your client avoid some of the tax burden associated with their hard-earned money and assets.
Ways to Reduce the Burden of the Estate Tax for Your Client’s Family
Fortunately, there are some methods to relieve the burden of the estate tax for your clients. Here’s a few of them to consider:
- Family Limited Partnership – This will help shrink the size of your personal estate by taking assets, such as your home(s) or business(es), and making your heirs limited partners in their ownership. You will retain control over the partnership while your heirs will have a stake in a portion of them.
- Irrevocable Life Insurance Trust – Life insurance is a tax-friendly way for millions of people to leave behind a substantial death benefit to the people they love when they die. However, this benefit can be considered part of your estate and therefore subject to the estate tax. By setting up an Irrevocable Trust and making your heirs the trustees, you are basically transferring ownership of the trust to them. Any changes to the trust must be agreed to by the trustees, but in doing so, the death benefit of your insurance policy will be excluded from the estate tax.
- Gifting – Part of the estate tax allows for yearly exemptions in gifting sums of money to your heirs. Currently, you can give a gift, tax-free, up to $30,000 each year to your heirs if you are married ($15,000 if you are single). There is not a limit to the number of people you can give this amount to. However, you cannot give beyond the amount of the overall estate tax exemption of $11.57 million over the course of your lifetime.
- Charity – A beautiful way to reduce the size of an estate is to gift money to charity. By setting up a charitable remainder trust, you will be able to lower the size of your estate while doing some good in the world. Additionally, you will receive a nice tax break on the donation.
There are more ways to help your wealthy clients achieve the best outcome when it comes to estate planning than we have time to list in this article. Call Trust Financial for help in assisting your clients through these important decisions.
Love is Eternal, Money…Not So Much
Insure Your Love is all about safeguarding the financial future of your family. Trust Financial is your partner in finding the best solutions for all of your clients’ needs. Their money is important to them and they count on you to guide them and their family toward safe stewardship of their estate long after they are gone. No matter what the future holds, their love will endure and it is your job to ensure that their estate does, too.