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Senior Client Issues: Passing Wealth to Future Generations

Sep 22nd 2016
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You can’t take it with you. It’s one of those lessons many seniors just don’t get. Your 70- to 90-year-old clients might be thinking of their own mortality, yet if they were born between 1925 and 1945, either they or their parents experienced the Great Depression. They are very protective about their accumulated assets.

A familiar figure to accountants is $5.45 million. In 2016, it’s the amount of money that can transfer to heirs before the federal estate tax kicks in. Forty percent is another familiar figure. It’s how much the federal government expects as its share from really large estates.

Older clients worry about passing their wealth to future generations. How can their accountants help?

What’s the Real Issue?
Few clients say: “Estate tax liabilities are keeping me awake at night.” Often, they are in denial. “Why should the government get money that I worked hard to earn?” In other cases they don’t see themselves as “rich,” especially when the assets are in farmland or other real estate. Sometimes they see the $5 million number and assume they will never hit that level.

If they are invested in the stock market and leave the money alone, statistics show the market has returned just under 10 percent on average over the past 50 or 88 years (using 1966 or 1928 as the starting point). Their estate might be at a substantially higher level in 20 years. Everyone likes tax-deferred growth, but you have to pay the piper sometime. Upon death, taxes on assets held in IRAs can be very high. Let’s not forget the federal estate tax threshold doesn’t necessarily apply at the state level.

As their accountant, you know all that.

The Wrong Solution
Unfortunately, that’s a story they don’t want to hear. Rather than do proper estate planning, clients often come up with wildly unrealistic solutions.

They’ve heard about these banks in the Caribbean. In addition to potential charges of tax evasion, they run the risk of the bank going bust. They flirt with putting money in someone else’s name, unaware the other person might neglect to give it back. They consider a sweetheart loan to their kids to buy a house, unaware the IRS will probably consider it a gift. They decide to put cash in a safe-deposit box or buy gold coins and hide them someplace. We’ve all heard about people developing dementia and forgetting where they hid the loot. Family members spend decades digging up the yard and knocking holes in the walls.

What’s the Risk?
This problem is keeping them awake at night. Heirs in the background have expectations of getting their fair share, often stoked by the older relative’s promises of “what you will get when I’m gone.” A big estate tax bill reduces their inheritance. Why didn’t someone advise them earlier?

Another risk comes from the insurance side. They might be introduced to an “estate planning specialist” or receive an invitation to a dinner seminar. (Many older clients who lived through the Depression love events featuring free food.) They position solutions. You learn about them after they’ve signed the paperwork. It might not be the best solution for them.

How Can You Help?
As their accountant, you have a major advantage. You are seen as a fiduciary, a professional who acts in their best interests and is paid for the advice you provide, not through fees and commissions on products you sell. You are seen as impartial.

The first step is to have a discussion with the client. What do they want their money to do both during and after their lifetime? Wealthy clients often support numerous charitable institutions through annual contributions. They might choose to make larger gifts now, reducing the future taxable value of their estate. Many charitable institutions actively solicit these gifts and feature estate planning vehicles, like charitable gift annuities, allowing donors to continue receiving an income during their lifetimes.

Their plans for inheritance and heirs enter into the discussion. It’s likely they have wills, although statistics show about 55 percent of American adults don’t. If their estate will be substantial, they likely have an estate planning attorney. Let the client explain who they want to benefit from their legacy.

As their accountant, you are well-positioned to address the scope of their potential tax problem. Can trusts be utilized? How much control is lost? This is likely in the estate planning attorney’s field or expertise. If they don’t have one, you might mention several you know, suggesting they interview them. You will probably need to provide their business cards or arrange introductions.

Initiate the Discussion
No one wants to think about their own mortality. That might be a good way to start the conversation, highlighting it’s for the benefit of the people they will leave behind. Acknowledge they have worked hard to achieve the savings and lifestyle they enjoy today. You are respecting “it’s their money.”

Bring up the obvious point: Do they realize the government will get a piece of the action? Do they realize how much? Do they have a will? Have they reviewed it recently? Does his or her spouse know where the various accounts are held?

You have identified a problem in a low-key, tactful way. They realize it needs a solution. They will likely ask: “What do you think we should do?” That’s your starting point.

Related articles:

Senior Client Issues: Financial Security for Surviving Spouse
Senior Client Issues: Catastrophic Medical Expenses
Senior Client Issues: Feeling Squeezed by Rising Prices

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