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estate planning

Why Estate Planning is Important, Even if You Aren't Seriously Rich


If your clients aren't seriously wealthy, they may believe estate planning isn't all that important. Not so, counters expert Bryce Sanders. Here's why they should make it a priority and how you can broach the subject effectively.

Jul 13th 2020
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What do all people working with accountants have in common? They want to minimize the amount of money they hand over to the government. You can help them achieve this goal year after year. You can also help clients avoid handing over a large amount upon their death.

Here’s the problem: You client might not see this as an immediate priority.

"I'm Not Rich Enough to Have This Problem"

The federal exemption is pretty generous. In 2020, the threshold is $11,580,000 per individual. Bearing in mind there is basically unlimited wealth transfer between spouses, your client might think estate tax planning only applies to “really rich people,” not them. 

There are three fallacies:

  1.  They could get richer. Let’s suppose your client is single, has $10 million in net worth, mostly in stocks. Also assume they will be around for at least another seven years and the historic return of the stock market is 10 percent annually. Using the Rule of 72, where an interest rate divided into 72 indicates how many years money takes to double, seven years from now, their $10 million might be worth $20 million.
  2. The government could change the rules. Administrations change. Majorities in congress can change too. The government has handed out lots of money during the pandemic. Money needs to be raised somehow. People have short memories. Today, the exclusion is $ 11.58 million. The top tax rate is 40 percent. In 2001, the exclusion was only $ 675,000! The top tax rate was 55 percent. Which do you think would get less public opposition? Raising income taxes or raising estate taxes?  Hint:  The Median Net Worth of the average US household is $97,300.
  3. The state’s got their hand out. Some states have an inheritance tax. Others an estate tax. Some have neither or both. For example, Washington State has an estate tax. Their threshold is $ 2.2 million. Their tax level above that amount is 10-20 percent. Florida does not have an estate tax. How much does your client know?

Points to Discuss

Even if your client is “okay" with paying taxes, coming up with the cash can be a big problem if their wealth is concentrated in hard assets (farmland) or illiquid ones (family business.) They will need ways to raise cash without being forced to sell under difficult circumstances. This is one of the advantages promoted about life insurance.

Your client might feel it’s not their problem because they would predecease their spouse. Although lots of wealth can transfer between spouses, many options to protect wealth disappear once one person owns everything.  Vehicles like trusts make sense, but usually require some advance planning. It’s not like adding an app to your Smartphone. A New York CPA shared the story how another accountant had a client who was slowly going downhill and wanted to make changes to her will. Her attorney met with her, learned of her wishes and returned the same evening with the updated will. Since the woman had fallen asleep, they didn’t want to wake her. She died unexpectedly that night in her sleep, never having signed her new will.

Your client might be charitably minded. That’s good. It makes more sense for them to transfer assets into a charitable foundation and “get them out of their name” vs. leaving them in their own name with the understanding gifts would be made upon their death. The foundation approach lets them get the money out of their name vs. making the final decision where it goes. Leaving bequests makes sense, but not if they change their mind often or find new charities they like better.

Last and most important, your client needs to have a will and update it periodically. In 2017, it was 42 percent of Americans who had wills or done some form of estate planning. A lot has happened in three years. You would think the number would have risen. In 2020, the number has actually fallen to 32 percent of Americans. and worked together to survey 2,400 Americans to gather these surprising results.

What does this tell us? There’s a two out of three chance the issue of estate planning isn’t even on your client’s radar screen. You can help them, as party of your financial planning discussions. You can also connect them with specialists in areas where you don’t have the licensing or expertise.