Editor’s note: Bryce Sanders is a longtime columnist with Rethinking65. Read more of his articles here.
Bryce Sanders
“Money isn’t everything, but it sure keeps the kids in touch,” J. Paul Getty once said. The most recent bull market began in October 2022 and is approaching its third anniversary. If your client is invested in the stock market — and they likely are since they’re your client — they’ve probably seen their net worth climb. Your client wants as much of their wealth transferred to subsequent generations as possible. This is not a deathbed activity. Your client should be planning in advance.
Consider wealth transfer in the UK. If you are a fan of BBC dramas on PBS, you likely know how it works. If someone wants to transfer ownership of the family estate to the next generation to minimize inheritance taxes, this must be done at least seven years before the death of the gifter. Should the head of the family dies before the seven-year point, taxes are due based on the amount of time since the transfer was initiated.
Your wealthy client might think, “I have all the time in the world.” But unlike municipal bonds, clients don’t come with a maturity or expiration date. (Financial planning would be so much easier.) Your client might think, “There will be plenty of money to go around.” Is this the same client who insists on buying gas at the cheapest place, regardless of how far they need to drive? Your client does not want to part with their money unless they have no choice in the matter.
Your client needs to look at several issues far in advance:
What do they want their assets to achieve after they pass away?
The likely answer is they want their surviving spouse to be comfortable. What is supposed to happen next once the spouse is no longer in the picture? Your client probably wants the bulk of their wealth to go to the next and subsequent generations. Is this their objective?
Do they have a will?
They know who should get what. Who else has this information? Three-quarters of Americans don’t have wills. Your client might think inheritance taxes won’t be a problem. They hold everything in joint name. Ask them, “Suppose something happens to both of you? Think about it. You drive together and fly together.” Who will know how you want your assets to be distributed?
If they died today, what would their estate-tax position be?
We often think death is something far off. Optimism is good. The people you read about who perished in floods in Texas or wildfires in California likely felt the same way. Some “what if” thinking is important. Federal taxes are what first comes to mind. Currently the filing threshold is almost $14 million. What about estate taxes at the state level? Estate taxes are paid by the estate before distribution, inheritance taxes are paid by the recipient. If you lived and died as a resident of Washington state, where the threshold is $2.19 million, and your estate was more than that, then your estate is paying tax. Iowa has a low inheritance tax rate, New Jersey has one of the highest. This can be the starting point for these conversations.
What are their plans for charitable giving?
Many people mention a favorite nonprofit in their will. If your client does not need the money, there is a case for giving the money now. Required minimum distributions from retirement accounts can cost your client in taxes. These can be given directly to charities as a qualified charitable distribution. This is only one example how they can maximize the impact of their charitable gift while minimizing current and future taxes.
Have they set up a donor-advised fund?
Your client might be charitably inclined but is waiting for a naming opportunity to become available during a future capital campaign. It makes sense for them to make charitable gifts now, sending them to their donor-advised fund as a “halfway house” until the right charitable giving opportunity comes up. This is ideal when a client owns stock with long-term gains because of a very low-cost basis. This can be a first step towards reducing the size of their estate.
Have they already used their lifetime estate-tax exemption?
It’s time for a personal story: We knew a couple who had been married almost 30 years. After the husband’s first wife passed away, he remarried. His second wife tells the story about the moment he proposed: “We were going out to dinner. I knew this was going to be a special night. He looked me in the eyes and asked, “Have you completely utilized your lifetime estate-tax exemption?” He had used his up, gifting to the next generation. One of the unexpected benefits of remarrying is gaining an additional estate-tax exclusion amount.
Are they utilizing the annual gift-tax exclusion?
If you make those big gifts during your lifetime, you are chipping away at your lifetime estate -tax exclusion. Another benefit under the tax code is the ability to make an unlimited amount of smaller gifts that do not count against your lifetime estate-tax exemption number. These gifts are not that small, currently $19,000 each. Your client can make an unlimited number of these gifts, reducing their taxable estate.
Have they spoken to an estate planning attorney?
Now that you have gotten them interested, it’s time to bring in the professionals to help them take the next steps. You have identified they have a problem. You have shown they should be proactive during their lifetime. They need to speak with the right professionals. These might be on staff at your firm, or they might be outsiders you can refer. Remember to always give your client the choice by mentioning a few names and giving them contact information. Business cards are ideal.
You are showing your value by identifying a problem when it can still be addressed. You are showing how taking action now can save money later. And you are taking them to a certain point where the next steps are their responsibility. Follow up afterwards so you can confirm a solution is in place.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” is available on Amazon.
