Interested in learning more about attracting — and retaining — more high net worth clients? Advisors looking at upping their game in the highly coveted category may want to learn the advanced estate and tax planning strategies that appeal to high net worth families. That was the topic of the “Advanced Financial Planning — Real World Strategies" panel Tuesday morning at Exchange in Miami, hosted by Vance Barse, wealth strategist and founder of Your Dedicated Fiduciary.
Barse, who began his career in the financial services industry at Altegris Investments, working as an investment consultant for private wealth managers and retail financial advisors, opened the gathering with some key observations from the thousands of hours he’s spent in the industry.
“The financial services industry suffers from a sea of sameness,” Barse said. “Everyone says they do comprehensive, holistic wealth management and financial planning to class breaking. News flash, breaking news, guess what: None of the public knows what that means.”
Barse explained that the allied professionals like the attorney, the realtor, the insurance agent, the CPA, the advisor, and other members of the client’s planning team are siloed. That makes it more important for the planner to solidify their position as the most trusted advisor.
So what are some advanced financial strategies? Well, first, it’s important to define high net worth clients or those with estates that will trigger the persona federal estate tax now or in the future; but overall, the focus is on estates of $5 million or more.
As a case study, Barse looked at a couple named Sheryl and Gustavo, or Gus. Sheryl and Gus are in their early 60s with two children in their early 30s, and all four family members work for one of two businesses. The couple have been saving diligently for retirement and give frequently with a philanthropic bent, and have a net worth in the double-digit millions. Cheryl has a real estate empire and also owns an affiliated forestry company in the scenario.
One of their primary complaints is their annual capital gains tax drag. They also want to keep as much of their estate in their family as possible while considering eventually selling their businesses. They have no grandchildren and want to keep their legacy as something more secure than a donated park bench, Barse said.
So what potential strategies can be considered? One is exiting their mutual funds. Their previous advisor, in this case, loaded them up on expensive mutual funds, so one strategy is to move their retirement accounts out of mutual funds.
One harder part, Barse said, is reducing tax drag and portfolio cost, which may require varying types of tax-loss harvesting. Barse said that too many advisors just try to tax-loss harvest from a few obvious strategies, but it’s important to look closer at every opportunity available to do so in a portfolio.
The second complaint in the case study is the estate tax. The first option is paying them with assets or insurance or reducing them via freezing, the second is discounting or gifting, and the third is avoiding them via charitable deductions.
“I have a confession: There are few things I dislike more than whole life insurance agents,” he said. “There are two goals in life insurance-based planning leveraging appropriate insurance solutions: to create liquidity, to achieve certain planning objectives, the second is holding the liquidity outside of the grantor’s taxable estate.”
Two strategies to do so are an irrevocable life insurance trust (ILIT) and a spousal lifetime access trust (SLAT), with the ILIT being a trust specifically created to own life insurance to help reduce federal estate tax.
Clients, Barse said, can make gifts to the trust or gift the entire policy to the trust, with the key factor being that the death proceeds are not included in the client’s estate, Barse said.
ILITs require an appropriate trustee, which cannot be the client or the client’s spouse because their involvement could see the proceeds included in the estate. If clients transfer the policy, they can’t die within three years, or the death benefit ends up back in their taxable estate. That’s why term policies, which expire, and whole life policies, which they don’t need, don’t work for the ILIT, so Barse and his team use a guaranteed universal life policy (GUL), he said.
SLATs, meanwhile, are grantor trusts that allow the client to give property away for tax purposes and asset protection while still retaining the ability to make distributions to beneficiary spouses. The trust allows distributions to the grantor’s spouse during their lifetime, single life, or in survivorship. SLATs can hold life insurance out of the estate while also providing access to cash value via trustee — but to avoid inclusion in the estate, an independent trustee is required.
One of the most common questions that Barse gets from couples is whether they can use so-called mirrored SLATs, in which each member of the couple starts a SLAT and benefits the other, but they’re not allowed per the law, he said. SLAT arrangements for a given partner can, however, be structured to terminate upon divorce while retaining it for future marriages.
“You can come down to Miami married, leave divorced, and use the same SLAT for the next spouse,” Barse said.
For more coverage of the Exchange conference and part two of this panel, please visit VettaFi | ETF Trends.