Estate Planning Insights from REO Speedwagon
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One of my very first cassette tape purchases was REO’s 1978 album, You Can Tune a Piano, But You Can’t Tune a Fish, featuring the popular song, “Roll with the Changes.” In addition to its enduring legacy as a rock classic, this epic hit provides several useful insights regarding the sweeping tax and estate planning changes under consideration by the Biden administration.
Prophetically and lyrically speaking advisors can leverage several lines from this chartbuster.
Let’s tune in to uncover these financial “pearls-of-wisdom” from over 40 years ago:
“I knew it had to happen – felt the tables turnin' – got me through my darkest hour.”
Even before Joe Biden completed his presidential oath of office with… “preserve, protect and defend the Constitution of the United States…,” pundits and prognosticators from all sides of the political spectrum were echoing concerns as to how the new administration was going to pay for the trillions of dollars already spent on COVID relief. Then came the president-elect’s proposed spending mandates for infrastructure, “green” energy, and the American Families Plan.
As the lyrics say, to survive the darkest hours of COVID, it had to happen…
Taxes will be going up.
The targets are personal income taxes, capital gains taxes and corporate taxes. However, most impactful to advisors, is the reduction or unwinding of the estate tax exemption, which under the 2017 Tax Cuts and Jobs Act was raised to $11.4 million per person; adjusted for inflation it sits at $11.7 million ($23.4 million per couple).
Should the Biden administration succeed, we could see this number get slashed to the $1-$2 million level last seen in the early 2000s.
“So if you’re tired of that same old story, oh, turn some pages.”
Advisors would cherish the opportunity to have a stable of clients with investable assets in excess of $11.7 million and the associated tax and estate planning concerns. The reality, however, is that the current $11.7 million individual exemption has raised the bar well beyond the level of what most clients consider impactful or concerning to their estate and wealth-transfer planning.
For the past 10 years, conversations with clients regarding strategies for saving on estate and gift taxes were ignored or considered irrelevant for households with under $5 million of investable assets. Those same households represent a significant portion of the target market for independent financial advisors.
The story that started... “Once upon a time when the estate tax exemption was $1 million,” may be coming back. Advisors need to ensure they are on the “right page” and prepared to re-open a dialogue with clients who are paying much more attention to the ramifications this may have on their future financial plans and gifting strategies.
“l’ll be here when you are ready – to roll with the changes.”
Advisors have long faced the hurdle of convincing clients to part with inherited or long-held investments with a low cost-basis relative to their value. Those holdings often represent a large percentage of a high-net-worth client’s portfolio yet are out of reach for the advisor to actively manage or consider reducing the concentrated position. Traditional client thinking has been to pass these assets on to their heirs with a step-up in cost basis and avoid paying any capital gains associated with selling the asset.
That thought process may soon be changing as the Biden administration’s American Families Plan seeks to raise the marginal capital gains tax from 20% to 39.7%. More ominous are plans to eliminate the step-up in cost basis at death, which has been in place for nearly a century.
It will be vital for advisors to provide strategic recommendations to help their clients navigate these changes and address emerging questions such as:
- Does it make sense to fund an irrevocable trust now while I am alive to take full advantage of the current $11.7 million tax exemption?
- Is it time to diversify a large position in a low-cost-basis asset?
- How can a spousal lifetime access trust (SLAT), grantor retained annuity trust (GRAT) or qualified terminable interest property trust (QTIP) address these proposed estate tax changes?
- What charitable and wealth-transfer strategies should I be considering before the end of the year to mitigate changes in 2022?
“You got to – keep on rollin’ – keep on rollin’.”
Adding value for your clients is a long-term effort. In addition to incorporating these dramatic changes to tax and estate planning, you must maintain continued focus and adaptability across multiple fronts such as family dynamics, technology, and long-term healthcare.
By shifting focus from products to services, and from asset allocation to managing risk, you can leverage open-architecture services such as “advisor-friendly” corporate trust providers to be seated at the head of the financial services table as the family’s preferred advisor.
Advisors who are prepared to “roll with the changes” will be best positioned to execute recommendations that will translate into significant dollars saved and make the difference between retaining or losing their best clients.
Mike Flinn is vice president and national sales manager for BOK Financial Advisor Trust Services. As a founding member of one of the original “advisor friendly” independent trust companies in 1991 and widely considered a “pioneer” in this rapidly expanding arena, Mike Flinn consults with advisors in the strategies and questions necessary to engage clients in the successor trustee dialogue. During his career, he has enabled advisors to capture and manage over $6 billion in new trust assets.