By Kristin Bulat
“Don’t let the tax tail wag the planning dog!” The key to planning is to remember that a client’s goals are paramount and taxes are a secondary consideration. So, if the tail shouldn’t wag the dog when taxes are “high,” why would should it be allowed to do so when taxes may be “low” or temporarily eliminated?
Yet, this is just what many clients and advisors are doing in light of the Trump presidency and the hype that preceded it. People are mesmerized by the possibility that the estate tax may be eliminated, bringing sweeping income tax and regulatory reform. It’s tempting to take a wait-and-see approach to planning, but this delay may not just be foolish, it could actually result in long-term financial harm to clients and their families. Don’t be a deer in headlights; behind that bright light is a powerful machine and we’re on a collision course.
Is putting planning on hold really in the best interests of our clients? Where’s the wisdom in not moving forward with planning to meet their goals, most of which are completely unrelated to taxes? Who will pick up the pieces after the collision?
The Purpose of Life Insurance
Life insurance is a risk management tool. Its purpose is no different than liability insurance or hazard insurance. Clients wouldn’t think of dropping their car insurance just because their car has airbags or homeowner’s insurance now that they’ve got an alarm system. Most wouldn’t think of self-insuring those risks. Why on earth, then, would anyone think it advisable to self-insure—or, worse, not insure—what they hold dearest: the future well-being of their families, the business they built from the ground up or their legacy?
Preserving Families’ Well-being
The fact that some heirs are receiving individualized treatment doesn’t mean that the other heirs should be disinherited; they just need the opportunity to receive liquidity that’s not tied to the family business, such as a life insurance death benefit. Having the ability to treat all heirs fairly is a desire that is not tied to the current state of the estate tax; it’s a need that transcends taxes. Not providing for the fair treatment of all heirs runs the risk of fracturing the family—an outcome that can easily be avoided through the use of proactive planning.
Additionally, most families would not ignore:
- The income needs of a spouse and young children
- The need to pay off debt so that a spouse and children can maintain their standard of living
- The costs of college education for children (or grandchildren)
- The needs of a special needs child or parent that is dependent on them for care
- The need to preserve and protect a family homestead, treasured vacation home or land for future generations
Protecting Your Business
So many times, a well-run business hinges on the cash flow generated by its owners. Without one of those owners providing revenue streams, the business can easily go under. However, the fate of a business can be secured with life insurance so that there is an immediate pool of liquidity at the death of a business owner. This business insurance is not tied to estate planning or to taxes; it’s based on the risk a business faces if it doesn’t have the liquidity it needs when it’s most needed.
Additional considerations for business owners include:
- The need to retain, recruit and reward talented employees and possible successors
- The need to avoid a fire sale of a business, real estate or other illiquid assets
- The need to properly affect a buy/sell or business succession plan
Life insurance is the only asset that provides the necessary liquidity to cover the risks behind these concerns and needs, as well as many others. With life insurance, the funds are there when needed and there is no timing risk or liquidity risk.
Qualifying for Life Insurance
However, life insurance requires insurability. The younger and healthier an insured is, the lower the cost. So, it’s important to purchase insurance today, when the "health knowns" are known. Waiting can be not only costly, but catastrophic.
Once the risk is identified, locking in the cost of mitigation becomes critical. Waiting leaves the underlying risk exposed and creates further risk that the only available mitigation tool may become unavailable or too costly.
The next four years may be volatile, but long-term goals require long-term focus. Plan today for the future you want. Tomorrow just may be too late.
Kristin Bulat is SVP Strategic Resources and Tim McFarland, VP Advanced Markets.