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Mad Dash to the Finish Line

Questions advisors should be asking their clients (and themselves) ASAP in this frantic time of FOMO.

We’re not even in the final quarter of 2021, but it’s pretty clear practitioners are running out of time to finish complex tasks. There are only so many things we can complete for clients before year-end. How many complex trusts can a good attorney do before Dec. 31—and do them well?

In retrospect, many affluent, successful people are going to be looking in the rearview mirror next year and wondering why their advisors didn’t push them harder in 2021. Whatever we can discover in the new law that’s going to allow us to solve problems, we’re gong to be scrambling hard to deliver that new fix. But for many, it will be too late.

As always, it pays to plan ahead. Just know there will still be time for ample planning in 2022 as not all the proposed legislation will be passed this year.

Affluent families will have an incredible need for life insurance that we haven’t seen recently—and trust me, it’s not going to be basic term insurance. They’ll need a permanent solution, especially if the estate exclusion is lowered, as many predict. If we go from $11.7 million down to $5 or $6 million, it means there’s less money they can give away. And if they’re going to be giving it in the form or insurance premiums, they want to make sure they’re giving it with the most leverage possible.

It’s a balancing act.

Clients are going to need liquidity. How else are they going to plan their estates if all their tools are taken away by new laws? If they give money to charity through various philanthropic vehicles, they’re removing assets that would have otherwise gone to their kids. That’s fine, but most people want a replacement. What’s the best way to replace those assets? Usually, it’s life insurance.

If they’re either going to remove assets by giving them to charity or delay the delivery of assets by using certain kinds of trusts, then obviously the need for liquidity becomes more important. They’re going to need some highly efficient life insurance structures that they know will last for the rest of their lives.

Four Questions to Ask Clients

1. Considering the proposed new rules of estate taxes, have you contemplated what’s going to happen to your estate in the event of your death—now and 10 to 15 years in the future? Your assets are growing and your estate is growing, but chances are you haven’t done significant enough planning to get all of that growth out of your estate.

2. What are the tools we can use now that will mitigate, reduce or eliminate the tax?

3. Do you have adequate liquidity for your heirs to inherit if you give away--or delay transferring-- assets you’re intending to leave them?

4. How satisfied are you with your long-term plan, assuming that tax rates and interest rates will likely be higher in the years ahead?

Three Questions to Ask Yourself

1. My client has expressed interest in charitable giving and legacy planning? Do I really have the expertise to help them?

2. If not, can I refer them with confidence to an expert who does?

3. If I help my client with charitable giving, am I sacrificing my assets under management?

Question 3 is especially important. Being a proficient advisor is not just about managing money. If you deliver an excellent result for your client on the planned giving side, it can only help your business. Your client will be more than happy to refer you to close friends and family.

Further, you’re not really migrating assets away from your firm when you help clients with their philanthropic goals. If you help a client give $5 million to a pooled income fund, you may still be able to manage the money, sometimes for the next two or three generations. Same goes if the gift is given via charitable remainder trust.

However, I’ve noticed another trend that’s even more concerning: FOMO (Fear of Missing Out). When clients rush to make transfers to beat the new tax bill, they worry if they don’t move fast enough, they’ll miss out on opportunities to reduce their estate taxes before current exemptions expire.

While it may be wise for a client to make a transfer, if they haven’t done proper cash flow analysis in advance, haven’t really crafted proper trusts or haven’t really considered the impact of an irrevocable transfer of considerable portions of their estate, then they shouldn’t move forward.

Real World Example

I’m working with a high-net-worth family in the northeast whose $50 million in assets were very poorly planned for. While they have basic revocable trusts in place, they’re concerned about their children inheriting too much wealth before they’re ready for the responsibility that goes with that windfall. They’re also concerned about taxes and worried about changes in the tax laws. Further, they live in a state where the rules don’t favor good planning, and their current documents are designed to distribute all of their remaining wealth to their children at relatively young ages.

Disturbing as this situation may be, it’s relatively common over the course of my normal document review. With pending tax changes looming, clients are often rushing to fund trusts that their attorney had already drafted. Yet, these trusts have the same dispositive provisions that their revocable trusts have. We caution clients to take a breath and wait for the planning to be completed before they start executing documents that don’t really follow their wishes and that require them to transfer assets that they can never give back.

While the proposed legislation is spurring millions of affluent Americans to take action, I hope that action is well thought out. We’ll find out next year if it was.

When I explained to my $50 million client that the funds he wanted to transfer irrevocably really shouldn’t be touched again in his lifetime, he paused and waited until we ran new projections for him. The numbers showed he could remain comfortably liquid and would never lack access to his capital for the balance of his life.

Calm thinking really matters.

There’s More to Learn

When people are rushing to make life changing wealth decisions to proposed tax laws that have yet to enacted, I keep thinking about the expression “they don’t know what they don’t know.” Given the narrow focus of what so many advisors think their role is, there’s a gross misunderstanding that wealthy people have it all figured out. Trust me, they don’t.

As Theodore Roosevelt famously said: “Nobody cares how much you know, until they know how much you care.”

Randy A. Fox,CFP, AEP is the founder ofTwo Hawks Consulting LLC.He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker. 

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