This New Year, Help HNW Clients Plan Ahead with Tax-Optimized Trusts

This New Year, Help HNW Clients Plan Ahead with Tax-Optimized Trusts

As 2015 approaches, estate planning and wealth transfer should be top of mind, especially for your high-net worth and ultra-high net worth clients. According to the 2013 U.S. Trust, Insights on Wealth and Worth, there are nearly two million high-net worth households in the U.S. with investable assets of $3 million or more. Roughly 60 percent believe a financial legacy is important. But they do not always take action, as nearly three-fourths (72 percent) do not have a comprehensive estate plan.

Help clients make estate planning a New Year’s resolution. Otherwise, the estate that you worked so hard to build for your client may be subject to probate, creditors, legal fees and taxes. Clients should create up-to-date wills and estate plans with an experienced lawyer and tax expert. Your financial planning and investment expertise is essential to maximize their asset growth and protection.

Trusts are becoming increasingly important in today’s challenging investing environment. Trusts can specify exactly how—and when—assets pass to beneficiaries. While trusts are traditionally used to control distribution of assets from a “governance” perspective, today many advisors say tax planning is the primary factor driving their decision.


Something New: Tax-Optimize Trusts with IOVAs

A new generation of low-cost Investment-Only Variable Annuities (IOVAs) can be used with trusts, to control how much clients pay in taxes—and when they pay those taxes. While traditional VAs rarely work, due to high asset-based fees, limited funds, complex guarantees and steep commissions, IOVAs have gained popularity, helping advisors maximize the power of tax deferral in a low-cost wrapper—with an extensive lineup of funds and virtually no contribution limits.

Jefferson National discussed tax-optimizing trusts with Drew J. Bottaro, Esq., CFP®, Vice President and Senior Financial Counselor at Weston Financial. A graduate of MIT and Boston University School of Law, who has taught estate planning at the graduate level, Bottaro notes, “It’s not necessarily complicated to use annuities with trusts—and there can be measurable benefits in certain scenarios.”

“Tax deferral is one of the primary benefits,” Bottaro adds. “And that’s where a low-cost Investment-Only Variable Annuity with a broad choice of underlying funds provides the competitive advantage.” By helping to maximize tax-deferred growth, enhance diversification and manage volatility, IOVAs can help clients build and maintain more wealth within the trust.


An Expert’s View on an Innovative Approach

According to Bottaro, there are important guidelines for tax-optimizing trusts with IOVAs.  In cases where a trust is acting as an "agent of a natural person," a VA will likely qualify for tax deferral. He also notes that there are essentially two “flavors” of trusts—those that remove the annuity’s tax protection, and those that keep it intact. The standard revocable trust can typically benefit from tax deferral, while irrevocable trusts often do not qualify under the “agent of a natural person” test. Trusts that work well with IOVAs include Special Needs Trust or Supplemental Needs Trust; Credit Shelter Trusts or Bypass Trusts, to help minimize current income and save more for future generations; and Net Income with Makeup Charitable Remainder Unitrusts (NIMCRUT), to reduce taxation of highly appreciated assets and control timing of income distribution.

Bottaro recently used a Charitable Remainder Unitrust (CRUT) for a client who owned low-basis stock with more than 90 percent appreciation. The potential of substantial capital gains made it difficult to diversify in a taxable account. Instead, Bottaro placed roughly $1 million of highly appreciated stock into a CRUT.

Bottaro’s client gets a current write-off for the charitable contribution. Once in the trust, the stock can be sold with no immediate taxable gains. Bottaro invests the proceeds into an IOVA, to fully diversify the portfolio. All income and earnings each year are tax-deferred until a pre-set date. In this case, provisions delay distributions—and their taxation—until the client reaches age 68. The trust is like a “private pension” while the client is alive—and when the client passes, the remainder in the trust will belong to the charity.


Prepare HNW Clients in the New Year

While competition for high-net worth clients increases, and complex market dynamics make every basis point count, you can differentiate your firm and create more value for your clients through expertise in wealth transfer and estate planning. Partner with legal and tax experts to provide the most comprehensive solutions. And, as you consider using trusts for estate-friendly investment structures, consider tax-optimizing those trusts with Investment-Only Variable Annuities. By building more wealth and controlling how much is paid in taxes—and when those taxes are paid—you can help maximize outcomes for clients and their heirs.


Important Disclosures:

Variable annuities are investments subject to market fluctuation and risk, including possible loss of principal. Your units, when you make a withdrawal or surrender, may be worth more or less than your original investment.

Variable annuities are long-term investments to help you meet retirement and other long-range goals. Withdrawal of tax-deferred accumulations are subject to ordinary income tax. Withdrawals made prior to age 59 ½ may incur a 10% IRS tax penalty. Annuities are not deposits or obligations of, or guaranteed by any bank, nor are they FDIC insured.


Laurence Greenberg is President of Jefferson National, which provides retirement products (variable annuities) for fee-based and fee-only advisers and their clients. For more information, please visit

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