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Estate Plan

Tips From the Pros: Estate Planning for Middle Rich Clients

Stick to the basics.

Advisors have an important role in convincing clients to take the necessary steps to achieve their goals. My thesis is that clients can sense our doubts. If we’re unsure about a strategy, if we worry about it, if we’re confused about it, if we think it’s too risky or complex, the client will sense that and draw back no matter how enthusiastic we try to appear. Think about your physician, who may express doubt in the face of uncertain diagnosis or may summarize the pros and cons of options, but in almost all instances will end with a hearty “here’s what we need to do”—or words to that effect. Your physician knows that their confidence is one key to your healing.

No advisor understands every idea, technique or possible plan. Often, we advisors even manage to confuse ourselves. We understand grantor retained annuity trusts (GRATs), but we’re not quite sure what seminar speakers mean when they discuss the 105-day grace period for paying the annuity. We understand charitable remainder trusts, but we’re not quite sure how a flip-charitable remainder unitrust (CRUT) operates, or we question whether we should be recommending CRUTs when we see a private letter ruling that disallows a CRUT in which a trustee could allocate 75% of the unitrust payment between a surviving spouse and charity. We’ve been drafting trusts for spouses and descendants for years, but now we hear about spousal lifetime asset trusts—are they the same or something different?  

Stick to the Basics

I bring happy news: The goals of most clients represented by most advisors, most of the time, can be met using common techniques, the basics of which are well understood and often time-tested. For instance, a GRAT in which the annuity is paid once a year or once a quarter, right on time, will work just fine for almost all of our clients almost all of the time. Even better, if we stick to those “basic” parts of even “advanced” techniques, then we’ll be much more confident in our recommendations, and that confidence will inspire our clients who will then move along with their planning.

Advisors sometimes worry that they’ll be criticized by other advisors if they don’t recommend the latest bell and whistle. When I was a young lawyer, I drafted a complicated charitable lead annuity trust (CLAT) using a form drafted and publicized by a leading lawyer in New York City. Some other lawyers sent me a list of half a dozen things that my CLAT lacked. So I called the lawyer: “None of those things are necessary,” was the simple reply. The answer is a good one and fits a myriad of circumstances. If the last bell and whistle isn’t necessary, why use it? “I don’t find it helpful to add that complexity” is a perfectly fine response to those who want to push us beyond where we’re comfortable.  

Expertise isn’t an end in itself, it’s a tool we deploy to help our clients. We understand that no matter how rich our client is, there’s always someone richer (even if sometimes our clients have a hard time remembering that), and similarly, no matter how much knowledge and experience we have, there’s always—always—someone who’s executed a great idea that we haven’t thought of. So what? Our job is to meet the needs of our clients, and for almost all of them, that last great idea isn’t necessary. If we do what we’re comfortable with and excited about doing, we’ll take care of our middle rich clients. 

That isn’t to say that each of us shouldn’t work hard all the time to learn and become more comfortable with a larger range of planning options. My observation of advisors is that those who don’t keep learning ought to retire because they’ll quickly lose the ability to inspire and lead clients. However, each of us must learn in our own way, at our own pace, not in response to pressures to solve client problems on the fly with ideas we don’t really understand.

Who’s Middle Rich?

I’ve mentioned middle rich clients, but who are they? Truth: I don’t know . . . but I have a guess. Let’s start with who’s “rich.” Reports in the summer of 2022 were that the median wealth of the top
1% in the United States was between $11 million to $11.5 million.1 And we know that there’s no estate tax in 2023 until our client has almost $13 million. It seems to me that our client isn’t rich if their estate is below the estate tax threshold. If that’s rich, who’s middle rich?

Let’s try a thought experiment. How much money would a client have to have to zero out their estate if, in 2023, they have their full exclusion amount unused, a 20-year life expectancy, spend all of the income from all of their assets—let’s say about 2.5% annually, pre-tax—and will do no estate planning other than making a large gift to a grantor trust?  That is, the client wants to give away to a grantor trust about $13 million now and then every year swap assets into the trust in exchange for the cash earnings in the trust, so that the client may always spend all the cash from the client’s original asset pile. If the client’s assets appreciate at about 5% a year, on top of the 2.5% estimated income, the client with about $21 million will exhaust all of the assets they didn’t originally give away in about 20 years. If we assume the client makes some annual exclusion gifts, and perhaps some of the assets can be discounted a little bit under existing law, then the $21 million may approach $25 million, and if the client has a longer life expectancy, the client will need a larger pile of assets on Day 1 to avoid running out prematurely.  

This thought experiment suggests that without sophisticated estate planning, a client who gives away to a grantor trust what Uncle Sam allows, pays the income tax on the assets in the trust and swaps cash in the trust for assets out of the trust can have assets in the $20 million to $25 million range, double that for a couple, without paying any estate tax. That seems like a good working range for the middle rich.  

Before going further, note what makes this thought experiment work? Time—20 years in the example. A client who dithers for years waiting for the perfect plan or looking for the best advisor will eventually become the client for whom only emergency, last minute, undoubtedly complex, planning with many bells and whistles must be done.  

The Best Gift

Where I come from, there’s an old saying: The best way to drink bourbon is however you’re drinking it. Similarly, the best gift for your client to make is the one they’ll make. However much your client will give, and whatever the terms are of the grantor trust that your client will agree to have as beneficiary, that’s the best gift for your client to start with. Once the client starts estate planning, the client will enjoy continuing because you’ll give them all sorts of ideas. And those ideas, the ones you believe and have confidence in, are the ones your client will be excited about and eager to do.

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