HNW clients face big tax bills, estate liability if they fail to plan
Why reticent clients need to be convinced to plan
Tenenbaum acknowledges that some clients may not want to do much advanced planning, or that the client might have thought about these issues without putting them into a real plan. Complexity can be a serious roadblock for clients, especially if plans need to be implemented during the client’s lifetime. A common strategy among some clients would be to implement an estate freeze, for example, capping the value of the shares they own in a business and passing additional shares that can accrue value on to their heirs. This helps mitigate the capital gains tax that has to be paid when a business is inherited by the successor generation.
The issue, Tenenbaum explains, can be that the client is unsure if the capped value of what they own in the company is enough for them to live on in retirement. Longevity and the cost of living can be uncertainties even high net worth clients have to grapple with, making final decisions on pre-death estate planning strategies like an estate freeze difficult.
It’s the job of lawyers and financial advisors to show clients where these strategies are appropriate. In the case of a client’s reticence to cap the value of their business as the primary asset they own, a financial plan could be a valuable touchstone to help show them what they need to live a long life in retirement.
Without decisions on strategies like this, the family is subject to the capital gains tax that comes from a deemed disposition. In the case of businesses built by the generation passing on, the value accrued could be in the tens or hundreds of millions of dollars. Huge liquidity issues can arise and force the heirs to make decisions they otherwise wouldn’t, such as selling assets from the business or the business itself. Even a relatively straightforward strategy like an estate freeze can go a long way towards mitigating the impacts of that tax bill, Tenenbaum explains.
Advisors’ role in building plans
While estate planning lawyers will lead in the execution of these plans, Tenenbaum says the financial advisor plays an important role. For advisors who have longstanding relationships with high net worth clients, Tenenbaum says they can issue spot and identify what the client’s goals really are. Advisors often have a deeper and longer-lasting relationship with their client than some of the other professionals who serve them, and that understanding can be powerful in making sure they plan for what matters to them.
