L&HA: Recent passage of Affordable Care Act and the presidential election this November have created a perfect storm for financial advisors and their clients. How close are we to the Fiscal Cliff?
KK: We know that it’s coming, whether we’re standing right at the edge or the edge is farther off. There is tremendous uncertainty not only for what’s going on in Washington and the country but also ultimately for individual clients as they try to figure out how to react and plan accordingly. Any of a number of outcomes could result in different ways to go from a planning standpoint. In the face of uncertainty the default seems to be for clients and sometimes for advisors to do nothing. We’ll just wait and see what happens – that’s the easy out. The problem is there’s very little time between the election and the end of the year when we’ll find ourselves at that Fiscal Cliff.
L&HA: Fiscal Cliff is a colorful term.
KK: It’s designed to get people’s attention. From a policy-making standpoint for the government, they are trying to scare people but it seems to have that effect for individual clients, too, and the result of that fear, again, is to do nothing. Advisors sometimes are confused and end up going along. We’re trying to encourage advisors to have proactive conversations with their clients now.
L&HA: How proactive can one be?
KK: We know there is some uncertainty, but we also know some things are certain. We know as a result of the Affordable Care Act and ObamaCare being upheld by the Supreme Court, higher income clients and investment-oriented clients are going to be facing some additional income and investment taxes. Those can be planned for now.
L&HA: What are ways advisors can help their clients plan?
KK: We’re a life insurance advisory firm, so we partner with advisors to help them make life insurance a consistent part of their practice. We often talk about using life insurance as a tax-efficient vehicle for wealth accumulation because it’s tax-deferred while it’s growing and because one can take loans out against the income-tax-free death benefit. That allows for an income-tax-free retirement income stream.
L&HA: Despite how the election goes, are there things advisors need to do now?
KK: The gift tax limitation is currently at $5 million. We don’t know for sure if that’s going to continue after the first of the year, or if it’s going to go back to the $1 million limit of the pre-Bush era tax cuts or the 2009 level of $3.5 million. We do know that it’s never been as high as it is in our lifetime. It’s something we would encourage advisors to talk to clients about, if clients are prone to do some gifting.
L&HA: What if clients are inclined to gift, but aren’t sure?
KK: If clients are potentially interested in gifting but are hesitant, there may be stopgap measures they can implement with their advisors, tax attorneys, and CPAs, structures they can put in place that can be executed on a wait-and-see basis. If the planning isn’t done now, trying to get it done in the last week or two of this year could be impossible.
L&HA: We’re looking at a critical timeframe here. Saybrus works with advisors to make sure they are up to speed, but where else can advisors go to stay informed?
KK: We partner with financial institutions and advisors to make life insurance a consistent part of their practice. That always comes around to tax planning issues. Many broker dealers, wire house firms, and banks have resources in the advanced planning area that are up-to-date on the potential changes in tax laws and can review the issues and ramifications given a particular client’s situation. There’s lots of information in the press; advisors can stay abreast of industry publications and the resources they provide.
L&HA: Is it important for advisors to meet with clients this fall?
KK: Advisors are often looking for reasons to be proactive, so this is a very good time to reach out to clients. Even if the next portfolio review is scheduled for first quarter 2013, contact clients to suggest that they meet now to talk through the potential implications of the various taxes that may or may not come to pass. Some taxes we know will be imposed — taxes on investments, dividends, rents, royalties, and so forth as related to the health care legislation and the additional high income earner taxes.
L&HA: What’s the client profile we’re targeting here?
KK: We’re generally talking about two spectrums, either high income clients or high net worth. The latter would have $1 million plus in investible net worth, exclusive of primary residence. The high net worth client that’s more focused on wealth transfer is usually 65 and older, a group many advisors don’t think of when it comes to life insurance. The high income client, earning high six-figure incomes (or greater), is usually under age 55, say 40-55 years old.
L&HA: Are there certain insurance products that come to mind?
KK: Usually with high net worth clients we’re talking about wealth transfer or preservation issues to preserve assets from the effect of taxes. If they are leaving qualified assets to their children or grandchildren that may be taxed as ordinary income, one strategy is to use a life insurance policy to transition the money out of a qualified plan now on a systematic basis over the next several years and pay the tax, and then leave an income-tax-free benefit to children and grandchildren. Where are income tax rates going to be 5, 10, or 15 years down the road? Most people think they are going to be higher so let’s do the planning now. In addition, we’re adding long term care riders to protect assets from the erosion of value for the long term care of one of the spouses.
L&HA: Isn’t it tough to meet with clients in the context of uncertainty and fear?
KK: If advisors work with an advanced planning resource, they can map a strategy and present several scenarios to educate their clients about issues that may come up and discuss putting contingency planning in place now.