Wealth Transfer and Generational Planning

Driving growth for advisors and their clients

by Laurence Greenberg

Mr. Greenberg is President of Jefferson National, innovator of the industry’s first flat- fee investment-only variable annuity with the largest selection of underlying funds, which was recently named in Barron’s list of Top 50 Annuities for a second consecutive year. For more information, please visit
www.jeffnat.com or call 1-866-WHY-FLAT (866-949-3528).

The transfer of wealth between generations has become a defining issue for the financial services industry. In the coming years, RIAs and fee-based advisors will need to prepare for an inevitable shift that will significantly impact how they manage their practice and counsel their clients. This massive intergenerational transfer of wealth is starting now – and is on pace to accelerate over the next three decades. Any advisor who is building their practice for the long-term must take action.

Expertise in wealth transfer and generational planning is critical to retain clients, especially the high net worth. It can help deepen the relationship with your client, as well as your client’s family, allowing you to manage more of the household’s assets. It can not only help your client leave an enduring legacy for future generations – it can also help you create a future generation of clients for your firm.

To capitalize on this powerful trend, it is important to understand three key components: 1) the demographics driving wealth transfer; 2) the innovative approaches to help clients build and transfer their legacy; and 3) how generational differences and family dynamics can impact client retention.

Demographics Drive a Growing Opportunity

According to the Pew Research Center, roughly 10,000 Baby Boomers are turning 65 every day and close to 10,000 more will cross that threshold each day for the next 19 years. As this massive cohort transitions from accumulation to retirement, estate planning increases in importance.

The opportunity is huge. As noted in a recent study by Accenture , a “Great Transfer” of wealth – estimated at over $12 trillion – is currently taking place as Boomers inherit wealth from their parents. And an even “Greater Transfer” – estimated at over $30 trillion – will occur as Boomers pass on wealth to their heirs.

This is especially relevant for the growing number of high net worth households. According to the 2013 U.S. Trust, Insights on Wealth and Worth, there are now nearly 2 million households in the U.S. with investable assets of $3 million or more. And while nearly six in ten of wealthy investors believe it is important to leave a financial legacy to the next generation, the desire does not always translate into action. In fact, 72 percent of high net worth investors surveyed do not have a comprehensive estate plan, 66 percent have not implemented a revocable trust and 80 percent do not have an irrevocable trust.

An Innovative Approach for Wealth Transfer

These facts show an obvious need for advisors to advance the process. Without an estate plan for the effective transfer of wealth, clients’ heirs may be subjected to a number of obstacles, such as probate, creditors, lawsuits, judgments and legal fees – all of which can compromise the value of the legacy that you and your client worked hard to create. More importantly, this provides an opportunity for you to demonstrate a proactive commitment to serve your client and their family, using an innovative approach to holistically integrate wealth transfer within your client’s overall financial plan.

To maximize outcomes for clients and their heirs, there is an urgent need for wealth transfer solutions that can adapt to today’s challenging investment environment of ongoing volatility, record low-yields and rising tax rates. As a result, trust planning has become an increasingly important solution. While the traditional purpose of using a trust has been to control the distribution of assets from the “governance” point of view, today many advisors say that tax planning is the primary factor driving their decision to use trusts.

With the advent of new products, advisors can offer their clients innovative ways of funding a trust. One such method is to use a variable annuity (VA) to control how much they pay in taxes – and when they pay those taxes. “It’s not necessarily complicated to use annuities with trusts – and there can be measurable benefits in certain scenarios,” says Drew J. Bottaro, Vice President and Senior Financial Counselor at Weston Financial. “Tax deferral is one of the primary benefits. And that’s where a low-cost Investment-Only Variable Annuity with a broad choice of underlying funds provides the competitive advantage.”

Using IOVAs to Tax-Optimize Trusts

While traditional VAs have often been inappropriate for trusts, because of high asset-based insurance fees, a limited selection of investment options, complex guarantees and steep commissions, a new generation of low-cost Investment-Only Variable Annuities (IOVAs) has changed the value proposition.
With low-costs or flat-fees, IOVAs can help maximize the power of tax-deferral. With an expanded selection of underlying funds, including more non-correlated assets and liquid alternative funds that employ strategies like those favored by hedge funds and elite institutional investors, IOVAs can help enhance diversification and better manage volatility. Combined, this helps to build and maintain more wealth within the trust.

While the traditional purpose of using a trust has been to control the distribution of assets from the “governance” point of view, today many advisors say that tax planning is the primary factor driving their decision to use trusts

When using an IOVA to tax-optimize trusts, keep in mind specific guidelines. In particular, the trust must be acting as a representative or an “agent of a natural person” in order for an IOVA, or any other type of VA, to be used. Further, there are distinct types of trusts that keep the annuity’s tax-deferral intact. Each of these distinct types of trusts can offer specific advantages to minimize, delay or eliminate income to the beneficiary, helping to increase accumulation and reduce the beneficiaries’ tax burden.

For example, the Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) will allow for the ability to reduce the taxation of highly appreciated assets and then control timing of the distribution of income. The Revocable Trust can be especially valuable for a grantor in a high tax bracket. The Credit Shelter Trust or Bypass Trust is a vehicle to keep current trust income to a minimum – and save more wealth for the next generation. The Special Needs Trust or Supplemental Needs Trust can allow the trustee total discretion for distributing assets to the child benefitting from the trust.

Outside of using trusts, another strategic option is to use a non-qualified stretch with an IOVA to transfer wealth to heirs while avoiding probate and estate taxes. “It used to be that if you were going to leave an annuity to your children, all the gains were taxed at death. It could take a big hit,” says Wes Martin, ChFC, CFP, founder and principal of Martin Financial Group. “Now you can use a VA in the same way that you would use a stretch IRA. Where you continue to tax-defer the money and pay out a set distribution over your children’s lifetime.”

Generational Dynamics

Once you have developed the appropriate solution for the effective transfer of wealth, keep in mind one important fact: Studies show that as much as 86 percent of heirs do not stay with their parents’ advisors. A number of generational dynamics are at play. Addressing these factors head on presents a tremendous opportunity for using generational planning – alongside wealth transfer – to create a new generation of clients.

First, younger investors are likely to be more self-directed, well-educated and independent than their parents. Today, there is no longer a monopoly on financial information, with more transparency and more access to real-time market data. Likewise, younger investors are inclined to access information differently than their parents, with increased focus on mobile, social and digital channels. Developing a platform to leverage these channels is becoming increasingly important.

Next, the financial advisory industry is aging. As studies show, the average age of today’s advisors is 50 years – and many firms don’t have a strategy to attract or retain younger clients. This presents a unique opportunity. Advisors can experience tremendous benefit from hiring a younger generation of advisors who can serve this younger generation of clients – to understand their expectations, communicate with them on their own terms, and grow with them as they grow their AUM.

And while there is no doubt that serving the head of the household is your primary focus, there are huge benefits from shifting to a more family-centric approach. Engaging the spouse and other family members in the planning process now, can help to retain them in the future. These conversations don’t always happen easily. According to Accenture, more than 60 percent of children did not have the opportunity to discuss a will with their parents before they passed. But if the ultimate goal is to build wealth for the entire family, and retain them as your clients, then engaging family members in this dialogue becomes an important part of your job.

Capitalize on a Powerful Trend

As this tremendous transfer of wealth takes places – first to Boomers, then to Gen X, then to Millenials – it is important for advisors to develop effective wealth transfer strategies for their clients and their families. And to confront today’s challenging investment environment of ongoing volatility, record low-yields and rising tax rates, trust planning is a solution that is increasing in importance. Using an Investment Only annuity (IOVA) to tax-optimize trusts, means that you can control not only how much clients pay in taxes – but also when they pay those taxes – to maximize outcomes for clients and their heirs.

And based on the enormous amount of wealth that will soon be transferred to this next generation, it’s critical that advisors focus on developing sustainable relationships with these young investors. This is the only way to retain these clients and their assets. Combining an innovative approach to wealth transfer and savvy strategies for generational planning, you can position your firm to serve and retain the next generation of clients.




End Notes
1. The “Greater” Wealth Transfer, Accenture (2012)
2. Morgan Stanley Private Wealth Management/Campden Wealth (2014); Rothstein Kass (2009)