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Capturing Tax Advantages for High-Net-Worth Clients

Sam Rocke   |   March 2022   |   2-minute read

We talk a lot about taxes. And with everything happening over the last two years, there was significant speculation about how tax laws might change, and considerable discussion about how to help our clients prepare. A lot of clients worked on estate planning at the end of 2021, trying to capture tax advantages before the anticipated tax changes took effect.

And then, not much happened with regards to tax laws. But that doesn’t mean there’s not an opportunity. Now is the time to capitalize on any planning that was done previously and see where insurance can help those clients manage their tax position.

The most important thing is to act.

For your high-net-worth clients, we have two planning ideas — one for individual clients and one focused on business owners. First, we’ll break down some ideas for estate planning for individual. In our next blog, we’ll look at buy-sell arrangements for business owners.

Recap of Tax Changes (and what stayed the same)

Although many of the expected changes didn’t materialize, here’s a quick recap of where things stand:

  • For individuals, exemptions have gone up to about $12 million per individual. That means a husband and wife can shelter up to $24 million.
  • Annual exclusion gifts have gone up from $15,000 per year up to $16,000.
  • Estate tax rates are still the same at 40%.
  • The applicable federal rate (AFR) for loans — which are typically used for estate planning strategies — are still very, very low, even though interest rates are starting to tick up.
  • The Build Back Better plan, which is the legislative structure that was intended to house all these new tax changes seems to be tabled for now.

Estate Planning

Toward the end of last year, many clients were trying to get their estates in order. They made gifts to trusts. And they made substantial transactions, whether it was a gift to a business or a gift of liquid assets. Many of these were in anticipation of tax changes. The tax changes didn't come, but they still did planning.

The fourth quarter was busy. Clients wanted to get ahead of grantor trusts being eliminated in the creation of an irrevocable trust. From an estate planning perspective, advisors either encouraged their clients to make a significant gift into an existing grantor trust or they hurried to help them create a grantor trust that could be grandfathered in as long as the transactions were completed prior to Jan. 1, 2022.

So, your clients might have a trust that is significantly funded and they're sitting with that money on the sidelines, determining what makes the most sense to do with those assets. In addition, the grantor is paying taxes on behalf of the trust, and over time that adds up.

The strategy is to divert some of the money to a life insurance product. All the growth in the policy is tax deferred and the ultimate benefit is tax free, creating a very liquid pool of money to fund their estate tax liability. This also reduces the grantor’s income tax liability while also enhancing the ultimate amount that goes to the trust to help fund the estate taxes.

And even those clients that aren’t willing to plan need liquidity and present an opportunity to use life insurance. Because even though we can’t predict changes, we can prepare for them.

Watch for our follow-up post offering ideas for buy-sell arrangements for business owners.

About the Author

Sam Rocke leads the protection sales, advanced planning and RIA teams at Ash Brokerage. He's driven to produce the best possible results for each individual, family or business by providing objective evaluations of insurance solutions.