Wealth transfer and estate planning can be among the most difficult conversations to have with clients, but advisors would be remiss in assuming that just because a client has accumulated wealth, their affairs are otherwise in good order.
"You would be surprised by the number of times that affluent clients have not completed even the most basic estate planning," said Chad Smith, a wealth management strategist with broker-dealer HD Vest.
In general, wealth transfer planning includes legal factors and, of course, emotional family dynamics that can complicate matters, but a third key aspect is tax. That's why it is critical to have the discussion with your clients and ensure that proper, tax-efficient strategies are in place. "When somebody passes away, assets go to one of three places: heirs, charities, or to the government in the form of estate taxes. Even when assets go to heirs, sometimes taxes are involved," said Smith. "In some states there's inheritance tax that is paid by heirs, then there are other states that have a state estate tax, and then there's an estate tax imposed at a federal level."
Annually reviewing a client's estate planning documents and beneficiary information to ensure they are up to date is a good rule for advisors to implement; however, Smith also suggested some specific tax strategies that advisors should have on their radar, including:
Stay abreast of state estate and inheritance taxes, as these taxes have been, and continue to be, in flux and can vary greatly by state. A good resource, said Smith, is Forbes' annual "Where Not to Die" report.
Determine where assets are domiciled, as it can have tax implications.
Be familiar with the portability concept under the American Taxpayer Relief Act, which refers to being able to transfer the estate tax exemption of one spouse to the other upon the death of the first spouse. Does it make sense for a client to still have a credit shelter trust, which is also known as a B trust or marital trust? If a client does not have a credit shelter trust, should you file Form 706, even if no tax is owed?
To help mitigate taxes for those affluent clients subject to estate tax, should you create entities such as irrevocable trusts? Instead of giving assets outright to heirs, you might consider giving assets to trusts for their benefit.
When dealing with the transfer of a business entity, should you create a defective grantor trust, which is a form of irrevocable trust? "Those are ways in which we transfer businesses quite often to trusts in a very tax-efficient manner," Smith said.
With mass affluent clients, it's worth examining which heirs will receive which assets. For example, if a client is in a 15 percent tax bracket and plans to leave assets to a loved one in the 39.6 percent bracket, it may make sense to do a Roth conversion before the heir receives the money so you can leverage the client's lower tax rate, or to consider other methods to have assets taxed at the lowest possible tax bracket.
The views and opinions presented in this article are those of Chad Smith and not of HD Vest Financial Services or its subsidiaries.
Published in partnership with HD Vest. For more information about HD Vest Financial Services and how we can help you implement a strategy for transferring your clients’ wealth, please visit
HD Vest Financial Services® and its affiliates (collectively, “H.D. Vest, Inc.”) do not provide tax or accounting services. You should consult your tax professional regarding the tax implications of any investments.
The views and opinions presented in this article are those of Chad Smith and not of HD Vest Financial Services® or its subsidiaries.
HD Vest Financial Services® is the holding company for the group of companies providing financial services under the HD Vest name.
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