Quite a Gift

Q: Can you give me an example of the flexibility you build into an estate plan?

A: I have a client who's 40 and worth well over $30 million. His accountant told him to set up an irrevocable life insurance trust, and buy a life insurance policy in that trust. The [accountant told him that the] type of policy he should buy is a no-lapse guarantee universal life product. The way he's funding the life insurance–it never builds any cash value–is that he pays the same premium every year, and whenever he dies, he gets that death benefit. Say he's spending $15,000/year for that policy and the death benefit is $1 million–it's $1 million at 40, $1 million at 50, it's $1 million at 100.

This client also keeps the majority of his money in cash. So why would he do that when he could buy a cash value insurance policy within his trust that would give him a greater rate of return than if he had kept the money at Chase, and the internal buildup will give him that estate planning protection long turn, and by the way, the value of the policy grows each and every year? It may be a million in year one, but it may be $3 million in year 20. It's better for a client like that who has the dual needs of getting a higher rate of return on his cash, and an estate planning need for the insurance, and he has a real risk of living a long life.

Q: Do you project out to 100?

A: At least 100. We make decisions and recommendations based on the belief that they are going to live a long life. Because plans always work when you plan that they're going to die early–everyone has enough money when they die early. The question is what happens if they live long.

Q: You mentioned capital gains as an issue. They're awfully low now, so how does this fit into how you plan for taxes when putting together a portfolio?

A: It's so important to look at a client holistically. A good advisor will look across all the investments of a client, and then determine what the most tax-efficient investments are in the portfolio. We do a lot of alternative investments–hedge funds, commodities, timber, REITs–but most of these asset classes tend to be tax inefficient. When you're talking tax efficiency in New York or in any state, [do you want] a 35% tax on the federal level versus a 15% tax? Would I rather have the hedge fund or a taxable bond that is throwing off interest or gains that is being taxed at a 35% short-term capital gains rate–would I rather have that in my taxable or my non-taxable account? If you look holistically at a client across all their investments you can save them a lot of money over time by making sure their portfolio is maximized for the tax benefits.

A lot of our clients are charitably inclined, but many of them simply write a check to the charity every year before we sit down with them. They have all these appreciated securities in their account and yet they tend to sell the security, pay the tax, and then donate the money, instead of just donating the stock.

Q: How closely do you worry about tax developments?

A: We spend a lot of time in the fourth quarter of every year pounding clients on what they need to be doing. Why wait until December [for tax loss harvesting]? We were doing it when the market dipped in the end of the first quarter of last year. Why is it ingrained in our heads that we can't do tax planning until December? Tax planning is for all year round. The same thing goes for charitable donations.

Editor-in-Chief Jamie Green can be reached at [email protected].