Inheriting heirs will secure your firm's future

Trusts are one of the most widely used solutions for wealth transfer, especially for high net worth and ultra-high net worth clients. (Photo: iStock)

A new take on funding trusts

Trusts can offer many advantages, helping to reduce estate and gift taxes, avoid probate, and protect assets from creditors and lawsuits. According to a 2015 survey by Jefferson National, nearly three-fourths of advisors use trusts as a vehicle for wealth transfer. And 47 percent of advisors say that trusts are their primary wealth transfer vehicle, substantially outpacing all other options.

The survey also illustrates that the vast majority of advisors (97 percent) consider tax consequences when looking at vehicles to use for wealth transfer, and 84 percent say it is important or extremely important to use a vehicle for wealth transfer that helps manage long-term tax consequences. But tax rates on trust income are high — even at very low thresholds. In 2016, the maximum tax rate of 39.6 percent comes into effect at just $12,400 of trust income, compared to $415,050 of income for an individual taxpayer.

One strategy that is becoming increasingly popular is funding a trust through an IOVA. By using an IOVA, trustees can control the timing of income distribution from the trust — and control when taxes are paid on that income. IOVAs can maximize tax-deferred growth during the accumulation phase with a broad selection of funds and complete control of assets. They are easily transferrable to a named set of beneficiaries. And unlike traditional variable annuities, IOVAs eliminate the layers of asset based fees, complex insurance guarantees and commissions that make most traditional variable annuities unsuitable for use with trusts. With all of these advantages, eight out of 10 advisors agree an IOVA would better serve a client's trust than a traditional variable annuity.

Related: A conversation about efficient wealth transfers

A simple solution for stretching assets

For clients who seek a less complex solution to stretch income over their heir's lifetime, many IOVAs offer a Non-Qualified Stretch payout option. It provides a simplified solution for clients to transfer and distribute wealth — without the cost and complexity of other legacy planning solutions. There are multiple benefits. Clients' heirs can avoid the high taxes of a lump sum payout, instead taking annual distributions to spread the tax liability out over years, decades or an entire lifetime. And heirs can protect and build more wealth by leveraging more years of tax-deferred compounding to maximize accumulation.

For clients who seek an additional level of greater control over how that wealth is distributed to heirs, the Restricted Stretch payout option is another type of Non-Qualified Stretch. The Restricted Stretch allows the client to restrict distribution options, so that beneficiaries can take only the required annual minimum distributions (RMDs). In this way, clients can create predictable income streams for heirs, while limiting the amount of the withdrawals, to help ensure their wealth is more likely to last for the heir's entire lifetime.

Traditional charitable legacy planning can be inflexible and complex. (Photo: iStock)

A unique approach to charitable giving

Traditional charitable legacy planning, such as private foundations, donor advised funds and pooled income funds, can be inflexible and complex, and very costly to create and maintain. While these structures provide an immediate tax write-off for highly appreciated assets, they typically require assets to be gifted irrevocably in exchange for current period tax deduction. There are other drawbacks, including limits as to how much clients can deduct.

A solution with greater control is to designate a charity as a beneficiary of an IOVA through a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT). Not only do clients reduce taxation of highly appreciated assets and take a tax deduction for charitable contributions the year the NIMCRUT is established, they also retain full ownership, access and control of assets, including investment selection. They retain an ongoing stream of income, while controlling the timing of income distribution until it is needed. They maximize their bequest by deferring ongoing investment gains and income through tax deferral, and ultimately gains are passed tax-free to the charity or foundation at the time of the client's death. In addition, the NIMCRUT is revocable, giving clients the flexibility to remove one charity, add other charities, or adjust the contribution amount.

Related: The role of financial literacy in generational wealth planning

Build your business — and your next generation of clients

As this tremendous transfer of wealth takes place — first to boomers, then to Gen X, then to millennials — it is important to develop effective estate planning and wealth transfer strategies for your clients and their families. With an effective approach to wealth transfer, you can help clients accumulate more wealth — and then safeguard it for their heirs. And using a low-cost Investment-Only VA, for funding trusts, stretching income or charitable giving can offer measurable benefits for many clients. _e longer tax obligations are deferred, the longer the assets can build upon themselves and compound. IOVAs help control how much is paid in taxes — and when those taxes are paid — to reduce the tax burden and retain more wealth for clients and their beneficiaries.

Don't wait for clients to bring up their concerns about wealth transfer. With many studies showing that up to 90 percent of heirs fire their spouses' or parents' financial advisor after they receive an inheritance, it's important to take action. Research shows that the most successful advisors make attracting and retaining heirs a top priority. Build a multi-person engagement team to match clients and heirs with counselors of the appropriate age. Take a more family-centric approach to planning. By offering a more holistic approach to estate planning and wealth transfer, you can attract and retain more of your clients' heirs — and bring on your next generation of future clients.

See also:

A look at the coming 'great wealth transfer'

How to increase financial literacy? Start young, train teachers

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