There's More to Estate Planning Than Tax Exemptions

Gene Farrell, the president and CEO of Vanilla, finds that media coverage of estate planning tends to focus almost exclusively on tax-savings strategies that apply to the ultra-wealthy.

This is especially true in the current post-election environment, with many policy experts monitoring what will happen with the many provisions of the 2017 tax overhaul set to expire at the end of 2025 — including the historically high estate tax exemption for individuals and couples.

The consensus is that the Republican Party’s control of Congress and the White House almost assures a long-term extension of the 2017 legislation, with some internal policy fights about the federal budget deficit and the $10,000 cap on state and local tax exemptions possibly complicating the process.

“That means the estate tax exemption is likely here to stay for the long term, and that gives highly wealthy families added flexibility as they engage in legacy planning,” Farrell, who has led the digital estate planning platform since 2021, said in a recent interview with ThinkAdvisor. “But I would actually argue that this focus on the estate tax exemption is not the most important theme for most advisors with respect to estate planning in general.”

As Farrell emphasized, only the very wealthiest families are subject to federal estate taxes in any given year. For the typical mass affluent client family, the estate value isn’t likely to approach the $26 million-plus estate tax exemption level, indexed to inflation.

Estate planning offers significant non-tax benefits for clients at lower wealth levels, including asset protection, small-business continuity planning and consolidated asset management.

“The key to successful legacy planning in this context is setting clear goals first and considering tax-management second,” Farrell argued. “And regardless of the wealth level being considered, advisors should help clients design plans that can adapt to potential changes in estate tax laws.”

By maintaining adaptable strategies, clients will be better positioned to respond to future shifts without compromising core goals.

On Liquidity and Protection

Farrell pointed to Vanilla’s recent backing by big national advisory and insurance firms including Edward Jones, Allianz and Nationwide as underscoring this message. These firms are focused on supporting the mass-affluent marketplace in addition to the wealthiest client segments, Farrell said, and they see an opportunity to integrate Vanilla’s tech-based legacy planning capabilities at scale.

One domain in which he expects advisors to embrace new planning capabilities is in the distribution of life insurance solutions to greater numbers of clients. Farrell sees that as a win-win for Vanilla, advisors, service provider partners and clients alike.

Depending on the clients’ circumstances, it could make sense for advisors to explore the use of irrevocable life insurance trusts. When structured properly, these trusts allow proceeds of policies insuring one’s life to avoid inclusion in the federal taxable estate upon death.

While the potential for estate tax savings is considerable, this pathway can also provide reliable liquidity and a tax-free transfer to beneficiaries.

“If a person’s estate will owe federal estate tax upon their death, life insurance proceeds sheltered in an ILIT can be used to help offset the impact of taxes on beneficiaries,” Farrell explained.

One planning factor to consider is that some of the $26 million lifetime exemption for a couple may be used either in transferring an existing policy into the irrevocable life insurance trust or in transferring assets into it to pay premiums, but it also may be possible to leverage the annual gift exclusion amount to avoid using up the lifetime exemption.

Estate Planning Ahead of a Possible Bull Run

Another theme that Farrell thinks advisors should focus on is making early strategic moves to get assets with the potential for significant growth out of the estate sooner than later. One way to do this is to establish what are known as intentionally defective grantor trusts.

These irrevocable trusts are structured to allow certain assets to be passed on without being subject to estate taxes, while still retaining the settlor’s liability for income taxes generated within the trust.

“So in other words, an IDGT allows assets to grow and escape future estate or generation-skipping transfer taxes,” Farrell explained. “IDGTs can be a powerful planning tool for cash flowing assets because they can allow assets that are rapidly appreciating and not tax efficient to avoid estate taxes.” 

There are several ways to fund an intentionally defective grantor trust, including through gifts, discounts, sales, private annuities and grantor retained annuity trusts.

Farrell said these planning techniques can be especially relevant for clients who either own and run high-potenital startup companies or who have made big early investments in public or private companies that seem set to achieve big things.

“Think about the people who bought Nvidia stock five years ago before the big AI boom,” Farrell explained. “In a traditional brokerage account, the amount of unrealized taxable gains would be huge. But if that kind of asset was instead held in an IDGT, there would be a lot more protection.”

Non-Tax Considerations for Business Owners

Wealth advisors, Farrell argued, should be prepared to help their business-owning clients create a thoughtful succession plan, regardless of the size or value of the business. 

Business owners — and, by extension, their wealth advisors — need to consider how owners or family members enter and exit the business, how shares transfer between owners or generations, and how to ensure that the business can carry on if an owner leaves or passes away.

In addition to having a documented plan for ownership transfer in the event of a death or disability, it’s important to lay the foundation for succession planning so that a smooth leadership transition can be implemented.

Elements of such a plan should cover the timing of transfers during lifetime versus at death; the development and training of successors and future leadership; and addressing how current partners might choose to collaborate (or not) with the original owner’s spouse or children.

In this process, advisors and clients can draw on legal resources for advice as well as a set of potentially useful planning tools, including key person insurance policies and pre-structured buy-sell agreements. A key component of any buy-sell agreement is how the business’ value will be determined in the event that the agreement is carried out. 

The Bottom Line

Ultimately, Farrell said, these approaches help advisors stand out from the crowd. Some have to do with taxes, but other goals can be more about maintaining control of wealth, ensuring that shared money values are passed down through the generations, or preventing a liquidity crunch during a difficult moment following a death.

Deciding which estate planning strategies to employ depends on such personal factors as marital status, level of wealth, children, charitable inclination, liquidity and many more.

“A savvy planner takes all these variables into account and chooses the most appropriate tool for a person’s situation, values and goals,” Farrell said.