Why High Net Worth Clients Should Consider Implementing Their Estate Plan Before the End Of 2020

Transcript of Podcast Episode 96

 Hello. This is Bill Rainaldi with another edition of Security Mutual’s “SML Planning Minute.” In today’s episode, why high-net-worth clients should consider implementing their estate plan before the end of 2020, an interview with Victor Ngai. 

 William F. Rainaldi, CFP^®: Today we’re going to be talking to our friend, Victor Ngai, who is Vice President of Advanced Markets at Security Mutual. Victor has been in the financial services business for over 25 years, preceded by 10 years in private practice as an attorney.

 His focus is on supporting our insurance producers who work with their clients on various estate- and business-planning strategies. Before we start, please be aware that Victor cannot and will not be providing you with tax or legal advice. Our listeners must rely upon the advice and counsel of their own tax and legal advisors. Our topic will be a discussion on why high-net-worth clients should consider implementing their estate plans before the end of 2020. Welcome Victor.

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Thanks Bill.

William F. Rainaldi, CFP^®: Vic, let’s get started. First, I think we need to define high-net-worth clients. Which of our clients are we talking about?

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Bill, I would say that any individual with a net worth over $3 million, or a married couple with a joint net worth of over $6 million, and not counting individually owned life insurance, to me that would qualify as a high-net-worth client for the purposes of this discussion. You know, the reason I included life insurance is because the death benefit of individually owned life insurance policies increases the gross estate subject to potential estate tax.

William F. Rainaldi, CFP^®: Okay, so why do you think it’s important for our high-net-worth clients to get their estate planning done before the end of the year in 2020?

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Yeah. Well, we now live in an environment where the country is socially and politically divided, and we’re in the midst of a worldwide pandemic where the U.S. government is spending trillions of dollars in an effort to stabilize the economy while supporting individuals and small businesses who have been financially severely and adversely impacted by the pandemic due to job layoffs and furloughs, closure of businesses, and medical expenses for those afflicted with the virus. I have recently read that the Congressional Budget Office is projecting a $3.3 trillion federal budget deficit for 2020.

William F. Rainaldi, CFP^®: Yeah. I’m not surprised. In the last seven months or so we have definitely been through some crazy and incredibly trying times, and I think that’s for everybody. It wasn’t until recently that I could even go to my favorite restaurant. Who would have ever thought we would be scrambling to find toilet paper?

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Crazy. Yeah, really crazy times, you know? The government must find a way to raise revenue and chip away at that deficit, and taxes is one of the best ways to do that. In this country the estate tax system is separate and apart from the income tax system. But a good estate plan will also consider income tax consequences, and we are just weeks away from a presidential election that has polarized the country, but from our viewpoint can have a dramatic effect on tax law.

William F. Rainaldi, CFP^®: Well, how so? I mean I know the current federal estate tax exemption is, I think it’s $11.58 million per person this year?

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Yeah, absolutely. You’re right. But when you hear that the estate tax exemption is so high, most of our listeners are probably asking, “Well, why are we even having this conversation?” For our listeners who are not familiar, the federal estate tax exemption amount is the amount that each person can leave to their chosen heirs completely estate tax free. Married couples, with proper planning, can transfer over $23 million to their heirs.

This current law was enacted under the Trump Administration called the Tax Cuts and Jobs Act of 2017. However, even if President Trump is reelected, the law provides that this very high exemption amount will sunset at the end of 2025. In other words, starting January 1st, 2026, any person who passes away no longer enjoys that super-high exemption. The exemption amount will revert to $5 million adjusted for inflation, so in 2026 that amount is estimated to be roughly $6.8 million.

William F. Rainaldi, CFP^®: Oh, okay. Well, hang on a second Victor. I think $6.8 million is still a really high number. If I understand it correctly, that means that a married couple would be able to transfer double that amount or, you know, over thirteen and a half million dollars to their heirs. I don’t know about you, but I don’t know too many people who are worth that much money either.

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: You’re absolutely right Bill. You know, that is still a very high number, and that’s where politics come into play, right? We have a presidential election in a few weeks, and we’ll definitely have another in 2024. So if there is a Democratic president and a Congress controlled by the Democratic Party, that federal estate tax exemption amount is sure to be reduced to a much smaller number, and the Democrats won’t wait until 2026 to do so.

William F. Rainaldi, CFP^®: What do you mean by that? What do you think might happen?

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Yeah, well, Joe Biden hasn’t specified an exact number for the federal estate tax exemption amount, but he has proposed that the exemption amount revert back to “historic norms.” Most commentators have interpreted that to mean an exemption amount of $3.5 million. That’s the exemption amount in 2009, when Barack Obama became president and Joe Biden became his vice president. $3.5 million is still a lot of money, but now we enter a category that isn’t so out of reach.

We can now probably name a few people that we know who are worth that much. So a lot more people will be subject to estate taxes, even though these people do not generally consider themselves to be rich or high net worth. Now, many commentators also believe that if Biden wins and the Democrats take control of Congress, estate tax reform will be one of the first things that his administration will work on. So the possibility that the estate tax laws will change next year is a real possibility.

William F. Rainaldi, CFP^®: Okay. What else has Biden proposed that might cause an urgency to complete estate planning strategies for our high-net-worth clients?

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Well, Biden has also publicly stated that he wants to abolish the concept of step-up in basis and have capital gains taxed at ordinary income tax rate rather than the current reduced rates of zero, 15, or 20 percent, depending upon your tax bracket. Of course Biden also wants to raise income tax rates too.

William F. Rainaldi, CFP^®: Yeah. I mean I know that phrase, and we’ve heard it quite a bit, step-up in basis. Maybe you should explain to our listeners what step-up in basis means.

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Yeah, sure. The concept of step-up in basis is a powerful estate planning tool. Let’s suppose that a person purchased one share of XYZ stock 20 years ago at $10, so $10 is his tax basis. That share is now worth $200. If he sells it today, he will pay capital gains tax on $190, which is the difference between today’s price and his tax basis or what he bought it for. If that person died today and left that share to his daughter, the daughter’s tax basis is not $10 but rather $200. Her tax basis has been stepped up because of her father’s death to the current value. If she turns around and immediately sells those shares for $200, she would incur no capital gains and therefore no capital gains tax.

William F. Rainaldi, CFP^®: Are there any other tax proposals from the potential Biden Administration that you think would impact the estate planning for our high-net-worth clients?

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Yeah, absolutely. There are many estate planning wealth transfer strategies that Democrats are not fond of, even though many of these strategies have been popular and well utilized for many years. Of course, many of these strategies are used by the wealthy, who the Democrats believe are not paying their fair share of taxes. Most of these strategies involve techniques to gift assets to heirs, as well as methodologies to determine the value of those assets such as business interest or other fixed assets for gift tax purposes. Fair enough, but the gift tax is but yet another tax regime that is separate from estate and income taxes, although it is closely related to the estate tax. Those topics are really too complicated for this short interview, but I’m sure any competent estate planning attorney will review these strategies with our clients, if they apply to their particular situations.

William F. Rainaldi, CFP^®: Okay. So one thing I wanted to ask you, Vic, is that I’m still not clear on why there’s such an urgency to complete estate plans before the end of this year. I mean after all, we still don’t know who’s going to win that election. It could be Trump or it could be Biden.

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Yeah, true. But there’s a couple reasons why planning needs to be done right away, and not to wait for the results of the election. Time is not necessarily our friend in this arena, right? Especially if the estate tax exemption is lowered before our listener has had a chance to take advantage of the current high exemption, that opportunity has been lost forever. The second is that estate planning is a long, complicated process involving the listener’s attorney, tax advisor, life insurance professional, and potentially other advisors as well. Estate planning is a multi-disciplinary process with many moving parts, which can take many weeks, if not months, to complete and implement.

The third reason is that the current pandemic is also affecting state revenues and budgets. There are currently 12 states plus the District of Columbia that impose an estate tax. There are also 6 states that impose an inheritance tax. It is possible that other states may adopt an estate or inheritance tax, or will modify existing laws to raise revenue. The process of estate planning would also take into account state estate taxes. Not just federal estate tax. The fourth reason is that even if President Trump is reelected, there will be another election in 2024 creating more uncertainty, and the current estate tax law will expire on its own at the end of 2025.

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Finally, life insurance is always a good part of an estate plan, but the underwriting process can take time, and the longer a person waits the more opportunity for adverse health or financial consequences to interfere with the application process. Now, to quickly summarize, good estate planning attorneys will provide flexible estate plans for their clients. A flexible plan will allow clients to continue as they are if the tax law environment remains tax friendly, or to quickly address changing tax law. But without a comprehensive estate plan, a client won’t be able to do either.

William F. Rainaldi, CFP^®: Wow. That’s a lot to think about for our listeners that are high-net-worth clients. What do you think should be the next steps they should take after absorbing this information?

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Yeah. I highly recommend that they start with their Security Mutual life insurance advisor, who can act like the quarterback to assess the situation and manage the team. Clients can also consider going back to their estate planning attorneys to review their current plans and situation. But for all of the reasons mentioned previously, clients should ensure that their tax advisors and Security Mutual life insurance advisor are kept in the loop since there are so many things to consider when considering and implementing a comprehensive estate plan.

William F. Rainaldi, CFP^®: Wow. That’s fantastic, Victor. Listen, thank you so much for joining us today. Let’s do this again sometime.

Victor Ngai, J.D., CLU^®, ChFC^®, RICP^®: Thank you, Bill. My pleasure.

Contact your local Security Mutual life insurance advisor today. As part of the planning process, they will coordinate with your other advisors as needed to assist in helping you achieve your financial goals and objectives. 

If you enjoyed this podcast, tell your friends about it and be sure to give us a five-star review, and check us out on LinkedIn, YouTube and Twitter. Thanks for listening, and we’ll talk to you next time.

This podcast is brought to you by Security Mutual Life Insurance Company of New York, The Company That Cares^®. This podcast is designed to provide general information regarding the subject matter covered and is believed to be current as of the date of publication. It is not intended to serve as legal, tax or other financial advice related to individual situations, because each person’s legal, tax and financial situation is different. Specific advice needs to be tailored to your particular situation. Security Mutual and its agents may not give legal or tax advice. Therefore, please consult with your own attorney, tax professional and/or other advisors regarding your specific situation.