ORLANDO, Fla. — So, your client has an estate that’s too small to trigger federal estate taxes. That’s the case for the vast majority of Americans.
But that doesn’t mean they’re off the hook for other major issues, warns a tax and estate expert. Trusts, state-level taxes and portability may all affect a client’s nest egg even if the estate is exempt from federal taxes, says Steven Siegel, the president of the Morristown, N.J.-based tax consulting firm The Siegel Group. For these reasons, he encourages financial planners to be quick to correct any common misunderstandings.
Most discussions about estate planning focus on estates above the federal taxable levels of $5.49 million for individuals and $10.98 million for married couples. At these levels, only the wealthiest 0.2% of Americans — roughly 2 out of every 1,000 people — owe any estate tax, according to the Joint Committee on Taxation.
Potential repeal of the tax under President Trump has also drawn attention. However, many clients need a wake-up call about the issue, Siegel says.
“A lot of people aren’t going to be taxpayers. And so what does that do for us as planners? It gets clients to say, ‘Who needs you? We don’t need estate planning. I can go to Staples and buy a will form and I can fill in my name, and I’ve paid $3, or whatever. I’m done,’” Siegel said in a session at last week’s NAPFA Fall Conference.
“Well, some people do that. That, of course, is a mistake, because they haven’t thought through all of the issues that are still equally important in planning.”
For starters, many clients set up their wills decades ago and need to look at updates to various provisions, Siegel says. They also may not know that gifts given outside their will, such as life insurance policies and retirement plans, add to the size of their estates upon their deaths, he says.
More than 20 states also collect estate or inheritance taxes on estates either in line with federal exemption levels or at varying sizes, according to the Tax Foundation, an independent tax policy organization.
Transferring real estate holdings among several states into a single trust can help eliminate complex filing requirements upon a client’s death, Siegel says. Trusts also help address potential problems with creditors, divorces or other scenarios involving beneficiaries, he noted in the presentation.
“I’ve seen more and more people lately wanting me to draft documents that say something like, ‘In the event my beneficiary is found to have a problem, substance abuse, gambling addiction, whatever; married a Democrat, married a Republican,’” Siegel said.
“Whatever the client is objecting to — I want the money held in trust. That way, they can’t do anything with it that would damage them.”
‘OVER MY DEAD BODY’
Advisors and their clients also face a Jan. 2 deadline with the IRS if they want to file a late Form 706 estate return on behalf of a decedent, Siegel notes. Executors must file one of the forms to take advantage of portability, which allows spouses to share their unused estate tax exemptions.
The idea can save beneficiaries a great deal of money, but clients still often push back against advisors who raise it, Siegel says. He counseled NAPFA members to go through a checklist with clients on matters like asset protection, disability and incompetency and charitable giving.
Some clients may even decide “who they’re going to leave their millions to” after a few minutes of discussion “and then spend hours and days fighting over who’s going to be guardian,” said Siegel, drawing laughter with an anecdote about a wealthy couple.
“I said, ‘Well, who would you like to be guardian?’” Siegel recalled.
“The husband said, ‘Well, if we’re both gone, my brother.’ And the wife said, ‘Over my dead body.’”
“I said, ‘That’s the point.'”
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