Wealth Distribution: Maximizing the Value of Legacy Assets

My wife is a legal assistant for an estate lawyer. Regularly, she gets involved in settling estates for clients in their 80’s and 90’s who have left behind hundreds of thousands, if not millions, of dollars. As she gets to know the estate better, she finds out that the deceased was living comfortably on pensions and was drawing little, if any, from the portfolio to fund the retirement lifestyle. As a result, the client has amassed a fortune over many years due to a combination of diligent saving, market growth, rising real estate values and living within his/her means.

Many advisors whom I support as a case coach prepare tax returns for clients, mostly as a way of providing value-added service. I am told that many tax returns show investment income that the clients are simply re-investing in taxable vehicles rather than spending in their retirement. As a result, their portfolios continue to grow for no apparent reason other than they don’t need the money.

With increasing frequency, I get calls from advisors who have clients in their 50’s, 60’s and 70’s who have recently received five and six figure inheritances that they don’t know what to do with. These clients have accumulated sufficient wealth for their retirement years while either not knowing the size of an inevitable inheritance or not including an inheritance their retirement planning.

As the baby boomers and their parents grow old and die, these scenarios will grow exponentially. There has never been a time in modern history where so much wealth will pass from one generation to the next. Advisors have done a tremendous job of helping clients accumulate wealth over the past twenty to thirty years. But, based on the above scenarios, it seems that much of that wealth may have been amassed for no other purpose than amassing it. And the accumulation vehicles that worked so well to amass wealth for retirement income purposes, may need to be re-evaluated to determine if they create the most value for a different purpose.

I have said for many years that there has never been a better time to be “in the life insurance business”. While life insurance began as a risk management tool, which continues to be it’s most important purpose, it has come of age as an intergenerational wealth distribution solution. There are several well-known insurance strategies that have been flogged for years by wholesalers which can significantly grow the value of estate assets. Assets which, whether a client realizes it or not, are currently being managed for children or charity. In many cases, these insurance strategies can increase the estate value of assets by two to four times when compared to traditional fixed income or equity investments.

There may be those who choose to give wealth to their heirs or charities while alive. However, as we have seen in the scenarios above, there are still many who prefer not to distribute their estates before they die. For those individuals, a very popular way to maximize estate value is to purchase a universal life insurance policy and transfer wealth into the policy over a few years. Most UL policies have a guaranteed minimum return which makes sure that the policy delivers the projected estate value. Aside from the tax advantage of an exempt policy, the biggest estate benefit is the immediate value gained by virtue of the policy face amount of insurance, a benefit that’s not possible with any other investment.

A case that I worked on recently involved a couple in their late sixties. Through some financial planning with their advisor, they realized that they had $300,000 that they wouldn’t need to support their retirement lifestyle. The advisor presented an insurance proposal showing annual deposits of $50,000 into a joint-last-to-die policy over six years. Assuming the second death occurred in twenty-five years, the guaranteed estate value of the policy would be just over $1,000,000. Whereas if they invested $300,000 in a 4% GIC and paid the tax out of the annual interest, the estate value would only be $535,000. Similar comparisons can be made if equity-type investments are preferred. But in this case, the math was so compelling that this was not a difficult decision for the client to make.

But the key is to help clients assign purpose for wealth. Only then can clients realize that they may have wealth that’s destined for different purposes. And as opposed to piling it up and investing it all the same way, it would seem to make more sense to help clients identify purpose for each dollar that they have and invest it to create the most value for it’s ultimate use. As advisors, isn’t that what clients look to us for?