Lately I have been conducting training for the agents of CG Financial Group on estate planning. When I talk with folks to invite them to these webinars, I will occasionally have a few of them question just how useful estate planning is in today’s day and age when the lifetime estate tax exemption is $12.06 million (2022) for a single person and $24.12 million for a married couple. (Note: Any estates beyond this size are subject to a 40 percent estate tax.) Their skepticism is warranted because not many families have over $12 million. However, as the cliché goes—we need to observe where the puck is going versus where it is now. Or, in my previous columns I have spoken about another cliché—the “Pig Through the Python.”
The “Pig Through the Python” refers to the giant chunk of Americans that are currently working their way through their 60s and 70s. These are the baby boomers. This demographic “pig” in the python is not just about the size of the baby boomer population, it is also about the wealth they own—which is well over half of our country’s wealth depending on what measure you reference. As this very large and wealthy demographic cohort gets digested and pushed “to the right” of the age chart, it’s important to think about the financial phases this influential group will go through.
From a financial standpoint I view the baby boomer generation as generally having three more “phases” left to complete:
- Right now, the youngest baby boomers are in their pre-retirement years (age 58) and are planning for the “Decumulation’’ phase of their retirement. Of course, the older baby boomers are already in this phase. This is where the rhetorical pig currently is, which is why it is easy for an agent to be exclusively focused on income planning.
- The second phase of retirement that some of the older baby boomers have already dealt with is the “Extended Care” phase. If long term care is not a part of your practice, I would make it a part—or partner with a long term care expert where you can split cases. The pig is coming that direction!
- The third phase that baby boomers and their families—and all of us for that matter—will deal with is the “Wealth Transfer” stage. Unless we find a way to prevent death, every single one of us—or our families—will deal with transferring our wealth. Whether we plan it or not, this transfer will happen after we die in 100 percent of our scenarios. And successfully transferring wealth to the next generation requires estate planning.
Again, with today’s large estate tax exemption, it is hard to imagine a world where we are consistently discussing estate planning. However, we all know things can change, and likely will change, with the amount of debt our country is in and with the popularity of targeting “the rich.” As a matter of fact, things are scheduled to change! In 2026 the “Tax Cuts and Jobs Act” sunsetting will mean that the estate tax exemption will go back to 2017 levels—$5.6 million per individual and $11.2 million for a married couple. Although I am fully cognizant that this number is still very high and still excludes a lot of folks, again, things can change! As a matter of fact, the Biden plan is for the estate tax and gift tax exemption to be $3.5 million. Considering that estate sizes can easily double between now and your client’s death, the prospect of a $3.5 million exemption puts a lot more people in the crosshairs of the estate tax. I know a lot of folks that have $2 million estates whereas they would have an estate tax issue if their estates were to double in size assuming a $3.5 million exemption.
In my previous sentence, if the current estate tax exemption was $3.5 million, and if I projected that my $2 million estate would eventually hit $4 million, my estate would be subject to a $200,000 tax (40 percent on $500,000). A way to minimize this tax might be if I “gifted” the present value of $500,000 (or more) today so that my estate does not exceed the $3.5 million in the future. And the “present value” may only be $250,000 for example. That is just a very simplified example of estate planning with gifting. Technically, I would want to give more than the present value of $500k but I won’t go there!
A Quick Note on Gifting
Many people don’t understand the value of gifting because, after all, for every dollar you gift above the annual exclusion it reduces your estate tax exemption dollar for dollar. So, either way, you are going to be taxed 40 percent once your gift/estate tax exemption is expended. Then what is the reason for gifting? If you look at my simplified example, I only lost $250,000 off of my exemptions versus the $500,000 that it would be if I let that asset grow in my possession then died with it! A lot of estate planning has to do with “freezing” the asset sizes and thus the estate size. This “freezing” can be done by gifting but also by using much more sophisticated tools than what I used above. There are Grantor Retained Annuity Trusts (GRATs), business entities, charitable trusts of various kinds, intra-family loans, etc.
More Than Just Estate Taxes
Lastly, estate planning has to do with so much more than just “estate taxes.” It also has to do with income taxes (IRS), estate preservation (long term care), annuities, life insurance, and probate avoidance. So, don’t let the current large estate tax exemptions dissuade you from sharpening up on estate planning. That is where the “pig” is heading.