Broker Check

Don’t Leave Too Much Money Behind

by Howard Hook, CFP®, CPA

As published in The Wall Street Journal, August 20, 2014

When it comes to retirement planning, most financial advisers focus on making sure clients don’t outlive their money. While this is key, there is a serious risk that many people don’t focus on: clients who leave too much money on the table when they die. What’s more, when these clients die, their children and grandchildren end up paying a premium in estate taxes.

While the federal estate-tax exemption has increased to $5.34 million, individual states have much lower limits for state taxes. Here in New Jersey, you can only pass $675,000 tax-free. Someone with an estate of $2 million will have about $1.3 million subject to a 16% state tax. However, New Jersey doesn’t have a gift tax, so if the client gave away the $1.3 million while they were alive, that money wouldn’t be taxed at all.

In my own high-net-worth practice, much of what I do involves getting clients to see that they have enough money to give part of it away while they are alive.

First, I do a conservative retirement projection using worst-case scenarios. What will happen if inflation is 2% higher than it is now? What will happen if the client spends $13,000 a month, rather than their normal $10,000? We show that they can spend more and still never run out of money.

Then we address the client’s inevitable fear of a stock market crash. We set aside five years of their cash needs in liquid nonfluctuating accounts. We buy CDs and bonds that mature over five years equal to their cash needs. No matter what happens in the stock market, their cash needs will be met.

Finally, we address what risks the client faces other than a market correction. For example, I have found that eight out of 10 clients are underinsured from a liability point of view. They may only have $1 million in liability insurance. If they get into a car crash and somebody sues them and wins a judgment of $2.5 million, they’re going to get hurt.

I have a client who has always been concerned that she didn’t have enough money. We ran all the projections and set aside five years of her cash needs. It took a combined effort between myself, an estate attorney and her daughter for her to finally realize she could give away some of her assets. We started an annual gifting program where she’s giving assets to her kids and grandkids, but she’s still not 100% comfortable. For somebody who’s not used to that kind of gifting, the spigot doesn’t just open, so we’ll continue to work with her to make her more comfortable.

Helping somebody plan for having too many assets is a unique situation, and advisers shouldn’t give up right away if a client is resistant to the idea of giving away money while they are alive. Instead, advisers should try to get clients to recognize the emotional benefits of giving away money while they are alive. When you phrase it that way, most clients get it.