Insurance as Part of a Wealth Management Strategy - Leo Wealth (2024)

Insurance as Part of a Wealth Management Strategy - Leo Wealth (1)

February 2, 2023

Estate Planning Tax Strategies

Dan Moore and David Donato

Today’s wealth managers are required to have a vast repertoire of professional financial services at their disposal. It’s not enough to simply provide investment management, custody, or trust services. Increasingly, you are expected to provide actionable recommendations for tax, legal, estate planning, and insurance solutions.

This is especially true within the high net worth community, where the preference has become to seek out one advisor who can offer a clear course of action across all these practice areas, all in concert, whenever instruments and insight are needed.

Jump to a section:

  • Wealth Management Pillars – to Build, to Grow – and to Preserve
  • Disability Insurance – An Essential Component for High Income Earners
  • Long-Term Care: A Case Study in Financial Efficiency
  • Parlay with the Tax Man
  • Estate Planning Considerations

Wealth Management Pillars – to Build, to Grow – and to Preserve

When it comes to wealth management strategies and broad financial planning, advisors are often focused on the building of wealth/creating new wealth aspects, and that’s good. It’s typically what your client is most focused on as well, and as such will be the main topic of discussions you’ll have with them.

But having the ability and the capacity to preserve the wealth that’s already there should always be at the forefront. For any given client over time, this preservation element can include insurance, more conservative investments, and other mitigation efforts. This risk management component of financial planning relies not just on conservative asset mixes over time, but also protecting against the risks of death or disability.

It’s important for advisors to understand that for their most important clients, the most likely of the unlikely outcomes can be protected against with insurance. Sharing this truth with your clients can help frame discussions in a clear way for them, and be a launching point for making key recommendations that will improve their quality of life and that of their families.

As clients progress through life, their perspectives about estate and legacy planning will inevitably change. When goals and perspectives evolve, it’s often insurance that can step in with the optimal solution – a solution that doesn’t disrupt any other parts of an existing financial plan, only bolstering it and widening its protections.

Disability Insurance – An Essential Component for High Income Earners

The risk management mandate of a financial advisor requires not just analytical solutions, but also thoughtful and proactive solutions. It requires an understanding of the main sources of wealth generation a client has, and how those income streams can be protected from the most likely culprits. If we consider the prime example of a family breadwinner or someone earning a strong income through their employment, should something happen to them through death or disability, the option to build more wealth simply won’t exist without strong insurance protections. This would impact the client and their family for generations to come, and quickly erode an otherwise well-devised financial plan.

The stronger the income a client has, the more of a non-negotiable item an individual disability policy becomes. Employer-offered disability plans more than likely won’t offer enough coverage or flexibility to suit the needs of today’s high income earner. And there’s also the consideration of non-acute medical conditions that may arise over time, conditions that impair the ability for someone to complete the job duties expected of them. This could cut short someone’s prime earning years, and severely impact their existing financial and wealth management plans.

It’s estimated that one in eight workers will be disabled for five years or more during their lifetime. The same client that wouldn’t blink at the notion of insuring their car or their home may have spent very little time considering if their ability to earn a strong income is put on pause – or a full stop – because of disability.

Disability coverage – as well as life insurance coverage – should also be evaluated periodically by the advisor, to make sure that the amount of coverage is keeping pace with the client’s overall asset base. The time to make changes or expand coverage is when everything is quiet and calm; once a debilitating condition arises it may well be too late to establish additional coverage.

Roughly 90% of disabilities are caused by illness – not by accidents or acute injury – so when framing these discussions with your clients, there’s no need to jump to the cataclysmic scenarios; the more practical and likely outcomes to pass are not morbid, but can still wreck a well-structured financial plan without sufficient insurance.

Long-Term Care: A Case Study in Financial Efficiency

When it comes to long-term care strategies, financial efficiency is a foundational concept. Even if your clients want to take care of their parents, you must help them consider the most efficient way to accomplish the goal. Does it really mean paying every cost that arises, from the first time that care is needed all the way through to when they pass? There is a chasm of middle ground where a client may be able to, or want to, take care of some but not all of the costs. And there is also the unfortunate fact that costs related to care typically do not come across linearly in time, instead arriving in a staggered, highly variable fashion.

Too often we hear someone say something along the lines of, “Oh this client has $3 million, $4 million in assets, they’ll be fine. They can self-insure their long-term care needs.” And frankly that’s just financially inefficient, and not in the client’s best overall interests.

It really doesn’t matter how much money a person has. Financial efficiency is about utilizing good financial leverage where your client can find it – as it relates to insurance, that means how much leverage they can get per dollar in benefits provided from a long-term care premium.

Long-term care as a cornerstone of a financial plan is easy to instill; we’re talking about a benefit that is, statistically speaking, highly likely to be paid out at some point in the future. Almost 70% of people require some form of long-term care before they die, and so it becomes financially inefficient to not have some form of long-term care insurance if it can be afforded. For the average client, they’re going to be lighting cash on fire at some point in the future if they do not obtain long-term care insurance.

Long-term care costs can include both acute care, such as breaking a hip and needing six months to recover, and also chronic needs, like if someone develops dementia or another chronic condition requiring full-time care. Chronic conditions could create scenarios where 8-10 years of care is needed, creating a massive financial burden for the uninsured.

Another important consideration for the client is what decisions they’d like to absolve their children from having to make, especially surrounding their long-term care. Nobody wants to put their child in a position to have to choose what level of care they can afford, at a time when stress is already maximized because of the care need itself.

Parlay with the Tax Man

Insurance sits squarely at the intersection of tax planning and overall risk management. This is especially true for high net worth and ultra-high net worth clients who can be exposed to federal estate taxes – which can be a huge hit to further generations. For some people, estate taxes could amount to 20%, 30%, even 40% of their net worth being gobbled up.

In this scenario, life insurance that is structured and housed in the right trust vehicle can provide protection and liquidity features, to aid in the efficient transfer of that wealth to beneficiaries. The most common vehicles involve irrevocable trusts, but there’s a wide array of trust vehicles that insurance can be used to fund. The right implementation will come down to your client’s specific needs, goals, and values – and these may change over time, so it’s important to revisit these topics periodically as key variables change with your client.

For example, SLAT trusts provide for a spouse, with funding coming via a lump sum payment that utilizes the gift tax exemption. A SLAT trust avoids estate and income tax if structured properly. You can even take tax-preferred loans out while you’re still alive, if needed. If the SLAT trust remains intact, any assets (including death benefit proceeds) can pass through to beneficiaries and possibly avoid probate once again upon the death of the spouse. Married couples can also utilize Leveraged Credit Shelter Trusts and fund them with life insurance, thereby allowing for probate-free distribution of funds to beneficiaries.

We see more and more situations of “blended families,” where through remarriage following a divorce or widowhood, children and heirs become spread far apart in age. This creates a situation where some children may require more consideration for near-term expenses and education, while other children have reached adulthood and self-sufficiency. Insurance can be structured in trust vehicles so that specific payments go to specific children, and equalized amounts can be distributed to adult beneficiaries, while managing tax friction.

Estate Planning Considerations

The importance of customized insurance also arises when the client has an oversized percentage of their assets that are not liquid. This most often takes the form of a business ownership, and land/property assets. The client may not have a lot of cash and equivalents, or even salable securities that can be used to raise cash quickly with minimal transaction costs.

As is most often the case, those illiquid assets don’t want to be sold by the client, such as in the event of a parent’s passing. For these clients, life insurance can provide a dedicated source of cash to pay estate taxes or other bills, and to help distribute assets evenly across multiple beneficiaries.

A great example would be a business owner who runs a manufacturing business, as well as owning the physical property it sits on. Maybe he leases out the property to the business, and instead of trying to leave the property to one child and the business to another – which can create undue financial implications – life insurance structured the right way can allow whoever runs the business to buy the property from the other child using cash proceeds, and help to equalize one’s estate provisions.

There are specific trust vehicles like GRATs or IDGTs that can aid business owners or holders of illiquid assets. They require an experienced hand to implement effectively but can dramatically mitigate specific risks should they arise, like a new business owner finding collateral for a loan or buying out an existing partner in the event of a sudden succession.

Insurance is a necessary and a flexible tool to approach most of the risk management scenarios you’ll face with your clients. For clients who have asset bases that will exceed what they need to support their retirement lifestyle, they can increase their legacy footprint with thoughtful asset repositioning, aided by modern insurance solutions.

The investment vehicles that were great for accumulating wealth during one’s working years, such as IRAs and individual marketable securities, are not ideal for every stage of a client’s estate plan. Key assets can be subject to big tax hits upon death, if not housed in the most efficient legal instruments. Life insurance solutions can, in most cases, increase the overall value of wealth transferred to heirs, to charities, and to further whatever legacy goals your client may have.

Wealth management strategy and best practices are constantly evolving, incorporating changes that occur on the tax front, the legal front, and within investment management and asset allocation. Insurance solutions have responded, adapted, and broadened to become key implementations of a sound estate plan – a plan that still grows wealth while increasing the protections on it.

Disclosures and Definitions

The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to the accuracy, completeness, or reliability of this information. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth or the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.

As an expert in wealth management, financial planning, and insurance solutions, I've gained a deep understanding of the intricate strategies and considerations involved in preserving and growing wealth. My experience allows me to provide insights into the comprehensive article on Estate Planning Tax Strategies dated February 2, 2023, written by Dan Moore and David Donato.

The article discusses various pillars of wealth management, including building, growing, and preserving wealth. It emphasizes the importance of not only creating new wealth but also safeguarding what's already accumulated. Let's delve into the key concepts presented in the article:

  1. Wealth Management Pillars – to Build, to Grow – and to Preserve:

    • Advisors focus on building new wealth for clients, but preserving existing wealth is equally crucial.
    • Preservation involves strategies such as insurance, conservative investments, and risk management to protect against death or disability risks.
    • Insurance plays a vital role in safeguarding against unlikely outcomes and can be a key component of a well-devised financial plan.
  2. Disability Insurance – An Essential Component for High Income Earners:

    • Financial advisors must proactively address the risk of disability, especially for high-income earners.
    • Individual disability policies are crucial for strong income earners, as employer-offered plans may not provide sufficient coverage or flexibility.
    • Regular evaluation of disability and life insurance coverage is necessary to ensure alignment with the client's overall asset base.
  3. Long-Term Care: A Case Study in Financial Efficiency:

    • Financial efficiency is emphasized in long-term care planning, discouraging the idea of self-insuring for long-term care needs.
    • Long-term care insurance is considered a cornerstone of financial planning, given the statistically high likelihood of needing such care.
    • The article advocates for clients to consider the financial burden of chronic conditions requiring extended care and the importance of planning to avoid burdening children with care decisions.
  4. Parlay with the Tax Man:

    • Insurance is positioned at the intersection of tax planning and risk management, especially for high net worth clients exposed to estate taxes.
    • Life insurance, structured within trusts, can provide protection and liquidity features for the efficient transfer of wealth to beneficiaries.
    • Various trust vehicles, such as SLAT trusts and Leveraged Credit Shelter Trusts, are highlighted as tools to manage tax implications in blended family scenarios.
  5. Estate Planning Considerations:

    • Customized insurance solutions are crucial when clients have a significant percentage of illiquid assets, such as business ownership or property.
    • Life insurance can provide a dedicated source of cash to pay estate taxes, distribute assets evenly, and address specific risks associated with illiquid assets.
    • Trust vehicles like GRATs or IDGTs are mentioned as tools to mitigate risks for business owners or holders of illiquid assets.

In conclusion, the article underscores the dynamic nature of wealth management strategy, incorporating changes in tax, legal, and investment landscapes. Insurance solutions are positioned as flexible tools to address various risk management scenarios and contribute to a sound estate plan that not only grows wealth but enhances its protections.

Insurance as Part of a Wealth Management Strategy - Leo Wealth (2024)
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