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Some Estate Planning Tactics Are Better Amid Downturn: Wells Fargo Exec

By Miriam Rozen May 15, 2020

Low interest rates and the equity markets’ nosedives have created multiple opportunities for estate planning, according to Rick Simonetti, head of wealth planning at Wells Fargo Private Bank.

“Right now, certain techniques in the estate planning arena are way more effective with low interest rates,” he says.

For the mass affluent, for example, an obvious tactic to consider is the conversion of a traditional individual retirement account to a Roth IRA since the value of many stocks is lower than it has been in years, Simonetti says. Clients’ beneficiaries will not pay income tax on the required minimum distributions from the Roths as they would from traditional IRAs.

Simonetti says it is the advisor’s job to guide clients toward the right strategy.

 “One of the roles that we play for clients is to analyze the cashflow impact, the income tax impact, the wealth transfer impact and the asset protection impact, so that they can say, ‘If I put this in play, this is what it looks like today. If I put this in place, this is what it looks like tomorrow,’” Simonetti says.

Rick Simonetti
He adds: “What I would hate to put in place for somebody is a technique that works for taxes but that destroys the cash flow in five years — unexpectedly.”

The rationale for many of the more sophisticated strategies grows out of the low rate of return on assets the Internal Revenue Service has set for certain gifts, including those to transfer assets to heirs, Simonetti says. The May 2020 rate is 0.80%, 73% lower than the rate in February of 2020.

That low rate set by the IRS makes a Grantor Retained Annuity Trust more attractive for some clients, according to Simonetti. The GRAT creates an irrevocable trust for a set time period, pays taxes on the assets initially given to the trust and allows the grantor to receive an annuity each year. When the trust term expires, a beneficiary receives assets tax free.

Similarly, that low rate potentially boosts the effectiveness of what’s known as an Intentionally Defective Grantor Trust, which is aimed at reducing estate tax exposure, Simonetti says. The IDGT sets in stone for estate tax purposes a trust’s asset values at the time of its creation and allows assets’ value to grow tax free. The client (the trust grantor) pays tax on any income the assets generate but avoids additional gift taxes.

IDGT has a “horrible name” but is “very effective,” Simonetti says. Today’s low interest rates mean an IDGT pays “its creator less over time,” he says. The IDGTs also keep more in the trust after the note is paid off, and the low values reduce the amount of the notes placed back into the estate of the trust creator, he adds.

Simonetti says he ensures clients scrutinize the estate planning strategies. “We don’t want people to jump on our list [of options] until they’ve seriously evaluated it,” he says.

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Tags:  Finding and winning new clients , Client retention , ERISA plans/institutional management , Investment strategies , Retirement planning , Estate planning , Family wealth/family office , Wells Fargo

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