The Golden Age of Estate Planning / The demand for the services and expertise will be greater than ever in the coming years and decades

Richard A. Behrendt for WealthManagement writes: The enactment of the American Taxpayer Relief Act (ATRA) in early 2013 gave the vast majority of U.S. taxpayers a reason to breathe a collective sigh of relief.  Among ATRA’s more important changes, the $5 million federal estate tax exemption was made permanent, with an inflation adjustment setting the exemption at $5.25 million in 2013, followed by incremental increases each subsequent year.  For the first time in over 12 years, there’s a reasonable degree of clarity and certainty about the federal estate tax system, and more importantly, an estimated 99.8 percent of all U.S. taxpayers are now shielded from the dreaded “death tax.”  Ironically, while most Americans cheered ATRA’s permanent relief from federal estate taxes, these tax law changes were met with a mixture of fear and self-doubt by one small segment of the population.  Quietly, a group consisting of attorneys, accountants, financial advisors and insurance agents fretted that if fewer individuals in the United States will be subject to federal estate taxes, fewer clients and prospects will need the services and expertise of estate planners.  Think of it as the “Maytag repairman syndrome” for estate-planning professionals.
The truth, however, is quite the opposite.  The demand for the services and expertise of estate planners in the United States will be greater than ever in the coming years and decades.  In fact, we are about to enter the “Golden Age of Estate Planning.”  
 
The Graying of the Baby Boom Generation
The sweeping demographic changes that are spreading throughout the United States have been aptly described as the “silver tsunami.”  The influential group of Americans known as baby boomers, individuals born in the United States between 1946 and 1964, are starting to enter the retirement phase of the life cycle.  According to the Pew Research Center, the oldest Baby Boomers officially began reaching age 65 on Jan. 1, 2011, and approximately 10,000 more boomers are expected to cross that threshold every day for the next 17 years.¹ Over the 30-year period ending in 2040, the total number of U.S. residents age 65 and over is expected to double from 40 million to 80 million.     
                       

U.S. resident population 65 years and over2

2010          40 million 2020          56 million 2030          73 million 2040          80 million

 
At the same time that the size of the 65 and over population increases in the coming decades, the average life expectancy of seniors will continue rising.  The average life expectancy of today’s 65 year-old is 83.6 (82.2 for men and 84.9 for women), while the average life expectancy of today’s 75 year-old is 86.7 (85.6 for men and 87.5 for women).3  In other words, not only will there be more individuals age 65 and older, but also, this segment of the population will be living longer lives due to a combination of advances in health care and healthier lifestyles.      
The 65 and over population will need a multitude of services that are routinely provided by estate-planning professionals.  These services include: drafting or revising estate-planning documents, incapacity planning, asset protection planning, insurance planning and retirement income planning.
 
Creating and Reviewing Estate Plans
Every adult should have an estate plan.  Yet, it’s estimated that less than half of all Americans have even a simple will, and even fewer have a comprehensive set of estate-planning documents, which typically also includes: a revocable living trust, a durable power of attorney and advance health care directives.  The importance of having an estate plan becomes even more important for individuals age 65 and over, who experience a greater incidence of cognitive or physical impairments.
A qualified estate-planning attorney should thoroughly review estate-planning documents every three to five years or if any of the following events occur:
 

·      Death of a spouse or family member.  The attorney should review all bequests and beneficiary designations, as well as the designations of executors, personal representatives, trustees, health care proxies and guardians.

·      Changes in domicile (to another state).  The attorney must make sure changes in state law are accounted for. 

·      Change in marital status (for example, divorce or remarriage).  Review of all estate-planning documents, as well as beneficiary designations of qualified retirement accounts, life insurance policies and annuities. 

·      Disability or infirmity.  Declining health or diminishing mental capacity should also prompt a review of estate-planning documents and may require consultation with family members to coordinate caregiving strategies. 

 
Incapacity Planning
As our senior population grows, the number of individuals experiencing diminished capacity will also grow.  A recent study at the Rand Corporation predicted that the number of individuals aged 71 and older who suffer from some form of dementia will grow from about 3.8 million currently to over 9 million by 2040.  This trend highlights the importance of older individuals executing a durable power of attorney, which designates an attorney-in-fact or agent, to help manage the principal’s financial affairs. 
Similarly, the creation and funding of a revocable living trust can often avoid the need for a cumbersome and costly conservatorship or guardianship in the event of incapacity.  In many cases, the combination of both a revocable living trust and a durable power of attorney for financial matters will be better than either of the two individual documents separately. 
 
Asset Protection Planning
Older clients are growing increasingly concerned about asset protection planning for themselves, as well as for their eventual heirs.  As diagnoses of dementia and Alzheimer’s disease continue to rise, seniors become increasingly vulnerable to predators who seem to develop a tireless array of credit card and internet scams.  At the earliest stages of cognitive impairment, financial management and control should be relinquished in favor of a responsible family member or corporate fiduciary.   
Also, wills and trusts are more frequently being drafted to include asset protection planning for future generations to protect against not only predators, but also divorce and spendthrift concerns.  Several states have adopted statutes to make it easier to protect inherited assets by establishing asset protection trusts that can continue over multiple generations. 
 
Insurance Planning
Life insurance will continue to be a key component of legacy and estate planning for many individuals and families.  Life insurance can provide secure funds for income replacement, tax and debt payment, education funding for younger heirs and charitable legacy planning.  For the baby boomer retiree who may be worried about health costs and other expenses eroding a planned legacy for future generations, life insurance can provide the “leave-on asset” that may provide financial security for children and grandchildren. 
More recently, planning for long-term care (LTC) expenses has become an important component of comprehensive financial and estate planning.  The amount and type of coverage needed will vary depending on each client’s health, net worth, financial goals and other factors.  Of course, insurability will be a key factor in LTC planning, and a timely review process, preferably prior to the client reaching age 65, will be important in many cases. 
Estate planners will also need to be familiar with Medicare benefits, which provide a basic level of health insurance to retirees and other qualified recipients.   
 
Retirement Income Planning
The increased longevity of our senior population will put a tremendous strain on their financial resources.  For many, the fear of outliving their assets will be greater than the fear of dying.  Estate planners will be increasingly involved in coordinating retirement income planning with other estate planning goals and objectives.  Strategies for successful retirement income planning may include:
 

·      Social Security.  Maximizing Social Security benefits requires a careful analysis of when to start taking benefits and how income taxes can impact a benefit payment.

·      Qualified Retirement Accounts.  Retirement plans such as 401(k)s, individual retirement accounts, Roth IRAs and others all have different rules regarding how they’re funded, as well as how withdrawals can and should be made to maximize the deferral of income taxes. 

·      Annuities.  Annuitization strategies can alleviate the risk of outliving financial resources by providing a consistent, guaranteed income stream for the life of a retiree. 

 
Other estate-planning opportunities that will keep estate planners busy in the coming years and decades include: charitable legacy planning, planning for state death taxes, Medicaid planning, pre-planning funeral arrangements and planning for same-sex couples.  So, while it may be true that fewer U.S. taxpayers are likely to need the more advanced and exotic wealth transfer planning strategies, such as discounted family limited partnerships and sales to intentionally defective grantor trusts, there should be little doubt that the services and expertise of estate-planning professionals will be in greater demand than ever before for many years to come.  Carpe Diem!