Table of Experts: Reading the tea leaves
Fluctuating market conditions, inflation and looming political uncertainty have wealthy individuals pondering the steps they should take to ensure their own financial security as well as their legacy. If Congress takes no action, there will be major changes in estate and income taxes starting Jan. 1, 2026, that will increase those taxes and have a dramatic impact on estate planning. In addition to the political uncertainty surrounding the 2024 presidential election, estate planners and their clients are keeping a close eye on market fluctuations to evaluate the most appropriate assets and wealth management tools. The Milwaukee Business Journal recently sat down with experts to talk about how current market conditions and the changing political environment are impacting what people are doing to protect their wealth and preserve their legacy.
Moderator: Political and economic trends can have a major impact on estate planning. What are your clients most concerned about today when it comes to managing their estates?
Kelsey Berns, Reinhart Boerner Van Deuren: It is an interesting time for a lot of our clients. Many are owners of closely held or family businesses and, generally speaking, they are doing very well. The labor shortage is probably top of mind, as are rising interest rates, which are making it increasingly expensive to finance expansions. From a political perspective, our clients are always concerned about a potential change to the composition of Congress or control of the White House. So, I think the 2024 election and the 2026 sunset of estate and income tax laws are top of mind as far as estate planning.
Joe Maier, Johnson Financial Group: Many business owners are not experiencing the recession we are supposed to be going through, but they are not immune to what they hear on television, and they are wondering if or when the proverbial shoe is going to drop. It is a weird, uncertain environment right now.
Berns: It is an exciting time to be in the planning world because I think people are understandably being conservative in their approach to things, but we have a lot of opportunity to plan right now with exemptions being so high and before any tax law changes.
Moderator: What economic, legislative and political dynamics are you paying the closest attention to and how might they impact your recommendations for estate management and planning?
Maier: The 2024 election matters a great deal because it is going to have an outsized impact on planning. Income tax provisions and estate tax exemptions are going to sunset if there is deadlock, which will do away with a lot of great planning techniques. We are watching the Fed because interest rates matter when it comes to estate planning.
Berns: Interest rates are hugely important to what we do. We have had such low interest rates for the last decade that we have been able to take advantage of grantor-retained annuity trusts, intra-family loans, loans to trusts and things like that. With interest rates on the rise, some of those wealth-transfer vehicles are less appealing, while others, like charitable-remainder trusts and qualified personal residence trusts become more attractive. Making wealth transfers when valuations are down is ideal, but that is also when people are least comfortable with parting with their assets.
Maier: Exactly. If you know that values are temporarily low, you can get people to act. But human beings are wired to think that when things are going in one direction, they will continue to go that way. Markets have ups and downs. A down market presents an opportunity, but as Kelsey noted, people are fearful to give things away when the market is down.
Moderator: Many Baby Boomers are looking to sell or transfer ownership of their businesses. How does the current market volatility and uncertainty impact those plans?
Berns: The pandemic is having a lingering impact on many of our clients and their businesses. Many went out of business, but others prospered because of the pandemic. As a result, valuations are kind of weird right now. Owners of businesses that saw a lot of growth during the pandemic want top dollar for their businesses, whereas people looking to purchase those businesses are concerned that growth is an anomaly. And if interest rates continue to rise, it will be more difficult to borrow funds, so buyers will want to pay less or defer to a later date.
Maier: Five or six years ago, one of the biggest impediments to selling a business was the purpose that owning and running a business gave to the owner. The pandemic caused many people to think differently about life and what they really want. Because of that, we see more people willing to sell their business and move on to a different purpose in life. On the other hand, business owners like having control over their financial futures. The performance of the market over the last couple of years has caused some business owners to be more trepidatious about selling the asset they understand and control and handing the proceeds from that sale over to someone else to invest.
Moderator: The Biden Administration wants to change grantor trust rules and decrease estate, gift and generation-skipping tax exemptions. Are any of these proposals likely to pass with a divided federal government?
Maier: Logic would say no, because when you have divided government, you are going to have deadlock around important issues like tax policy. But back in 2011, when the estate tax exemption was going to drop from $5 million to $1 million, lawmakers cut a deal even though we had divided government.
Berns: I am more of a pessimist than Joe. In 2021, when Democrats had a three-way sweep, there were several proposals concerning exemptions, grantor trusts and other high-net-worth planning vehicles floating around Congress, but nothing got done. And with the sunset provisions, lawmakers don’t need to do anything to have a significant change. It will happen automatically. If there is a GOP sweep, they might push the sunset out, but otherwise I don’t think lawmakers are going to do anything.
Maier: Kelsey has the better bet, but I do think lawmakers will take into account how well the stock market performed between 2017 and 2021 and some of that performance had to do with tax policy. Moderator: From your perspective, what are some of the most common pitfalls people fall into when it comes to their estate planning?
Berns: One pitfall that comes to mind is failing to coordinate assets with your estate plan. A lot of clients create revocable trusts that leave their kids’ inheritance in a trust, but they also have life insurance policies, IRAs and 401(k)s that all name their kids directly as beneficiaries. By doing that, they unintentionally end up circumventing their own plan by not coordinating things with their revocable trust.
Maier: One pitfall is assuming that a generalist can do what a specialist should be doing. There is a science and art to estate planning, so it is important to turn to someone who does it all of the time. They know which tools to use in different interest-rate environments. Another pitfall is looking at estate planning as a simple math or distribution exercise. Those two things are critically important, but there is a piece that comes before: determining your values and how you want them to translate to your legacy. Failing to have that discussion is a mistake I see many people and planners make.
Berns: I agree. Sophisticated planners start with the non-tax portion of the estate plan: What is your long-term legacy? What do you want your money to look like for future generations? They take those non-tax goals and put them into a tax-efficient document.
Moderator: Many people consider estate planning to be a once-and-done process. Why is that not the case? How often do you recommend clients review their estate plans?
Berns: Estate plans are drafted against the backdrop of state property law and federal tax law. Both of those change with some frequency so you need to update your plan to react to changes in those laws. How often? It depends. You should review it more often as you get older. We review it once a year for our very high net-worth clients. For others, we recommend every five years or so, or whenever there is a major life change, like getting married, having kids or starting or selling a business. Those are good times to pull out your plan and look at it.
Maier: We meet with some of our high-net-worth clients four or five times per year. We evaluate their lifetime assets – the assets that will impact them while they are alive – and their legacy assets, the assets that will have an impact after they die. Someone like Kelsey can put together an infrastructure that allows us to move things back and forth as market conditions change.
Moderator: What are the one or two things you would like our readers to take away from this discussion?
Berns: People who are pondering a sale or generational transfer of business should come talk to us now because there are many tax-minimization strategies we can deploy prior to a letter of intent. People tend to make the mistake of negotiating a potential sale and then trying to do some last-minute tax and estate planning. A lot of avenues can be closed when you take that approach.
Maier: My favorite estate plan was for a couple who had no kids, some pretty significant wealth and a bunch of nieces and nephews. Their plan was to leave everything equally to their nieces and nephews until we started having a conversation about what made them happy. It turned out they loved to travel and had kept detailed journals on the different places they visited around the world. We incorporated that into their estate plan. They left money that their nieces and nephews could do whatever they wanted with, but they also set aside a multi-generational fund to provide annual trips to follow the journals. I would invite people to think about what their estate plan says about them as human beings. What is the impact you want your wealth to make? What is the legacy you want to leave and does your estate plan reflect that?