For most financial advisers, successfully meeting a client’s financial goals defines the completion of a successful case. The exceptional financial adviser will fulfill a client’s goals, but understands that he or she also needs to perform three distinct roles — adviser, counselor and leader.
The adviser role entails educating clients as to how a specific strategy or financial instrument should work. Most advisers understand this role and believe developing this skill is all that is required to be successful.
However, the role of counselor is more what clients are looking for when searching for a financial adviser. A counselor is someone who is trusted to have the requisite technical expertise but also places the client’s interests above all other considerations. Once an adviser is perceived as a counselor, virtually all transactional barriers are removed.
The exceptional adviser goes the distance to be considered a leader by clients — one who provides direction and inspiration. Whether a client is able to verbalize it or not, he or she needs a counselor to provide inspiration to attain greater things with his or her assets, and also provide direction on how to attain those greater things.
The area of wealth transfer or estate planning is where an adviser can best exhibit leadership. While clients want to reduce the effects of estate taxation, most are uncomfortable with the two best ways to do that – life insurance and charitable gifting. Charitable gifting may prove to be the most difficult concept for a client. Giving something away for financial gain is not intuitively obvious and can be extremely challenging to accept.
Following is a case study of how charitable gifting and life insurance can provide benefits to society and a client’s heirs.
Ben, a 60-year-old widower, would like to make a charitable contribution at his death but does not want to reduce the inheritance to his family. Ben owns a $500,000 residence, free and clear. His effective state and federal income tax rate is 35 percent, his estate tax rate is 45 percent and his real estate borrowing rate is 6 percent.
Ben and his trusted counselor develop a three-step plan.
1. Get a $100,000 interest-only mortgage from his bank.
2. Use $80,000 to buy a single premium life insurance (SPLI) policy with a death benefit of $345,000, which is gifted to charity.
3. Put the balance of the mortgage ($20,000) plus the income tax savings on his charitable contribution ($80,000 x 35 percent = $28,000) into an irrevocable life insurance trust (ILIT). The ILIT uses this combined $48,000 to purchase a SPLI policy with a death benefit of $205,000. Ben’s kids are the beneficiaries of the ILIT.
When Ben dies, the charity gets the death benefit of $345,000. The $100,000 home equity loan reduces Ben’s estate tax by $45,000, which is added to the $205,000 ILIT policy death benefit, for $250,000 gross. Of course, $100,000 of the policy benefits go toward paying off the home equity loan, leaving the kids with $150,000 net. (In a 45 percent estate tax bracket, Ben would have to leave his kids $272,725 to net $150,000.)
The cost to leave $345,000 to charity and $150,000 to the kids is only the annual income tax deductible cost of interest on the $100,000 loan.
For the adviser that leads clients toward charitable gifting, there are great rewards. In addition to financial value, there is enhanced emotional and spiritual value realized by the client, which results in greater value being placed on the client-adviser relationship.
The adviser will be able to realize not only financial rewards but the greater reward of providing true value to clients and society.
Thomas McDermott is a registered representative and investment adviser representative of Equity Services Inc. Securities and investment advisory services are offered solely by Equity Services Inc., Member NASD/SIPC, 1050 Crown Pointe Parkway Suite 1000, Atlanta, GA 30338. Reach McDermott at (770) 512-5100.
