As much of the planning community has focused their attention on the impact of the new estate tax laws for the extremely wealthy, the moderately wealthy client has been lost in the shuffle to some degree.  I think it may be time to take a step back, and get a little perspective.  If we are honest with ourselves, most of our clients are not in a position to take advantage of the reunification of the gift and estate tax exemptions and the larger amounts of wealth that can be transferred without taxation.   

So what has changed for these moderately wealthy clients?  Almost nothing.  Consider 2010 and the opinion held by most clients that there was "no estate tax".  While I have not spoken to all who had that opinion, it is not a big leap to think that they probably still believe there is no estate tax if they are worth less than $10 mil.  Further, at the end of 2012 they will all be sweating bullets again as our elected representatives apply another temporary fix to a long term planning challenge just as they did at the end of 2010.

Clearly, we have our work cut out for us as advisors working with these clients.  The government has once again created a false sense of security for this group, and we are all going to be very challenged by the need to educate and motivate these clients to take action.  So what action should they take?  Great question.  The first answer is the easiest - remember that tax planning is but one aspect of estate planning.  A conversation about what the client wants their money to do rather than simple tax mitigation is a good start.

The next step is the education piece.  The potential reduction of the $5mil exemption to some lower level is a risk factor in any plan.  There are ways to deal with that uncertainty, and one of them is with life insurance.  Convincing a client to commit to an insurance solution that is one dimensional and solves a problem that may or may not present itself in the future is a big challenge, and may in fact be a poor recommendation.  If we can find a way, however, to build some flexibility into the plan, then we may have the right solution.  It's time to consider trust owned term insurance, permanent products that are more than "lifetime term" and trust structures that allow for multiple applications aside from simply being outside the taxable estate.  Spousal Lifetime Access Trusts would be a great example of this in some situations.

My last point for today is this.  Look back over your clients who have successfully implemented estate plans with an insurance solution.  How many were estates under a current value of $10mil?  How much revenue did that business generate?  Then take a look at your largest case for your wealthiest client, including the compensation.  It was a big number I am sure, but associated with that was an extremely high number of man hours, with no guarantee of success at the end of the day.  Why think about this?  Simple - it is easy to starve to death hunting elephants.  Maybe, just maybe, this under-served moderately wealth group is the sweet spot moving forward.  I think they need you more than your extremely wealthy clients.

What do you think?