Using Tech To Fight The Estate Tax Wars – Financial Advisor Magazine

Over the past few months, estate planning has become financial planning’s ultimate moving target as significant tax reforms are proposed and debated by state and federal policy makers, says Andrew Altfest, founder and CEO of FP Alpha.

“We have one bill that would have federal estate taxes apply to more people at $3.5 million, which is getting to the heart of the typical financial advisor’s clients,” Altfest says. “Advisors could have a very narrow window to act when potential legislation is passed but before it becomes effective.”

The challenge for financial advisors is keeping up with the proposed changes and preparing to revise their clients’ plans to account for any new laws, rules and regulations that may arrive. FP Alpha, a fintech company giving advisors a suite of AI-infused financial planning tools, is now offering technology to help advisors keep up.

The firm, which was designed to help advisors craft personalized client recommendations, is preparing to launch an “Estate Planning Lab” that allows advisors to upload their clients’ estate planning documents—particularly wills and trusts—and test the estate plans against different scenarios for different policy proposals.

“The proposals are moving so fast that we’re constantly updating our algorithms to keep up,” Altfest says, “but this is something that is going to help save a lot of time for advisors and help them be more proactive with their clients and have access to real-time updates on the legislation.”

The legislative items on most advisors’ minds, according to Altfest, are the American Jobs Plan and the American Family Plan, which both encompass President Joe Biden’s tax proposals. There is also Sen. Bernie Sanders’s “For the 99.5% Act.” Under the president’s plans, the top individual income tax rate would rise, the top capital gains tax rate would rise dramatically, the step-up in cost basis for assets at a person’s death would be capped, and carried-interest provisions would be eliminated. Real estate exchanges and business losses would be capped.

The Sanders plan would reduce the lifetime estate tax exemption to $3.5 million per person and the lifetime gift tax exemption to $1 million per person. The combined gift and estate tax exemption currently resides at $11.7 million per person. At the same time, Sanders’s plan raises estate taxes on large estates to a maximum of 65%—from a current flat 40% estate tax applying to estates in excess of the exemption. The annual gift tax exemption would be lowered from $15,000 to $10,000. The plan also attempts to eliminate valuation discounts for non-business assets, end certain grantor trust structures and limit the time horizon on dynasty trusts for estate tax purposes to 50 years.

“With the Sanders plan in particular, there’s potential to act today or lose the opportunity to do so,” Altfest says. “The one commonality to tax proposals is that they aren’t expected to apply retroactively. So if the bill progresses, if you can take advantage of the estate exemption today and use different planning vehicles available today, you can lock in and reduce the size of an estate and the potential to be subject to estate taxes. If you wait until after it’s enacted, you may have lost planning opportunities.”

The Estate Planning Lab, one component of FP Alpha’s holistic platform, is primarily designed to offer advisors a pre-populated summary of a client’s distribution plan. It uses information automatically read and analyzed from estate documents.

Different policy scenarios can be entered into the lab, says Altfest.

“I was just reading [that] the SECURE Act 2.0 was voted to advance by a House committee,” he says. “Included are ideas of raising the beginning age for [required minimum distributions] to 75 and increasing the catch-up contributions to retirement accounts. There are little planning opportunities hidden all throughout that bill.”

By uploading client documents and importing information, such as beneficiary designations, from linked accounts, FP Alpha automatically creates flowcharts showing where assets will be distributed after clients pass.

Altfest explains that while many advisors may have the knowledge to construct a visual representation of the flow of a client’s assets, the process is too time consuming to be done manually. So software that automatically and instantly creates such visualizations brings a new and powerful guide into financial planning relationships.