Why We're Better at Financial Software

Estate taxes are also known as "death taxes." State estate tax law varies by state, and in general, follow what the Feds do. Here's the basic concept after the new laws are in force in 2011:

If you die with $6M worth of assets, then the IRS first deducts an "exemption" of $5M. Everyone gets this $5M exemption (it's just like the Standard Deduction on a 1040 Form).

This leaves $1M in the "taxable estate." If you don't do any "estate planning," then this $1M is taxed at 35%, so your estate would owe the Federal government $350k.

So whoever is in charge of administering the estate through probate, would have to drum up $350k in cash and send the IRS a check with the estate tax forms. If this happened today, then your effective estate tax rate would be a whopping 6%. In the 20^th century, this was around 50%.

People made an enormous fuss about paying this tax when the rate was much higher, and the exemption was as low as $600k in the last century. So a whole "industry" evolved since the beginning of time, called estate planning.

These people are mostly commission-based financial planners working with estate planning attorneys. Their goal is get you to buy into their strategies that basically (using the above example), will allow you to give away this extra $1M, without really giving it away.

So this $1M would find its way into a wide variety of "trusts" that would transfer ownership to someone else, thereby removing it from the estate. Then the estate would only be worth $5M, so there would be no tax due, and everyone except the government is happy.

So the goal of an estate planner is to first convince you that estate taxes are bad, and then try to get to you to spend your bottom dollar on their favorite strategies to ensure you pay $0 in estate taxes when you die.

These trusts are designed to give you a high-income stream, but not allow you to spend any more than that (because the principal would belong to someone else now - the beneficiary). So you basically gave the money away, but it doesn't actually get given away until you die, and you still get to spend (and sometimes control) a huge part of it - the dividends and/or other "income."

So you sort of gave it away enough to get the Feds off your case, but at the same time, you still get most of the benefits of owning it. Basically if the money / asset technically belongs to someone else, it's out of your estate, and beyond the reach of Federal estate taxes - but you can still get paid from it.

The main reason this industry grew to be so huge, is that most of these arcane trusts and strategies used an enormous amount of life insurance and other life insurance company products (e.g., annuities), to "fund the trusts." So now you can see where this is going. As you probably know, these are the financial products that pay financial planners by far the most money when sold. Compared to making a normal life insurance sale - these sales are hundreds to thousands of times larger.

So back in the day, financial planners practicing estate planning were by far the richest financial planners (and the envy of everyone else). They basically made six-figure life insurance commissions on a single case (and of course, the attorneys would make very high and easy fees in setting up the trusts and other documents - without having to prospect for it).

So everyone won something big when this happened, and everyone was happy. Except for the client, whom was usually dumbfounded by the whole process. They're usually left with just a vague impression that they went through an enormous amount of time, attention span, had to sign tons of legal documents (none of which they understood), spent a ton of money on lawyers, and had to buy a boat load of life insurance company products. All just to lower the amount of estate taxes due if and when someone died. Most didn't think any of this was worth it.

So for many decades, there was a whole industry of very fat and happy financial planners and lawyers that serviced this "high-net-worth" niche market. This drew many new people into the business, and as a result, all of the "Broker Dealer software" companies just had to add an expensive estate planning module to their suite. Estate plan modules really are only included in BD software in the commission-based world, because RIAs usually can't sell life insurance, so there's no need.

All of this worked great until 2001, when rates were lowered and exemptions were raised. Both were slowly lowered and raised until we got to the point where the need for estate planning for 99% of clients was non-existent. Taxes declined annually until 2010, when there was no estate tax period (so really, the industry mostly died off in '09).

In general, the new 2011 Federal estate and gift tax rates, exemptions, and law changes have effectively, and permanently, killed off estate planning. The vast majority of the whole industry has just been wiped out for good. This is because very few clients have enough assets subject to estate taxes anymore (and the rates are much lower).

This is why AIG, and most of the big life insurance companies, started having hard times around 2002. They depended on all of this to survive since the beginning of time, just assumed this crème de le crème business would always be there forever, and it was just an integral part of their business model. When it was all just taken away piece by piece over a decade, and they didn't want to change nor cope, the end result is that they're now barely surviving. It all got to be too much around '08 as AIG proved with their need for $182 BILLION of taxpayer bailout money in '09 (which they still have yet to pay back). So the taxpayer footed the bill so they can continue being "too big to fail."

If you're an estate planning client, then all of this extremely expensive, arduous, and time-consuming battle with the lawyers, financial planners, estate planners, and life insurance companies to set up all of these undecipherable trusts, agreements, documents, life insurance company product policies, contracts, etc. is now ALL FOR NAUGHT! That's right, if you're still alive, then the resources that went into all of that are now mostly wasted (and no, you can't get a refund from a lawyer on an expensive trust just because it's now useless - but you CAN and SHOULD look into un-funding things by just canceling the life insurance contracts, by simply stopping the payment of premiums).

This is why we never made estate planning software over the last decade. All it took was seeing the slow decline in need from '01 to '10 (where there was no estate tax at all), and it was obvious that it would be stupid long-term to get into a complex market that was just headed for extinction.

Many people hoped that these rates would revert back to 20^th century rates in 2011 when all of this "expired;" but one thing you can always count on is the fuss "rich people" make when they see their taxes going up. As usual, the fuss they made in Washington won out, and when the dust settled, the new laws passed in Dec '10 with ease.

In 2011 going forward for many many years to come, for a $10M estate, the first one to die can pass their $5M to their spouse tax-free. Then the survivor can spend or give away $5M over their lifetime (or use a simple A-B trust), then when the last one dies with just a $5M estate, there is NO FEDERAL TAX DUE, PERIOD!

On top of that, the gift tax was also overhauled, so if an estate is worth $20M, they can just give away $10M to anyone before they pass, and again, there are NO FEDERAL TAXES DUE, PERIOD! And then if and when tax is due, the rates are now much lower (only 35%, down from 55%).

Now very few people will be taxed to death at death, instead of hundreds of thousands annually (like they were in 2000).

So unless someone is worth way over these enormous amounts, there's now little-to-no need to use all of the expensive CRATs and CRUT trusts funded with way too much of the most expensive life insurance and all of those complex lawyer strategies just to shelter money above these exemption limits from having to pay estate taxes. And then when it is taxed, the rates are now a third lower, and thus not painful enough to make the usual fuss over.

So the whole estate planning industry is now pretty much obsolete forever (forget hoping, it's not coming back... for decades).

So now there is little-to-no need to maintain expensive and cumbersome estate planning software to do all of the work one was used to since the beginning of time. How many clients do you have that's worth over $10M? One maybe if you're lucky.

So you should know that when you spend ~$1,500 EVERY YEAR on maintaining expensive and cumbersome BD software like NaviPlan, Profiles, eMoney, ESPlanner, MasterPlanner, all of the MoneyWhatevers (Money Tree, Money Guide, and Money this that and the other), etc. - you're spending about a quarter to a third of this money for estate planning tools that ARE NO LONGER NEEDED! It's mostly all obsolete and pretty much kaput forever. You'll be lucky to have a need for any of this once every five years.

Maintaining the estate and tax software modules are by far the most expensive parts of the whole. We just didn't go there after seeing the law changes in 2001. That's why our software doesn't cost an arm and a leg to buy initially, nor to update annually. These huge costs are just passed onto you. Laws frequently change during the year, new trusts and strategies were constantly being experimented with, etc. Actual uber-expensive human programmers with decades of experience in the field needed to be maintained to keep up with this tedious and constantly changing work. This is a major reason why this type of Broker Dealer software is always so expensive (and full of bugs).

So ~$500 of your $1,500 annual costs is now just money poured down the drain. And no, you cannot tell them you want to buy everything but the estate planning modules. Their software is all fully-integrated, so you can't just not buy the parts that are now mostly useless. And no, they're not going to lower their prices after they update and even layoff these programmers to reflect all of this (because they're most all working with skeleton crews and on the verge of going under as it is because of the "recession and financial crisis" of '08 - '10). So you, the financial planning software customer, will end up paying for their decision to make software for this dead market - decades into the future.

If "this" keeps up, then most Broker Dealer type of financial plan software will probably have to be infused with a new multi-million round of capital from the life insurance and venture capital industries (which both are also mostly-belly up too these days), just like they had to be in the first few years of the 21^st century.

Programming estate planning was a big part of their business model, hundreds of thousands of very expensive people-hours went into maintaining these modules since the beginning of time - and now it's ALL FOR NAUGHT! And to add insult to injury - they now have to waste even more resources updating all of their programs (and fix the bugs caused by that) to reflect the new laws and rates. Then sales will decline even further because of the state of affairs in general and lack of demand for estate plans. So they are not happy campers.

Think about it - how good could their software be, how good is it going to be in the future, and how good is their support going to be, if they're barely surviving already, and then just had a huge setback like this? How many times will their investors get burned by not seeing a profit from their investments for over a decade? Things are not getting better in this space either - it's still somewhere between stagnant and getting worse for just about everyone in the financial services industry (there's still thousands of jobs being lost in the industry monthly since the beginning of the 21^st century, and the trend is not showing any signs of reversing even yet).

So, because the BDs have a lock on the software market, you know what's coming next. Because these folks deal with change like the dinosaurs did, another major price increase is up next (for the same product). How much are you willing to pay for NaviPlan before you start looking into alternative platforms? $2,000 per year? $5,000?

So if you're planning to buy this usual BD software, you should know that you can buy everything on this site for $999. And then it's only around $250 per year to update. So you can get better financial tools for the same money, on top of not flushing $500 down the toilet annually on obsolete estate and tax modules.

Now is the time to do your homework and you'll see. For the occasional client that still needs estate planning, it now makes more sense to just farm this work out directly to the estate planning lawyer, instead of wasting hundreds of hours of time annually trying to be an expert at estate planning (usually, just so you can bag life insurance sales).

You can still make these life insurance sales because the lawyers usually can't sell insurance. In order to sell the kinds of life insurance and annuities that made estate planners rich, you'd have to be both life insurance licensed with the state, AND be hooked up to a Broker Dealer so you can sell securities. Attorneys are smarter than the average bears, so few do all of that, unless that's what they or their firm already specializes in.

So let the lawyers pay through the nose for estate planning software and let them do the work, AND assume the legal liabilities. Just sell the life insurance - which is all you really want anyway, right? That's right, now you don't have to spend hours and hours reading trying to understand estate planning just so you can bag these huge insurance sales. Just let the same lawyers do it all that were doing it before and save money, time, and reduce your legal liability all at the same time (you also may be able to reduce the expense of E&O insurance if you remove the estate planning shingle from your practice).

Now you can finally say no (or can at least have something to argue with) to your branch manager that's forced you to spend up annually for this kind of BD software in the past. Now's the time to change, learn, and grow your business in a much better direction for the long haul. It's also time to tell your Broker Dealer that since estate planning is over, you want them to stop spending enormous resources (that you the rep end up paying for - your payout is the BD's only income source) supporting obsolete software platforms, and start supporting ones that better give clients what they want and need.

With the money you'll save, and all of the free time you'll now have, you can also learn to be more of a fee-based money manager.

Because of this site's global exposure, we've known thousands of financial planners for over a decade, and have monitored their progress with great interest. Here's the bottom line: People that migrated in this direction years ago are doing fine now - their fees went down with the markets, but they always get their quarterly checks right on time, and are still in business and still own the same house and still drive nice cars. Those that didn't and fought tooth and nail to reclaim past glory and easy riches - not so much.

We know several financial planners that made estate planning the focus of their practice since the 80's. How the giants have fallen! These are the people that were once the envy of everyone in the biz with their constant six-figure life insurance commission sales several years ago; living large in their huge homes, fancy cars, and large fully-funded families. Now most all of them went under, sold their fancy cars at a huge loss, and are now scrambling to pay the mortgage to avoid foreclosure.

The thing is, we warned them about all of this years ago by advising that they should bag this line of work and just evolve into fee-based money management.

Now that the new laws are worked out, it's time to reevaluate your practice, and tool up for profiting in this new reality with software better suited for the future. Especially if you were an estate planner in the past. The first thing you'll want to do is convert your book into fee-producing accounts (not just trailers).

Then in 2013, assuming Congress does nothing, they revert back to an exemption of $1M and a rate of 55% (like they're going to let that happen).

Read why we have a much better way of do all of this here, and here.

Also, why all of the usual "tax wrappers" (IRAs, Roth IRAs, 529 plans, and all forms of annuities and all forms of whole life insurance) have around half of the value they did back in the "good 'ol days," is explained on the 529 plan page.