So many firms get to the first finish line of tax season in April by working as many hours as humanly possible. This may be gratifying for May and June collections, but in the process you probably burned yourself out and may have missed the opportunity to help your clients at a higher level, with work that they want, need and would gladly pay for. Of course, that work is personal financial planning.
When in conversation with CPAs who are serious about building the best personal financial planning practice possible, we often talk about transitions. The transitions in question could be about growing or acquiring a PFP practice, changing firms for better PFP assistance, or transitioning your clients from seeing you as a once-a-year hero into a year-round advocate for their entire financial life. To transition to the latter, and be the resource that your clients absolutely, positively cannot live without, you need to act differently when the heat is on the highest: tax season.
It’s important that your firm’s tax work be accurate and valuable for your clients, but there should be more to tax prep than making sure that Box 14 of a W-2 goes in the right place during the input process. Under the gun, the CPA is most concerned with profitably getting tax returns out in a timely and accurate manner. But in the process of attempting to maximize your realization from tax prep, you may be missing planning opportunities.
Discovering a clients’ financial planning needs from reviewing a tax return starts with curiosity. The curiosity isn’t about accuracy; it’s about all of the non-tax stuff that this information may lead to. From this minute forward, you’ll be able to uncover some planning needs from a mile away by simply looking at a tax return.
Start with the children
We don’t even need to get into the numbers part of the return to start asking intelligent questions. You can start with dependents. More than their Social Security number and whether they live at home, ask about their children’s health. Is everyone healthy and doing OK, or are there special-needs children that may require additional insurance or a more sophisticated estate plan? Ask about their benefits and what type of insurance they may have in the event that their life or health is cut short of the children’s emancipation date. You may be surprised when certain clients can’t really answer that question. You may be even more surprised when you learn how many are woefully underinsured for both life and disability.
Ask about their intentions with respect to their children’s education. Will younger children attend public school or do the parents need to plan for private school tuitions? When it comes to college, not every parent has the goal of paying for their children’s education. Many do want to pay, and many of those are not prepared. Dig in a little and ask if they have a plan, know how much they need to save, and if their cash flow can support that level of savings.
For the family with young children, ask about the insurance coverage for both spouses. Many people rely on the group insurance provided at work without realizing that it only exists as long as you stay employed by the benefit provider. For clients with one stay-at-home parent, find out how much life insurance is on the parent who stays home. Having life insurance on a stay-at-home spouse makes a lot of sense if the survivor must continue to work and would otherwise struggle to pay for child care, transportation, and other out-of-pocket costs that may arise from the loss of a stay-at-home spouse.
If the dependent on your client’s tax return is an elderly parent, find out what kind of estate or long-term-care planning has been done. Moving Mom into your home is a nice gesture, but many find out too late that being a caregiver is very difficult to do for extended illness. Caregivers burn out, miss work, and sometimes get resentful if they’re the only children providing the needed care. Due to the astronomical cost of LTC insurance, it may not be feasible to buy at this point — but do ask if they have a plan for health care and the associated other costs if needed.
Ask about the elderly parents’ estate plan. Just like younger people, there are many elderly walking around with inadequate estate documents. Don’t just take their word that they have a will and they’re OK — examine the documents. Your elderly parent may not recall what the documents say and sometimes there have been enough material changes in the beneficiary’s lives to require a change. Divorce of a child or dependency issues are common life changes that may impact your parents’ estate plan.
Another common situation with elder parental care has the parent’s former homestead now in the name of the children. Many lawyers do this without regard to any consequences simply to protect the house in the event that the parent needs expensive professional care. There are many problems with this plan. First may be a basis issue. If Mom bought the home 50 years ago, the carry-over basis may be so low that it causes a huge income tax bill when the children finally do sell the home. The second big problem is the assumption that the children will never have a health or financial problem before the parent, thereby putting the home equity again in harm’s way.
Lines and numbers
Let’s move down the first page of the 1040, and start talking about some line items that involve numbers. Let’s start with Schedule A. An obvious question for those with a mortgage is to inquire about the terms. Some conservative savers are still walking around with a mortgage rate higher than what they may be earning in their savings accounts. Ask about their charitable contributions. For the material givers, make sure that you talk about gifts of appreciated assets, charitable gift trust accounts, and if they’ve got any other material charitable intentions. This may lead to a discussion about a private foundation or a large pledge that they’ve been thinking about. With the rise in the standard deduction, nearly every contributing client can benefit from a conversation on bunching deductions or gift trusts — especially in windfall years like deferred comp payouts or sales of businesses.
Moving over to Schedule B also give us opportunities to prove that we care more about the client than simply getting the return out the door. For any 1099s received that will end up on Schedule B, take a close look at the owner of the account causing the 1099 in the first place. In most cases, you’ll probably find that investment or bank accounts are owned individually by each spouse or in joint name with rights of survivorship. For larger clients, this is firsthand evidence that the estate plan is outdated, not comprehensive, or not being followed. Most people whose estates approach their local state exemption or the federal estate tax exemption should have trusts and be using these trusts during their lifetime. Among many other things, the use of trusts while you are alive can help with privacy, the speed of estate settlement, and is a lot easier to deal with than relying on the rules of portability or probate. Many counsellors will say that probate is not a big deal. And while it may not be in some states, why bother if you don’t have to? This becomes even more significant if there are complicated beneficiary arrangements or the possibility of a challenge from an unhappy beneficiary.
Schedule B also gives you a look at how your client invests and saves. From that you may inquire about their savings and what type of interest they may be receiving. You may also discover private loans if you ask. Many wealthy clients loan money to children or friends and family, and probably do not understand imputed interest or their obligation to claim the interest income from a private loan. You can also ask why they have chosen the investments that they have. You may find no reason at all or a reason that is equally foolish. We recently met with a new prospect who claims that they choose investments by fighting with their trustee attorney about improving the dividend yield from the portfolio. The trustee only pays income (although corpus distributions would be permissible); therefore, the beneficiaries argue that their stock selections should be made based on the highest dividend-yielding instruments that they can find. Obviously not the most tax-friendly or diversified way to invest.
When preparing a Schedule C for a client, approach it like a case study in college, and ask all of the basic questions that we all learned as undergrads. First is that of liability. Make sure that the client understands the unlimited liability nature of a Schedule C. Ask about the type of insurance they have for that sole proprietorship. Do they have coverage for a business in the home, driving a business auto, or business interruption insurance? They may be surprised when you tell them that the basement full of computer equipment is not covered under their basic homeowner’s policy.
Ask about their succession plan. Just because the business is a sole proprietorship doesn’t mean that there aren’t stakeholders who would benefit from a well-thought-out succession plan. Whether it is their family, employees, clients or suppliers, a smart succession plan should cover the business and its owner for temporary disability, permanent disability or premature death.
Inquire about retirement contributions. Teach them about their options to maximize the contribution and the obligations that it may create for employees or another business where they own more than 80 percent. It seems the most vulnerable here may be those whose Schedule C is a second or side business. Many times these clients aren’t aware that they may defer much of their income from this Schedule C with a retirement plan.
There are a hundred or more examples of great PFP service that can be delivered by simply paying attention to more than the numbers being input to the system. Ask all the questions that most CPAs ignore, and it will be clear as day to your clients that you care and that you can help with more than just tax preparation.
