If you’ve been a CPA as long as I have, then you’ve lived through this many times. Whenever there is talk about a potential tax change, it is front-page headline material. Regardless of a client’s political persuasion, when Uncle Sam talks taxes, people listen. And when they are done listening, they begin to ask questions.
Part of their problem is that these possible tax changes are so stressful for some clients that they talk to anyone who will listen to them, and as a result they may get a variety of answers and inaccurate guidance. Because taxes are such an integral part of financial planning, especially for your high-wage earners and high-net-worth clients, this tax act could be just what the doctor ordered to readdress the bigger-picture financial planning needs of your clients.
In this article, we’ll talk about the intersection of tax and financial planning topics, with a focus on areas in the sights of lawmakers. These possible changes impact income tax planning, business exit planning, estate planning, domicile planning, charitable planning and just about every area in your clients’ financial lives.
Beginning with items that may come sooner rather than later, let’s talk about the possibility of a lower estate tax threshold. No one knows how low the threshold may go, but at this moment there have been conversations ranging from lowering the threshold to $3.5 million through to not making any changes at all.
What this tells me is that now is the time to speak to your wealthy clients about utilizing their unified credits. Assuming that your client has a net worth in excess of their lifestyle needs, help them decide which assets may be good candidates for gifting outright or to a protected entity such as a spousal lifetime access trust, or SLAT. I like the idea of using property with the following characteristics for this type of gifting:
- An asset that is likely to be appreciating.
- An asset where you may gift a partial interest in an illiquid asset and that lends itself to benefiting from the discounting provisions generally acceptable to the taxing authorities.
- An asset that generates taxable income.
The theory behind an appreciating asset is pretty basic, but it still makes a lot of sense. By making the gift now, all future appreciation remains outside of the taxable estate. The problem is that no asset with risk guarantees appreciation, so an educated guess is needed.
Even if you don’t make the best guess, keeping any appreciation out of the estate is ultimately beneficial. Gifts of cash can also make sense. With gifts of cash there are no basis issues and the SLAT or whatever entity structure you choose can always elect to invest aggressively in search of appreciation.
Gifts of partial interests of illiquid assets are good candidates for many reasons. The best answer is for the opportunity to provide a discount for the gift while that is still permitted. Every year we hear about the possibility that discounting for intrafamily gifts may become history, but for some reason this year it feels more possible. A closely held business interest or a substantial piece of investment real estate are great candidates for these unified credit-utilizing gifts.
Assets that generate taxable income can also help to further reduce the remaining taxable estate. While trust taxable income taxes rapidly reach the highest incremental bracket, that usually doesn’t matter to a high-net-worth client who is always going to be in the highest marginal tax bracket.
The benefit to the trust having a tax bill is that the grantor may be able to pay that bill from their otherwise taxable funds outside of the trust and accomplish two further objectives. First is further reducing their taxable estate, and second is maximizing the assets in the trust for growth by not depleting them for income taxes.
Getting out
For clients who are thinking or who should be thinking about an exit from their business, this may be a good time to test the waters. Once again, this isn’t something that can frequently be done at the drop of a hat. Many businesses, especially large ones, take time to prepare for a sale. If you have a client whose business is ideally positioned to sell, talk about that possibility before any capital gains rates may increase. But the reality is that most will not be able to act fast enough to get a deal done before any major changes, and it could be years until a more tax-friendly window of opportunity opens up.
The financial planning service that your firm should be providing to a client like this would be a solid exit plan with a few years to execute. When doing the exit plan, please pay special attention to the possibility that your client won’t live long enough to sell the business and create a succession plan for either their premature death or disability.
Charitable planning could also be changed radically. At this point, some may think it is best to wait for next year, as it appears ordinary income rates will be higher for your high-earning clients. However, in all of the banter, it has been discussed that all deductions, including charitable ones, may be limited in one form or another under a new tax act. If limits are placed on deductions for 2022, your client may be well served by starting their contributions now. At the very least, perhaps opening a charitable gift trust account to get that started may make sense to avoid a last-minute struggle.
Having ‘the talk’
The fact is that there will be hundreds of technical planning opportunities for your clients between now and the end of 2021. My main issue here is that your firm should be proactive to get the attention of your clients. While it is true that some of these moves may be important even if there are no major tax changes, don’t sit around thinking that you have time for planning because there are no new laws at this moment. Begin to use your clients’ awareness of the possible changes to get their attention, and focus them immediately on the strategies that they should be thinking about now.
Getting their attention now is going to be easy thanks to the headlines about change. The best way to do it is to have one-on-one conversations with the clients who you know need to do advanced planning. Even if you’ve had the conversation before, you need to have it again.
This time, be armed with some facts. The best facts are their real-life scenario and what happens from a planning perspective if they do nothing. Then you can talk about what changes if they take action and the associated benefits and possible tax savings. This sounds like a perfect conversation to have over lunch or a cup of coffee, and is best if both spouses are present.
Using the possible tax changes as a marketing tool may fall under the category of news hijacking. It sounds atrocious, but it makes a lot of sense. If clients are thinking about it because the media is hyping it, you need to turn that into your advantage.
Your successful clients are successful for many reasons, but one is usually because they are busy. They don’t mean to ignore what you and I consider to be serious gaps in their personal and family financial situation; they are simply fully engaged and occupied in the process of running a business and making money.
On top of that, these wealthy families often have more income and assets than may be needed to live their current lifestyle. To them, life is good and they may not feel as if they need your help with financial planning until they reach their own conclusions that the gaps you’ve identified could derail their long-term financial or family plans.
To tastefully get your message out, it needs to be delivered in an understandable format and be available for when your clients or prospects want to read it. So, the printed newsletter in the mailbox may not be the first choice to communicate and educate clients so they can become aware of their gaps and how your firm can help them. This is something you can do, and if a newsletter is one of the ways that your clients have consistently received important messages from you, then by all means, do it.
But this message is so important that you can leverage your word with a few 21st-century marketing ideas. Simple ideas, but it’s shocking how few firms do these.
Social media and your website should be the place where you put forth your education effort and marketing. Remember this: Marketing is not sales. Marketing is more about educating clients and prospects about matters that commonly need attention and how you may be uniquely positioned to assist. My premise here is that by publishing articles, videos and podcasts, your clients and prospects will be able to get a good feel for your expertise and ability to help — and they can do it at their own pace.
