Assisting clients with income or estate tax reduction may seem like a small task in comparison to the vast amount of financial planning work advisors do yearly. However, if you can help your client find extra and unexpected funds in their tax returns, you can use those funds to set the client’s foundation for a lifetime of long-term success.
Tax reduction techniques
New tax reform laws in 2018 created significant tax liabilities to many consumer’s income and estate taxes. Most individual clients are unaware of these liabilities which puts them in a precarious financial position. In fact, a recent MDRT study found that 42 percent of Americans aren’t comfortable explaining the implications of the tax reform. It’s our role to stay abreast of these changes and alert clients to ones which may impact their plans while also offering applicable solutions. Oftentimes, the best solution for tax relief lies in identifying tax deductions.
The quickest way to uncover tax deductions is to examine the tax return. For example, many people have taken dividends of various kinds over the years that appear on page one of their tax return. Even though dividends are taxed at a lower rate, they can lead to a higher tax liability than your client is prepared for due to the new tax reform laws. One of the ways to navigate that is to reduce the dividends and interest income by using annuities, so that the growth occurs on a tax-deferred basis. From my personal experience, if you can incorporate an annuity into your client’s portfolio, you can reduce the tax liabilities for those types of investments anywhere from 25 to 40 percent on average.
If your client is a small business owner, another technique to reduce their taxes is to investigate their employee stock ownership plans (ESOP). With an ESOP, contributions of stock and dividends are both tax-deductible. Employees do not pay taxes on the contributions to the ESOP, only the distribution of their accounts. ESOPs can be enormous tax savers for small businesses that want to sell their business tax-free or tax-beneficial.
Charitable remainder trusts (CTR) are also viable options, especially for clients with diverse assets. If your client donates assets such as stock, real estate or cash to a CTR, they will preserve the market value of the assets rather than reduce it by large capital gains taxes. When they fund the CTR, they’ll also qualify for a partial income tax charitable deduction. Moreover, the investment income they receive from the CTR is tax-exempt. A CTR can save your client money while simultaneously increasing their net worth.
Be creative as you find your client solutions. For example, I recently did a 1031 real estate exchange to help a client avoid $1.3 million in taxes that he would have owed last year under the new laws. My client’s personal income tax deductions exceeded $490,000 per year, so I showed him how to navigate some of the tax liabilities that apply in the state of California. We then set up a defined benefit pension plan which allowed him to positively impact his taxes going forward.
Transition to long-term liability protection
After you guide your client through managing tax liabilities, walk them through the ways to best invest those recuperated funds to set them up for financial success in retirement. One of the largest liabilities they’ll face during retirement is long-term care, and after saving money from their tax returns, they will feel more confident about purchasing long-term care insurance.
Once your client decides it’s in their best interest to purchase long-term care insurance, suggest a potential product. Remember that this is not necessarily a sale as much as it is a relationship-building meeting. You can provide comfort and clarification in this process by inviting in their CPA. If they do not have one, recommend several you trust and bring in a product expert as well. This will allow your clients to ask specific questions about the product and to better understand its benefits, the tax liabilities, cost and structure. With the reinforcement of the CPA and the product expert, you can help make your client more confident that this is the right product for their financial well-being.
In addition, you can get creative with their long-term care by setting up plans which can use life insurance or annuities with long-term care providers. Also, help them establish a better savings plan that allows them to acquire income that’s not taxed so heavily. In most cases, the money and benefits your clients use to pay for their future nursing home will then be tax-free.
Know your territory
The same MDRT study found that seventy two percent of Americans who currently work with an advisor will most likely use their financial advisor to help file taxes. If you are looking to give your practice an edge that sets you apart from other advisors, explore the taxation realm. It will take more work, time and dedication than other aspects of financial planning due to its intricacies, but it can ultimately be very rewarding. If you are new to taxes, take the time to learn as much as you can. Many advisors work with straightforward products, but if you decide to take on tax returns you must know your territory. It can be complex, so ensure you have a fellow advisor or CPA you can bounce ideas off of as well. Add to your knowledge base regularly, be creative and think outside the box. If you can master tax relief, your clients will be able to save more and, most likely, invest more with you. Ultimately, you’ll be able to set your client up for the best long-term success possible.
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- Reduce Client Taxes and Establish Foundation for Growth - February 14, 2019