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Gifting Without The Headache: Tax-Efficient Strategies To Stay Under Gift Reporting Limits

October 9, 2024 07:01 am 0 Comments CATEGORY: Taxes

Gifting is a common planning topic discussed between advisors and clients – often raising questions about which gifts are taxable, need to be reported to the IRS, or may be exempt from reporting altogether. The rules around gifting are nuanced and can create confusion for clients, but advisors with a clear understanding of gifting strategies can guide them toward informed decisions.

While all gifts could technically be considered taxable to the donor, the annual gift tax exclusion (currently at $18,000) provides for a practical allowance that makes it unnecessary to track and report every small gift (because no one wants to spend time accounting for the value of birthday gifts like bikes, books, or cash!). Furthermore, every individual also has a lifetime gift and estate tax exemption ($13.61M per recipient in 2024). Both the annual gift tax exclusion and the lifetime gift and estate tax exemption come with various nuances that determine what counts toward these exemptions.

For clients looking to give sizable gifts, advisors can help navigate any tax implications by considering how the gift will be given. For example, direct gifts (e.g., those given by cash or check) are simple transfers from donor to recipient, with no limitations on how the recipient can access the gift. On the other hand, gifts in trust allow donors to maintain some degree of grantor-retained control over the recipient's access, which can safeguard the assets under certain circumstances (e.g., divorce, poor decision-making, or claims by creditors). Finally, there are some contributions that get special treatment. For example, transfers into a 529 plan are considered gifts for tax purposes, even though the donor retains significant control over the transferred funds. And gifts of tuition payments made directly to an educational institution or medical expenses paid directly to a medical provider are exempt from both the annual exclusion and the lifetime exemption, meaning that these can generally be made ‘tax-free’ regardless of amount.

Ultimately, the key point is that despite the many complex rules relating to gifting, clients will rarely be required to pay taxes on a gift. They would need to have both an ultra-high net worth and a desire to gift a substantial portion of their estate during their lifetime to be subject to a gift tax liability. For clients who do fall into those categories, advisors can help them implement relevant gifting strategies to minimize gift tax (e.g., by 'gift-splitting' for spouses or dividing gifts across multiple tax years). For others, advisors can offer them peace of mind by clarifying which gifting situations are actually applicable and when they might be obligated to file with the IRS to help them better understand gift taxes. All of which can do a great deal for clients aiming to make the most informed decisions possible!

#FASuccess Ep 406: Exiting To A Perpetual Purpose Trust To Facilitate Internal Leadership Succession Without Indebting G2 Advisors, With Michael Kramer

October 8, 2024 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Michael Kramer Podcast Featured Image FAS (new)

Welcome everyone! Welcome to the 406th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Michael Kramer. Michael is the manager of Natural Investments, an RIA based in San Francisco, California that has offices across the country, overseeing $1.9 billion in assets under management for 1,300 client households.

What's unique about Michael, though, is how his firm used the unique perpetual purpose trust structure to facilitate an internal succession plan, allowing the founding partners to monetize their ownership in the company without indebting the firm's newer advisors, in the process also creating a more equitable leadership structure based on more than just relative ownership of shares.

In this episode, we talk in-depth about how Michael and his fellow partners used the perpetual purpose trust, which now "owns" the underlying RIA, to implement a succession that provided them with an up-front payment financed by a loan taken out by the business as well as ongoing earn-outs, and allowing them to monetize their original stakes in the firm without putting the firm's next generation advisors into debt, how Michael's firm decided to allow new advisors joining the firm to become eligible for its profit-sharing payouts and voting rights immediately (without a vesting period) to further distribute power across the organization, and why Michael's firm decided to make profit-sharing payouts to advisors on a per capita basis, rather than based on revenue or other metrics, to further help the next generation of advisors build their own practices and economic capabilities for themselves.

We also talk about how Michael's RIA is now governed by 7 "trust stewards" who are elected by the firm's advisors who make major decisions for the firm, allowing more of its advisors to participate in decision-making for the firm, the unique "trust enforcer" role that Michael's firm implemented to ensure its trust stewards have accountability as well, and why Michael and his firm chose the perpetual purpose trust model over others, such as an ESOP conversion or cooperative arrangement, in part based on its structure of having its advisors run their own practices as 1099 contractors rather than as employees of the shared firm.

And be certain to listen to the end, where Michael shares his personal journey of how he built his practice after starting with no clients 24 years ago, in part by public speaking events that helped him gain the trust of prospective clients, how Michael initiates conversations with prospects and clients about their values, which can open the door to discussing how the firm's socially responsible investing approach can match these values, and why Michael views himself as a "seed planter", in part by helping to create a business that reflects his values, and is structured to live on after his days as a financial advisor are over.

So, whether you're interested in learning about using a perpetual purpose trust to drive a succession plan, how this structure can allow founding partners to monetize their ownership without indebting G2 advisors, or how to approach values-based investing conversations with clients, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Michael Kramer.

Wealth.com Raises $30M To Provide Estate Documents To Advisors’ Clients (And More Of The Latest In Financial #AdvisorTech – October 2024)

October 7, 2024 07:02 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the October 2024 issue of the Latest News in Financial #AdvisorTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors!

This month's edition kicks off with the news that digital estate planning platform Wealth.com has raised a whopping $30 million in Series A funding, following on the heels of Vanilla's follow-on $20M capital round just a few months ago – which on the one hand reflects the anticipated enthusiasm for solutions that can help advisors efficiently solve their clients' needs for estate document preparation (beyond 'just' estate planning software), but on the other hand raises questions about how big the market opportunity really is for advisor-driven estate document preparation, given that unlike tax planning tools (which have an annual cadence for filing tax returns with the IRS) most clients may only update their estate documents only 10–15 years (often amounting to no more than 2–4 clients per advisor per year).

From there, the latest highlights also feature a number of other interesting advisor technology announcements, including:

VRGL has announced a new venture capital funding round to continue building out its capabilities to extract data from prospects' investment statements and automatically generate investment proposals – but while VRGL has proven popular among some advisors for its ability to save time spent poring over paper statements, it remains to be seen how many will want to use (and pay for) it as a standalone investment analytics and proposal tool versus 'just' as a tool for extracting investment data (to send to the advisor's preferred analytics platform)
Cashmere, an AI-driven prospecting tool aiming to help advisors "identify, enrich and engage" with prospective clients, has announced a $3.6 million seed capital funding round – although, as multiple new solutions have cropped up in recent years that also seek to help advisors catch money-in-movement events, fill in gaps in data on prospects, and match advisors with their best-fitting prospects, the question remains how many different solutions the market for prospecting tools can support (especially given that most firms tend to move away from prospecting as soon as it's feasible to generate most of their new growth from referrals)
Fidelity has announced that it plans to effectively cut off access to 401(k) plans on its platform by Pontera and other technology that uses client credentials to view and trade in held-away accounts – which while putatively being about protecting client data and privacy, also serves to highlight Fidelity's conflicts as both a 401(k) provider and custodian (since now in order to manage within Fidelity-held 401(k) accounts, advisors will need to have custody assets on Fidelity as well), and raises questions about how Pontera can resolve its disputes with both state regulators and now plan recordkeepers to continue allowing advisors to manage clients' 401(k) assets on its platform

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including:

Charles Schwab has announced that it plans to shut down its Institutional Intelligent Portfolios "robo-advisor for advisors" in the coming year, further accentuating the decline of the B2B robo-advisor space in recent years as the costs of attracting next-generation clients to sign up have continued to outpace the growth of new assets, to the extent that only a small handful of the original crop of B2B robo-advisors from the mid-2010s still exist today

Retirement planning platform Income Lab has announced the launch of a new Annuity Planning tool aiming to model the impact of a wide range of different types of annuities on a client's overall retirement picture – which is arguably the first tool capable of subjecting many annuities to a robust and objective analysis (rather than the optimistic projections included in annuity sales literature), and may help to settle some debates over how certain annuities might perform in a range of different scenarios

And be certain to read to the end, where we have provided an update to our popular "Financial AdvisorTech Solutions Map" (and also added the changes to our AdvisorTech Directory) as well!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading For Financial Planners (October 5–6)

October 4, 2024 02:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that a recent survey from Charles Schwab indicates that advisors see technology as the biggest driver of change in the RIA industry, with the growing number of AdvisorTech solutions as the most frequently cited tech-related driver of change. Further, Artificial Intelligence (AI) was the most cited factor driving industry growth during the next 3 years, with client data integration as a primary area for improvement, suggesting an opportunity for AI tools to help advisors make the most of the significant amount of client data they possess (possibly saving time in the process) and potentially offer a deeper planning experience for their clients!

Also in industry news this week:

A recent survey found that while 1/3 of advisory firms are currently using AI tools, another 1/3 are fearful of doing so, indicating that while some firms are eager to be early adopters of this technology, others are taking a wait-and-see approach, perhaps as regulation surrounding this technology evolves over time
National RIA Creative Planning recently received an eye-popping 23X earnings valuation in its sale of a minority stake to a Private Equity (PE) firm, indicating that some acquirers are prioritizing a firm's depth of integration and consistency (and the growth prospects it supports), and not just its size, when making investments and setting a value for advisory firms

From there, we have several articles on retirement planning:

Why now could be a good time for clients nearing and in retirement to trim their equity allocations (perhaps as part of a regular rebalancing strategy), despite the potential temptation to be overweight stocks in the current hot stock market
Why contingent deferred annuities could serve as a middle ground for advisors and their clients who want additional protection from longevity risk without giving up control over their assets
How a "bond tent" approach can help advisors and their clients reduce sequence of return risk without increasing longevity risk in the process

We also have a number of articles on client communication:

How advisors can craft effective stories that can help clients and prospects better understand technical planning topics and the value the advisor provides
Why individuals and companies that have the 'best' story sometimes prevail over those that might have better ideas or products
5 types of stories for advisors to have in their back pocket to deal with a variety of client circumstances

We wrap up with 3 final articles, all about spending on children:

Why some parents are cutting back on financial support for their adult children, and the strategies they are using to do so
How providing "helicopter money" can unintentionally stunt a child's path to financial independence from their parents
Why buying kids the highest-quality goods could give them a skewed perspective on what 'normal' purchases look like and the need to balance financial limitations with their 'wants'

Enjoy the 'light' reading!

Kitces & Carl Ep 148: Making It Easier To Get Started By NOT Building In Public And Focusing On Version 0 Instead

October 3, 2024 07:02 am 0 Comments CATEGORY: Kitces & Carl Podcast

Kitces & Carl Ep Making It Easier To Get Started By NOT Building In Public And Focusing On Version Instead

"Building in public" is a common piece of advice for tackling new challenges – whether launching content, starting a business, or setting personal or professional goals – as public commitment fosters accountability and motivation, tapping into the human desire to avoid embarrassment. While this approach can be effective, it ultimately poses its own difficulties; for example, when stakes are public, advisors may feel pressured to endlessly perfect their offerings and over-commit their time and resources before knowing what really works. Alternatively, they may avoid public commitment altogether to sidestep this pressure.

In the 148th episode of Kitces and Carl, Michael Kitces and Carl Richards discuss how advisors looking to try something new can overcome mental roadblocks and take action… without feeling the pressure to publicly announce their plans first.

As a starting point, it may be helpful to remember that, for better or worse… few people pay attention to someone's early public efforts. For example, firm owners often spend an immense amount of time on marketing before referrals or prospects begin to flow in. Most new offerings don't come with a built-in audience. The reality is that, more often than not, recognition for one's 'new' offering tends to come long after the offering was launched, which is why we often hear the phrase about taking 10 years to become an overnight success. On the one hand, it may feel defeating ("What's the point if no one cares?"); on the other, it can feel liberating ("I can build anything I want, and few will notice if I fail.").

The benefit of this slow recognition is that it gives advisors time to refine their product… as long as they start. The desire to create a polished product that matches what clients want is important (and a part of how an advisor has gotten so far) but can also inhibit advisors from getting started in the first place. From that end, it may be helpful for advisors who struggle to start to create a "Version 0" – a version built with release in mind, but not a commitment to a finalized, perfected end product. For example, an advisor creating new video content may record "Version 0" videos, where rather than focusing on perfecting sound, light, and other design elements, they ‘just' turn on their camera and follow a brief script. After recording, they may find that Version 0 is actually good enough to release! And once "Version 0" is out, observing who shows up and engages can inform the advisor about what their audience truly cares about.

The key point is that if advisors can ‘just' begin by iterating new offerings, the process of releasing them gives the advisor space to refine what truly resonates with clients – ultimately leading to a great, relevant product!

Helping Nervous Clients Understand The (True) State Of The Social Security System And What It Means For Their Retirement

October 2, 2024 10:15 am 0 Comments CATEGORY: Retirement Planning

Given the frequent news headlines on the (un)sustainability of the Social Security system, many working-age financial advisory clients might harbor doubts about receiving their full estimated Social Security benefits (and many current Social Security recipients might be concerned that they will not continue to receive their full benefits throughout the remainder of their lives). In this environment, financial advisors have the opportunity to add value for their clients not only by giving a clear explanation about the current status of Social Security and the potential legislative changes that could improve its solvency, but also by modeling what (realistic) changes would mean for their clients' financial plans.

To start, while the state of Social Security's trust fund reserves often receives significant media attention, in reality, the bulk of funding for paying out Social Security benefits comes from Federal Insurance Contributions Act (FICA) taxes, more commonly known as payroll taxes (with workers and their employers each paying 6.2% on up to $168,600 of income in 2024 for the Social Security portion of FICA). Which means that even if the trust fund reserves were to become depleted (currently estimated to occur in 2035), the system would continue to pay the majority of benefits that are simply covered by the ongoing receipt of significant payroll tax revenue. In fact, according to the latest annual report of the board of trustees of the Social Security trust funds, Social Security would still be able to pay 83% of scheduled benefits in 2035 when it is expected to be depleted, though this figure would decline to 73% of scheduled benefits by 2098. Which might come as a surprise to clients who assume that the exhaustion of trust fund reserves would mean that no (or very little) benefits would be paid!

Nonetheless, given the disruption that a reduction of benefits would cause recipients of Social Security retirement benefits (particularly those who rely on such benefits for a significant percentage of their retirement income), policymakers have an incentive to enact measures that would allow the system to continue paying out full benefits for decades to come. Such options include single-policy solutions that would wipe out the entire 75-year shortfall (e.g., the board of trustees report estimates that a 3.33 percentage point increase in the payroll tax or a 20.8% reduction in benefits would cover the gap) or a (perhaps more politically feasible) combination of policies that address system revenues and/or costs (e.g., raising the payroll tax wage cap or increasing the Full Retirement Age) that would close the funding gap.

Ultimately, the key point is that financial advisors have the opportunity to add value for their clients by providing context on the state of Social Security (e.g., even if the trust funds are exhausted, the system would still be able to pay out the majority of scheduled benefits) and potential legislative fixes (which, depending on the legislation passed, might not be as severe as some clients assume), as well as leveraging financial planning tools to show the impact of the possible trust fund exhaustion and/or potential policy actions on each client's financial plan (both in dollar terms and how it changes the probability of success of their plan). Which, together, could provide clients with a more realistic picture of what changes to Social Security could mean for their unique situation!