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Untangling The IRS’s New Finalized (And Proposed) Regulations On RMDs: The 10-Year Rule, Trust Beneficiaries, Spousal Beneficiaries, Annuities, And More!

July 24, 2024 07:02 am 0 Comments CATEGORY: Regulation & Compliance

When the original SECURE Act was passed in December 2019, it brought sweeping changes to the post-death tax treatment of qualified retirement accounts. One of the biggest changes was to eliminate the prior "stretch" treatment of post-death distributions for most non-spouse beneficiaries, who are now subject to the so-called 10-Year Rule requiring beneficiaries to fully distribute inherited retirement accounts by the end of the 10th year following the original account owner's death.

In early 2022, when the IRS issued its initial Proposed Regulations regarding the SECURE Act's provisions, it included another bombshell: Not only would so-called "Non-Eligible Designated Beneficiaries" be subject to the 10-Year Rule, but, if the original account owner had been subject to Required Minimum Distributions (RMDs) prior to their death, the beneficiary would also need to take annual RMDs throughout that 10-year period (in addition to fully distributing the account by the end of the 10th year).

And now, in its new Final Regulations issued on July 18, 2024, the IRS has confirmed the requirement for Non-Eligible Designated Beneficiaries to take RMDs annually (although for beneficiaries who would have been required to take RMDs in 2021–2024 but didn't, the IRS has confirmed that there will be no penalty and no requirement to make up the missed distribution, meaning the new regulation effectively starts with RMDs required to be taken in 2025).

Beyond the confirmation of the general post-death RMD rules, the 260-page Final Regulations document offers a slew of other regulatory guidance for specific circumstances where the new rules for Eligible and Non-Eligible Designated Beneficiaries apply. These include:

New rules for handling undistributed RMDs in the year of an account owner's death;
A new "Hypothetical RMD" rule for surviving spouses who initially elect to use the 10-Year Rule but later choose to roll over or treat the inherited account as their own;
Specification that when a plan participant has 100% of their plan balance in a Designated Roth account, any Non-Eligible Designated Beneficiaries are not required to take annual RMDs during the period of the 10-Year Rule;
Clarification of the requirements for successor beneficiaries who, depending on the circumstances, may need to either begin a new 10-year period after which the account must be fully distributed or finish out the original beneficiary's 10-year period;
New definitions of which beneficiaries of a See-Through Trust are also considered beneficiaries of the retirement account and which may be disregarded for retirement account purposes;
A new rule providing that when a See-Through Trust is divided into separate trusts for each beneficiary upon the death of the retirement account owner, the RMD rules will be applied individually for each trust beneficiary rather than uniformly across all beneficiaries based on the beneficiary with the shortest required distribution timeline; and
Clarification that when a retirement account (including IRAs) owns both annuity and non-annuity assets, those assets can be aggregated together for the purposes of calculating the participant's RMD and that payments from the annuity can count against the total RMD for both annuity and non-annuity assets.

Along with the new Finalized Regulations, the IRS also released a new set of Proposed Regulations dealing with some unanswered questions around the SECURE 2.0 Act passed in late 2022. Most notably, the new Proposed Regulations confirm that the RMD age for individuals born in 1959 is 73 (since a drafting error in the final legislation inadvertently set that RMD age to both 73 and 75) and fill in rules around the SECURE Act's new provision allowing surviving spouses of retirement account owners to elect to be treated as the decedent for RMD purposes – although, as the Proposed Regulations make clear, the treatment for surviving spouses won't really be identical to the decedent's since the surviving spouse must still calculate RMDs based on their own life expectancy, and none of their own beneficiaries will qualify as Eligible Designated Beneficiaries.

As a whole, these regulations introduce significantly more complexity to the process of tax planning around retirement accounts, particularly after the death of the account's original owner. Which makes it all the more valuable for financial advisors to get familiar with the new rules and their planning implications for different circumstances, since clients will be more reliant on sound advice to give them clarity and help them avoid pitfalls when deciding what to do!

#FASuccess Ep 395: The Rise Of Bank Financing To Fund Independent Advisor Acquisitions And Succession Plans, With Dustin Mangone

July 23, 2024 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 395th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Dustin Mangone. Dustin is the Director of Investment Advisor Services of PPC LOAN, a firm based in The Woodlands, Texas that facilitates conventional bank loans to financial advisors.

What's unique about Dustin, though, is how his firm allows financial advisors to tap into bank lending, an historically challenging source of debt capital for the advisory industry, to finance both RIA and independent broker-dealer transactions from internal succession plans to acquisitions and other growth initiatives.

In this episode, we talk in-depth about how Dustin's firm works with partner banks to offer loans to financial advisors buying into (or all of) an advisory firm, enabling selling firm owners to receive most or nearly all of the purchase price up front without the need and awkwardness of relying on a seller-financed note that's just paid back to the original owner with the profits they were already getting in the first place, how the repayment success for bank lending to financial advisors has led to increasingly larger loan amounts available, sometimes up to 100% of the acquired firm's purchase price (depending in part on the financial strength of the acquiring firm), and the key financial metrics Dustin's firm ultimately uses to determine the amount it is willing to lend for M&A deals, including the buyer's capitalization, the selling firm's recurring revenue, and the ratio of the firm's cash profits to its anticipated debt payments after the deal closes.

We also talk about how Dustin's company facilitates internal advisory firm successions, including both partial buy-ins and complete purchases, how the metrics Dustin's firm uses changes when considering loans to internal buyers and how firms can structure sequential transactions in tranches to build the borrowing capacity of the next generation advisors to buy out the rest of the firm over time, and why Dustin recommends that potential successors assess their financing options early on in order to be able to set realistic expectations with the seller regarding the buyer's financial capacity before the 2 sides negotiate the terms of the deal.

And be certain to listen to the end, where Dustin discusses current trends in advisory firm valuations, with firms frequently seeing multiples of 2.5–3X recurring revenues (although ultimately the valuation, like the debt financing capacity, is really based on a multiple of profits not revenue), how Dustin sees conventional bank loan offerings differing from the Small Business Administration loans that historically were available to advisors, and how Dustin continues to see robust deal financing opportunities for external firm purchases and internal successions, even in the current elevated interest rate environment, because of how fundamentally sound advisory firm businesses really are because of their long-term relationships with clients.

So, whether you're interested in learning about the dynamics of the bank lending market for financial advisory firms, how potential internal and external advisory firm buyers are evaluated by lenders and what this means for the proceeds received by selling firm owners, and how internal successors can best plan to buy into their firm, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Dustin Mangone.

Evolving From Dysfunctional Team To Advisory Dream Team To Improve Retention And Attract Better-Fit Clients

July 22, 2024 07:01 am 0 Comments CATEGORY: Practice Management

Although many advisory firms start out with a single person handling all the work of advising clients, bringing in new business, and managing operations and compliance, there's a limit to how many hours any one person can work, which also means that there's a cap on the amount of client growth a solo advisor can achieve before running up against their capacity limit. The obvious answer to growing beyond the capacity of a single owner/advisor is to build a team of employees (either in advisory and/or other roles like client service or operations) that can accommodate additional room for growth. And yet, not all teams are created equal: While some team members complement each other well enough to facilitate more clients and revenue, others can be problematic to the extent that the firm owner has less time to advise clients because of the additional managerial burden that a poorly functioning team creates.

In this 'hybrid' video-based article, Michael Kitces and John Bowen, CEO and founder of CEG Worldwide and CEG Insights, dive into the data on what makes advisory teams work, how strong teams can help firms attract high-net-worth clients, and how a team-based approach – despite the higher complexity and managerial duties involved – can actually improve the wellbeing of advisors who are stressed beyond their capacity on their own.

Good teams are valuable not just from a productivity standpoint (as they allow the firm to serve more clients); they can also be an asset when it comes to developing new business and attracting high-net-worth clients. Because from the client's perspective, a firm with multiple people working together can be reassuring; they are able to rely on faster responses, more efficient service, and someone who will be available to answer their call when the lead advisor goes on vacation.

But as the firm grows (both in terms of clients and employees), it becomes less about the number of people on the team and more about having the right people in the right roles. Because even though a firm with high revenue might be able to sustain some turnover and loss of revenue due to a team that doesn't work well together, continuous team dysfunction can eventually compromise advisor wellbeing, which can ultimately impact capacity at the revenue level. As while any team can expand a firm's capacity and bring in more revenue, it takes a high-functioning "Dream Team" to both expand capacity and improve everyone's enjoyment of actually working in the business.

In many respects, the ideal team is composed of people who will self-manage themselves without requiring extra involvement from the firm owner. But it isn't enough simply to find self-motivated people: There needs to be a clear vision for the company, communicated during the hiring process and reinforced regularly, that emphasizes not only the values and significance of the business today but also where it's going in the future, to ensure that everyone is working towards the same goal (and to make clear the opportunities that await employees who stick around).

The key point is that advisory firms of different sizes, business models, and growth plans all encounter the same pain points that come with building a team. And even for more seasoned entrepreneurs, the challenges around building a team that can work well together never really stop – they just take on different (and often more complex) forms. Nevertheless, for advisor-owners who can communicate a clear vision of their company's direction (and what that means for employees coming along on that journey), it's possible to build teams that work together to grow the firm – not only in terms of clients and revenue but also in terms of happiness and wellbeing, as everyone recognizes the meaning and significance of what they're building together!

Weekend Reading For Financial Planners (July 20-21)

July 19, 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 Charles Schwab and other brokerage platforms are planning to increase the interest rates they pay on client cash held in their platform or cash sweep programs, which could boost the income of clients who maintain a cash balance in their accounts. Notably, the move could have follow-on effects for the industry in the longer term, including the potential for custodians to start charging RIAs platform fees to compensate for the lost revenue from tightened net interest margins resulting from the higher cash sweep rates.

Also in industry news this week:

A new survey of RIAs indicates that about 1/3 of respondents have been in serious M&A negotiations during the past 3 years and that many firms are embracing a hybrid work environment, with employees splitting time between working from home and from the office
The IRS on Thursday issued final regulations regarding Required Minimum Distribution (RMD) requirements for those who inherit retirement accounts, indicating that Non-Eligible Designated Beneficiaries subject to the "10-year rule" will be required to take RMDs starting in 2025 if the decedent had already reached their required beginning date

From there, we have several articles on investments:

Why advisors might still consider using actively managed mutual funds even as the number of active ETFs (which often have lower expense ratios) has grown
A study finds that while large-cap equity funds make up the top category of active ETFs, active fixed-income ETFs and funds using derivative and options strategies have attracted more than $30 billion in assets as well (though these assets continue to pale in comparison to those held by passive ETFs)
How advisors can evaluate and compare active ETFs to decide whether their potential benefits (and typically higher expense ratios) outweigh an approach of using passive ETFs as building blocks to create a custom active strategy

We also have a number of articles on marketing:

A branding expert offers advice for new advisory firm owners considering what to name their business, from whether to use the advisor's name to the need to avoid duplicating the name of another firm
Why some firms decide to change their name and the creative and administrative steps required to do so
Why descriptive logos that explain what a firm offers can be particularly effective for branding purposes

We wrap up with 3 final articles, all about wellbeing:

A new study finds that there is no limit to the relationship between income and happiness, though certain factors can mitigate this relationship
How one individual with a net worth in the hundreds of millions of dollars spends his time (and money) in the pursuit of internal happiness
How the established U-shaped curve of happiness appears to have changed during the past decade, with young adults on average seeing declines in life satisfaction

Enjoy the 'light' reading!

Business Buy-Sell Agreements In The Wake of Connelly V. IRS: Ensuring Clients’ Business Succession Plans Don’t Create Future Estate Tax Issues

July 17, 2024 07:03 am 0 Comments CATEGORY: Taxes

Buy-sell agreements are a common succession planning tool for business owners where, upon a triggering event like the death of one owner, the surviving owners have either the option or the contractual obligation to purchase the deceased owner's shares of the business. Traditionally, buy-sell agreements are structured either as cross-purchase agreements (where the surviving owners buy the deceased owners' shares directly from their estate) or entity-purchase agreements (where the business itself redeems the deceased owner's shares).

The agreements are usually funded by life insurance policies on each owner: cross-purchase agreements are owned by each owner on every other owner, and entity-purchase agreements are owned by the business on each owner. This has generally made entity-purchase agreements preferable for businesses with more than a small handful of owners, since an entity-purchase agreement only requires the purchase of one insurance policy per owner, while the number of policies needed for a cross-purchase agreement increases exponentially as more owners are added to the group.

Which makes it notable that, in a recent ruling by the U.S. Supreme Court in the case Connelly v. Internal Revenue Service, the court ruled that life insurance proceeds paid to an entity-purchase agreement increase the business's value for the purposes of determining the taxable estate of the deceased owner, with the IRS arguing (and the court agreeing) that if a hypothetical third-party buyer were buying the shares, they would be willing to pay for them based on the full value of the company… including the life insurance proceeds.

As a result, business owners who have implemented entity-purchase agreements face the prospect of the insurance proceeds used to fund those agreements being at least partially included in their taxable estate, which, at a top Federal estate tax rate of 40%, could result in a significantly higher estate tax liability for owners whose estates either exceed the current $13.61 million estate tax threshold or for whom inclusion of the insurance proceeds would bump them over the threshold. And with the threshold scheduled to be reduced by 50% when the Tax Cuts & Jobs Act expires after 2025, many more business owners stand to be impacted by the Connelly decision in the near future.

The challenge of 'fixing' an entity-purchase agreement that may subject owners to higher estate tax is that it isn't possible to simply move ownership of the business-owned insurance policies to the business owners themselves, because doing so could trigger "transfer for value" rules that make the proceeds taxable on receipt for income tax purposes. However, one exception to the transfer-for-value rules makes it possible to transfer a life insurance policy to a partnership owned by the insured person – which potentially opens the door for business owners to create a new "special-purpose buy-sell insurance LLC" that is treated as a partnership for tax purposes and assumes ownership of the insurance policies, which would serve the purpose of moving the policies off the books of the original business without running afoul of the transfer-for-value rules.

The caveat, however, is that despite having recognized such insurance LLCs as legitimate in the past, there's no guarantee that the IRS will continue to do so – and in the wake of the Connelly ruling, they could potentially scrutinize new and existing insurance LLCs, challenging the legitimacy of ones that may lack a valid business purpose – which, if successful, could cause the LLC to be disregarded and the insurance proceeds to become taxable, either to the estate of the deceased owner for estate tax purposes and/or to all of the business owners for income tax purposes!

The key point is that while an insurance LLC may make it possible to transition away from an existing entity-purchase agreement to one that won't create new estate tax exposure without unwinding the entire buy-sell agreement and starting from scratch, doing so does add to the complexity of the business succession plan and introduces potential risks that it won't succeed in meeting the business owners' goals. Which, for some owners, means it might be preferable to simply start anew with a traditional cross-purchase agreement – but for others, who are willing to accept the risks and navigate the challenges of drafting and adhering to an insurance LLC, it may still be worth it for the potential for estate tax savings and flexibility.

#FASuccess Ep 394: Launching An Administrative Family Office Practice To Deliver Your Best Support To (HNW) Clients, With Christi Van Rite

July 16, 2024 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 394th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Christi Van Rite. Christi is the Founder of White River Consultants, a firm that provides administrative family office services to 17 ultra-high-net-worth households, and is on track to generate nearly $1.5M in revenue this year from its specialized services.

What's unique about Christi, though, is how she evolved her career into providing this type of unique family office service after nearly a decade of working as a more 'traditional' financial advisor, when she realized that she had developed a unique skill set to get very deeply involved in the (many) administrative demands of running complex ultra-high-net-worth households, slowly becoming the communicative and coordinative glue to manage each family's financial lives with her 8-person team.

In this episode, we talk in-depth about how Christi provides families with 4 primary pillars of administrative family office services – bookkeeping for their personal financial household, payroll for household employees, property management for their multiple homes, and information and document management – in order to both manage the day-to-day logistics such as paying bills, as well as managing their relationships with their other advisors, how Christi actually manages the financial needs of her complex client households, such as ensuring that all bills and household payroll are handled, while also maintaining a high level of cybersecurity and client privacy, and how, because Christi views her company as just one piece of the 'puzzle' that these complex families work with, she provides administrative but not investment management services, and intentionally uses a tech stack that the client owns themselves, not White River Consultants, so that the client can easily move to another administrative services company if they ever needed to.

We also talk about how Christi made the unexpected leap from traditional financial planning and into administrative family management simply by showing up to the unconventional opportunities as they presented themselves, how Christi avoids the sensitivity of marketing high-net-worth family "success stories" by instead building robust referral pipelines from attorneys, accountants, and even other financial advisors who manage their high-net-worth clients' portfolios but don't actually want to get this far into their top clients' billpaying needs and the associated liability exposure, and why Christi insists on her team tracking their time for everything they do (even though they don't bill by the hour) in order to measure team capacity and the complexity of their work.

And be certain to listen to the end, where Christi discusses how she curates, onboards, and trains highly specialized and competent team members to be able to run with the firm's highly sensitive client interactions, how Christi manages the risk of serving relatively few high-dollar families and the potential revenue loss of being 'fired' by even just one family, by maintaining a high cash reserve with a year's worth of payroll (to give her time to find a new client without having to let any team members go), and why Christi believes that administrative family office services is not only a viable and fulfilling career path for financial advisors, but also an underserviced part of the (traditionally very saturated) high net worth financial services industry, with space for new entrants and advisors looking to do less traditional planning and instead simply want to execute on all the tasks it really takes to run high-net-worth families' complex financial lives.

So, whether you're interested in learning about how to profitably provide administrative family office services, what it takes to make the leap from traditional financial planning, or how to build a highly specialized team to serve high-net-worth clients, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Christi Van Rite.

4 Ways To Boost Associate Advisors’ Client Confidence And Communication (Without Risking Client Revenue)

July 15, 2024 07:01 am 0 Comments CATEGORY: Practice Management

Associate financial advisors play an important role within a financial planning firm, for both their work today (e.g., preparing financial plan drafts and notetaking in client meetings) and their potential to become the next generation of lead advisors at the firm. Which means their development (and desire to stay at the firm) can contribute to the firm's long-term health. At the same time, working as an associate advisor can come with frustrations based on the extent (and limits) of their job responsibilities and the freedom granted to them. For instance, because they have relatively less experience than lead advisors, their firm might not yet be confident in their ability to present 'live' in client meetings, as a mistake made by the associate in the meeting could reduce a prospect's or client's trust in the firm.

Perhaps reflecting these frustrations, data from Kitces Research on Advisor Wellbeing show that associate advisors are less likely to be "thriving" (and more likely to be "struggling") than more senior advisors and indicate that they are significantly more likely to leave their employer within the next year. Which suggests that creating a collaborative development plan that allows associate advisors to build and practice the needed skills to increase their client interactions and reach the next level could not only lead to more engaged associates, but also better leverage the investment the firm has made in them.

Advisory firms have a variety of ways to gradually increase associates' client interactions, including external training, client-facing practice, and opportunities to progress internally within the firm. This type of support can empower associate advisors and get them ready to advance within the firm, while minimizing the potential for making mistakes in front of clients. External training options include development programs that help advisors build client communication skills (e.g., Amplified Planning's CORE program and FPA Residency) as well as pro bono planning opportunities that can give associates practice working with 'live' clients and give back to the community in the process. Internally, creating a progression that starts with asynchronous client communication to demonstrate the associate's expertise (e.g., drafting substantive emails to clients and/or writing for the firm's blog or newsletter) and leads to the associate presenting during client meetings on a single topic that they have mastered can allow the firm and the associate to increase their responsibilities in a structured manner.

Ultimately, the key point is that while associate advisors tend to have lower overall wellbeing scores than more senior advisors, finding ways to increase their skills and responsibilities, as well as creating a growth path that shows how they can play a bigger part in client meetings and eventually manage their own client households, could give them the confidence and feeling of empowerment that could not only improve their sense of wellbeing (and perhaps the likelihood that they will stay with the firm), but also increase the chances that the investment the firm has made in the associate will pay off in the form of a more skilled (and happier!) advisor who can help the firm thrive for years to come!

Weekend Reading For Financial Planners (July 13-14)

July 12, 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 at a time when employee retention has heightened importance for advisory firms given the ongoing competition for advisor talent, recent studies indicate that factors such as firm culture and leadership, as well as providing advisors with a sense of autonomy, can play important roles in building advisor loyalty to the firm. Which suggests that while firms might be tempted to zero in on compensation when it comes to retaining advisors, focusing on these other factors (which do not necessarily involve hard dollar expenses) could pay off in the form of increased advisor (and client) retention over time.

Also in industry news this week:

2 House committees this week advanced legislation that would halt implementation of the Department of Labor's new Retirement Security Rule, which, combined with ongoing lawsuits, threaten to derail the regulation either before or soon after it becomes effective in late September
A Federal judge has put the future of the Federal Trade Commission's ban on non-compete agreements in limbo, issuing a limited temporary injunction and indicating that a final ruling on the regulation (with possible nationwide impacts) could come before the ban goes into effect in early September

From there, we have several articles on tax planning:

Why potential upcoming increases to marginal tax rates and recent changes to RMD rules for inherited accounts could make Roth-style retirement accounts increasingly attractive for many clients
How advisors can add value not only by regularly analyzing whether Roth conversions might be appropriate for a client in a given year, but also by communicating how they work in a clear manner to help the client better understand the strategy and its potential benefits
How working clients can get more money into Roth-style accounts, from in-plan 401(k) conversions to in-service distributions

We also have a number of articles on marketing:

How applying the principles of beauty, simplicity, and creativity when it comes to website design can help advisory firms stand out at a time when differentiation is becoming increasingly challenging
Why targeting a firm's website and marketing content to an ideal client persona can help prospects better understand whether the firm can meet their unique needs
How becoming a "knowledge sharer" online can help advisors build their brand and support higher quality personal financial information amongst a sea of "finfluencers"

We wrap up with 3 final articles, all about exercise:

While middle age is associated with a growing number of aches and pains caused in part by natural muscle loss, regular exercise can help mitigate these trends and potentially lead to a better quality of life
Why resistance training, in addition to aerobic exercise, is an important part of a healthy lifestyle and can ultimately improve longevity
How targeting 4 "pillars" of exercise – stability, strength, aerobic efficiency, and peak aerobic output – can help an individual lead a healthier lifestyle, even if their exercise routine dropped off during middle age

Enjoy the 'light' reading!

Kitces & Carl Ep 142: Carl’s 13 Magical Questions Of Conversational Goodness With (New) Clients

July 11, 2024 07:02 am 0 Comments CATEGORY: Kitces & Carl Podcast

Meaningful communication is crucial to building strong, durable relationships, and asking effective questions is an essential part of facilitating impactful conversations. Being able to initiate and lead those conversations has become an important aspect of any financial advicer's skill set, but for many, it's one that isn't always as straightforward or easy to learn… particularly for advicers who might be happiest when nerding out with spreadsheets and flowcharts! The good news, however, is that every advicer can learn how to be a better communicator, especially when there's a certain podcast host willing to share his roadmap for having Meaningful Conversations About Money.

In our 142nd episode of Kitces & Carl, Michael Kitces and aforementioned client communication expert Carl Richards discuss Carl's "Magical Questions Of Conversation Goodness", how an advicer can 'move through time' to help clients make meaningful connections around their relationships with money, and how advicers can effectively implement those questions in their own practices.

It's generally accepted in the financial planning world that people don't typically wake up in the middle of the night because they've realized they need a comprehensive financial plan. More often, initial outreach from a prospect occurs because there's some urgent issue they need help with. Accordingly, advicers can foster a space for deeper money conversations by helping the prospect (or new client) paint a picture of their desired future state, homing in on whatever the underlying issues may be (which won't always be the same reasons they reached out in the first place). Questions like "What brought you in today?" and "How do you think we could help with that?" are great places to start, while Dan Solin's "3 years", Bill Bachrach's "What's important about money to you?", and George Kinder's EVOKE questions can offer powerful avenues to help clients start to open up.

As conversations (and relationships) deepen, advicers can probe further by 'working through time', asking questions like "What was money like in your home growing up?" and "Were you one of the rich kids or poor kids in middle school (and how could you tell)?" From there, advicers can help clients explore their relationships with money by asking, "If you could go back and talk to yourself with the benefit of hindsight, what would you say?", potentially providing them with insight around experiences that have been informing their lives for years. From a forward-looking perspective, advicers can ask about how the client deals with money in their home, and (if they have children) what they think their kids would say if asked the same series of questions 20 years down the road.

It's important to note that the goal isn't to tackle all these questions in one meeting. Rather, advicers can have multiple conversations over time to deepen the relationship. Initially, advicers can focus on discovery questions to understand the client's future desired state, which (once defined) becomes the basis for a Statement Of Financial Purpose, which in turn becomes the foundation for well-informed goals. And with clear goals, the advicer can then ask about the client's current state, identifying what they owe and what they own.

Ultimately, the goal is to normalize the process of having meaningful conversations about money. And by implementing Carl's Magical Questions Of Conversation Goodness, not only can advicers help their clients buy into their financial plans, implement recommendations, and reach their 'desired future states', but they can also learn a skill set that helps them differentiate themselves in an increasingly crowded marketplace while engendering long-term, durable relationships with their clients!

Planning For Changes In Client Marginal Tax Rates After TCJA’s Sunset

July 10, 2024 07:02 am 0 Comments CATEGORY: Taxes

The Tax Cuts and Jobs Act (TCJA), passed in 2017, was one of the most extensive pieces of tax legislation to be passed in the last 30 years, touching many aspects of individual, corporate, and estate tax. However, most of TCJA's provisions are set to 'sunset' at the end of 2025 – an event that would have at least as much impact as TCJA's initial passage.

From an advisor's perspective, TCJA's impending expiration raises the importance of planning for clients who will potentially be impacted, which, given the law's broad scope, could be nearly every client. And yet, the timing of the sunset provision at the end of 2025 means that the actual fate of TCJA will largely hinge on the uncertain outcome of the 2024 U.S. elections. In reality, any law that extends or replaces TCJA would likely not pass until well into 2025, creating a very limited window (potentially only days long) in which to implement any planning strategies. And so even though there's uncertainty today about whether or not TCJA will sunset as scheduled, it's still not too early to start making plans for either contingency so they can be triggered quickly once there is more certainty.

For many clients, one of the biggest questions is whether they'll have a higher or lower marginal income tax rate after TCJA expires than they do today, and whether it is therefore reasonable to accelerate income – i.e., to recognize it before the end of 2025, such as by converting pre-tax retirement funds to Roth – or to defer income to be recognized in 2026 or beyond. And although TCJA's reputation as a broad tax cut might give the impression that everyone's tax rates would increase after its expiration, comparing the current Federal tax brackets with their estimated post-TCJA equivalents shows that a fair number of households will actually see their tax rates decrease.

Beyond the tax brackets themselves, however, households will also see significant changes to how their taxable income is calculated post-TCJA. First, the combination of a lower standard deduction and the elimination of the $10,000 cap on deductible state and local tax payments means that many more people will be taking itemized deductions instead of using the standard deduction. Second, the reinstatement of personal exemptions means that households will be able to take an estimated $5,010 exemption per taxpayer or dependent, meaning that larger households could see a large reduction in their taxable income. With the caveat that the expiration of TCJA will also bring back the Personal Exemption Phaseout (PEP) and "Pease limitation" on itemized deductions above a specific income threshold, both of which effectively create a surtax on income within the threshold range, increasing the household's marginal tax rate above their nominal tax rate based on the tax brackets alone.

For owners of pass-through businesses like partnerships, S corporations, and sole proprietorships, the biggest concern around TCJA's sunset is the elimination of the Section 199A deduction on Qualified Business Income (QBI), which allowed for a deduction equal to 20% of the lesser of the taxpayer's QBI or their taxable income. For most pass-through business owners, the end of the QBI deduction will result in much higher marginal tax rates in 2026 or later, with one exception: Owners of Specified Service Trades or Businesses (SSTBs) like lawyers, consultants, and financial advisors, whose QBI deduction phases out above certain income thresholds, will have a much higher marginal tax rate on any income earned within the threshold range – meaning that while it might make sense for most business owners to accelerate income in 2024 and 2025 while the QBI deduction is still in effect, SSTB owners within the phaseout threshold range would be better off doing the opposite and deferring income until after TCJA expires.

The key point is that different households will experience the end of TCJA in a wide variety of ways, with income level, filing status, number of dependents, and QBI all factoring heavily into the impact that the TCJA sunset will have. And although TCJA's ultimate fate may still be undecided, for at least some clients the potential benefit of taking action today (e.g., to recognize income at a lower marginal tax rate today versus after TCJA expires) may be worth taking the risk that TCJA is ultimately extended – since in that case the client would have simply recognized income at the same marginal rate that they would have later on, merely 'costing' them the value of a few years of tax deferral. So by understanding how each client stands to be affected, advisors can narrow their focus on the planning strategies that will have the biggest benefit for their clients.Read More...