More On Tax Planningfrom The Advisor's Professional Library
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
- Precious Metal Taxation Precious metals can be used to better diversify a portfolio but can be volatile. The tax implications of investing in these types of assets vary depending upon the situation.
As the fiscal cliff looms on the horizon this election season, financial advisors are figuring out strategies to help spooked clients take action if Washington lawmakers fail to deal with the expiration of the Bush tax cuts, which are scheduled to go into effect in Jan. 1, 2013.
For advisors who have a fiduciary responsibility to their client, but perhaps little expertise or capabilities in tax planning, the uncertainty leaves them trying to figure out what guidance to provide, says Kathy Stewart, vice president of fiduciary research at fi360, the education and training company that acts as a watchdog for the fiduciary standard.
“We are inundated with information on the looming fiscal cliff daily,” says Stewart (right). “When sifting through all the articles and studies, it is important to not forget the basics.”
Here, then, are the fiscal cliff basics for advisors – fi360’s top five tips for financial advisors who are navigating investors through the shoals of tax positions, portfolio evaluations, estate planning and budgeting.
(Read Fiscal Cliff Is Higher Than You Think: BofA-Merrill at AdvisorOne.)
1. Know Your Client. Remember to brush up on your client’s overall goals and objectives as you begin fiscal cliff preparations, including a review of your client’s budget/cash flow, investments, retirement plan and estate plans, says fi360’s Stewart, who contributes to the organization's professional training programs on legal, regulatory and financial subjects.
Keep in Mind: In an overall client review, good communication is essential, whether face to face, over the phone or in an email or letter. According to Susan Weiner, an investment writing consultant and CFA charterholder, the principle of “What’s in it for me?,” or WIIFM, should guide you: “When someone looks at their email inbox, they’re going to judge things by WIIFM,” she says.
2. Tax Positions. Investment advisors are expected to know the implications when they advise either the purchase or sale of assets in client portfolios, according to fi360’s Stewart.
“With changes forthcoming to income tax rates on ordinary income, qualifying dividends, capital gains rates or the impact of the AMT, what is true today might not be true once Congress either takes action or fails to do so, as the case may be,” she says.
Keep in Mind: While generally not tax experts, prudent investment advisors will involve outside experts such as the client’s accountant to look at any effects of forthcoming changes. Richard Niles, senior editor for Summit Business Media's Tax Facts Online, suggests that advisors should help clients avoid getting blinded by the 2013 sunset and consider moving income items into 2012, when rates may well be lower, and at least some certainty prevails.
3. Portfolio Evaluations. For advisors who claim to provide comprehensive advice over a client’s financial picture, now is the time to investigate the tax ramifications as part of your year-end advice, according to fi360’s Stewart.
“It is critical for an advisor to exercise good judgment when contemplating the impact of portfolio modifications from a tax perspective as rebalancing or other changes are necessary,” she says. “Fiduciaries have an ongoing duty to monitor their client’s situation pursuant to agreements and scope of client engagement.”
Keep in Mind: Before a presidential winner is announced, business decisions and the markets are sure to bounce around in the lead-up to the election as political rhetoric ignites passions and causes mood swings in sentiment. Read How to Create Your Election Portfolio.
4. Estate Planning. Not only are changes to income tax rules on the table, so are estate tax rules, and certain very large exemptions now in effect for gifting and the federal estate and generation-skipping tax exemption amounts are scheduled to decline dramatically in 2013, Stewart says.
“For clients who might be affected by estate tax changes, an advisor should encourage visiting with an attorney to help accomplish their estate goals,” she says. “Advisors need to be asking critical questions in light of the tax changes to determine what course of action, if any, should be undertaken.”
Keep in Mind: The scheduled expiration of current tax rates and exemption amounts will expose many more individuals and families to estate, gift and GST tax liability, writes Gavin Morrissey of Commonwealth Financial. Read his comment, As Window Closes, 4 Key Points on Wealth Transfers.
5. Budget and Cash Flow. Finally, fi360’s Stewart notes, the fiduciary duty of due care may require investment advisors to monitor sources and uses of cash.
“A significant tax increase can lower income, leaving a client no choice but to make adjustments that might include reallocation of investments to garner additional income or tightening the belt to remove excess spending,” she says.
Keep in Mind: A new report from Sentier Research finds that pre-retirees age 55 to 64 are worse off now than they were three years ago, with real median annual household income declining by almost 10%. But it’s not all bad news, especially for those who have already reached retirement age. Household income for people age 65 to 74 actually increased by 6.5%.
Read Fiscal Cliff Is Higher Than You Think: BofA-Merrill at AdvisorOne.
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