More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
Now that I’ve finally come up for air after a daunting 2012 tax season, which kept me away from writing my monthly column in April, I want to discuss whether you’ve ever explained or shown your clients their non-market-related return on investment.
The simplified method of looking at a monthly statement to assess whether their money has increased or decreased is basically what all our clients use to determine the value that we as advisors provide. While I do agree that simplicity is an important point, it is usually the unnoticed returns over the years which really allow clients to live off their money and maintain or increase their wealth. Do you relay to your clients the non-market related returns you generate for them?
Here are seven examples of how a good advisor creates non-market returns for clients:
Example 1: Advising your client to withdraw money from their IRA/401(k) when they were in a lower tax bracket than the bracket they were in when contributing to their 401(k) or IRA.
These non-market returns are huge in the overall lifetime big picture, but sometimes very hard for your client to notice or remember in the short-term. Remind clients that helping them plan to only pull money out of their IRA/401(k) when they’re in the 15% or 25% tax bracket rather than the 28% or 33% tax bracket during retirement is a non-market return that saves them money.
Example 2: Helping clients finance a home addition or beach house with a tax deduction.
Having clients withdraw the money over a five-, 10- or 15-year period will have fewer tax consequences than if they withdrew the lump sum needed all in one year as taxable income. This sometimes can save 10% to 20% in income tax savings, which are, again, non-market related returns.
Example 3: Developing a retirement income planning structure to help clients meet their monthly income needs, by advising them on a specific planned withdrawal, coordinated in the most tax-efficient manner.
Usually this allows your clients to pay the lowest possible income taxes for their specific situation, while saving them lots of money over a 20- to 30-year period. This is a continuous flow of non-market benefit to your client which they may sometimes forget.
Example 4: Assisting a client in selling some land, timber, rental real estate or their business in the most tax-efficient manner, saving them thousands in taxes.
Example 5: Advising and managing a tax-free bond strategy that generates more after-tax returns than a taxable bond strategy because of the client’s income levels.
The market returns will be less than taxable bond returns, in most cases. Be sure to remind your clients of the net after-tax returns on the two, as clients can’t always see the non-market returns from the advice you provide.
Example 6: Managing clients’ portfolios by offsetting losses against gains in order to better manage the tax efficiency of a client’s overall AGI levels or year-end tax bill.
As of 2013, this may be a major non-market return factor, due to implementation of Obamacare investment income taxes for income brackets above certain levels.
Example 7: Finally, consider that “fiscal tax cliff” we all dealt with at the end of 2012.
Maybe you helped save your clients and their heirs hundreds of thousands, if not millions, in inheritance tax planning or gift-tax planning. Again, these can be tremendously important, but are the non-market returns which will never show up in your clients’ account statements return rates each month.
I’ve only touched on a few of the many possible non-market returns that we as advisors offer to our clients, but it’s important to remind them of the value of these returns, and the benefits of having you as their advisor. The best advisors show clients not only their portfolio returns, but the worth of their non-market related returns as well.