Whether you are an insurance professional, attorney, accountant, trust officer or investment advisor, the quality and thoroughness of your work is based on current, complete and accurate client information. Securing that information is as important as understanding the latest tax and legal changes. The appropriate client information required ranges from the basics (age, marital status, resident address) to the more intricate (business ownership(s), trusts in place, retirement programs in place, etc.).
One document that provides needed data or an established path to that data is an individual’s Federal income tax return – the IRS form 1040. A current tax return provides recent (and in most cases accurate) information, as well as a path for discussion.
Where the needed information is not readily available, the return points to sources of essential data through schedules and other related tax forms. Comparing tax returns for multiple years can also provide important insight into trends and changes that have occurred in a client’s life. Example: When the spouse’s name on the 2009 return is different from that listed on the 2007 return.
Insurance professionals are often required to obtain copies of a client’s 1040 to submit for financial underwriting, whether the issue is income verification for disability income insurance or for large amounts of life insurance. Many advisors, however, overlook the value of the tax return in helping identify other client planning needs. With client approval and participation, the 1040 review may be the trigger you need for your annual review.
For some planners, the thought of using a tax form for prospecting with existing or new clients is “too simple.” But once they consider the breadth of the data available and all the areas that are touched, they come to realize the intrinsic planning value. For other planners, the detail of a 1040 form may at first appear complex. They ask “Where do I start” or “What do I look for”?
There are a number of 1040 entry items that might lead to planning discussions. This article will focus on two: “dependants,” item 6c; and “wages and salary,” line 7.
Dependants, Form 1040, Item 6c
Many clients, especially those who are younger or middle aged, will have dependants listed on their 1040. The most common entry will involve minor children of the current marriage. However, it is not uncommon to find children of former marriages, older special needs children or relatives, and occasionally older parents listed as dependants.
Identification of young children can lead to a discussion or re-examination of educational needs and survivor income protection. Planning solutions may involve 529 plans, additional life insurance and other investments. The inclusion of children of former marriages may lead the review towards child support agreements, alimony, estate plan considerations, gifts, court-ordered life insurance, voluntary life insurance, and possibly an insurance audit.
The inclusion of special needs children or relatives should trigger consideration of financial responsibilities, both legal and moral, the existence or need for a “special needs trust,” and trust funding with equities, annuities, single life or survivorship life insurance policies.
When a parent is a listed dependant, the planning discussion checklist might include a trust for the parents, trust funding, the client’s perspective on the financial need for medical and “long term” health protection. Life insurance in a trust for the benefit of the parents, annuities for the parents and long term care protection for the client may flow into the discussion’s natural course.
Even when legal dependants are not identified on the 1040, the entry item should trigger a discussion and identification of those who are “natural objects of the client’s bounty,” children or otherwise. The dialogue can address the goals and plans to provide for these other parties during life and upon the client’s death. For example, “who are the older children?” and “are there grandchildren?”
Wages and Salary, Form 1040, line 7
Income protection is a basic tenant of insurance and financial planning. This is especially true for clients who are married or married with children. Review of current salary and changes since the last review (or earlier 1040) should trigger a re-examination of existing life insurance amounts, types and a policy audit. Salary and wage levels are also important in assessing cash flow sources to support aspects of the client’s existing or modified financial goals.
Addressing line 7 “wages and salary” may also lead to another primary source document, the W-2, which provides information on the employer and employee benefits. The W-2 includes information on the employee benefits provided by the employer or, in their absence, benefits not provided. A box (W-2 item 13) should be checked if the employer has a retirement plan in place–a possible clue to another planning void. Among other entries, in item 12 the W-2 should indicate if there is:
? employer-provided group term;
? elective deferrals made to a 401(k), 403(b), 457(b) or other miscellaneous plans; and income under IRC 409A-compliant non-qualified deferred compensation plans; and
? employee salary reduction contributions to SIMPLE plans.
Knowing about these benefits, or lack of them, may be important to your review of the client’s planning needs. Depending on the nature of your practice and the products and services you provide, a 1040/W-2 discussion may also lead to a referral to a client’s employer to discuss employee benefit program options or a review of existing insurance and plans.
For employer clients, a discussion may open up options to use the business to address personal insurance and retirement needs or business continuation planning.
If you have previously reviewed client’s tax returns, then you are aware of their value in helping to complete an accurate client profile and generating new sales opportunities. If you have not previously reviewed your clients’ tax returns, then you may have an incomplete picture of your clients and their total needs.
This article merely scratches the surface of the planning areas that can be addressed through a form 1040 review. Additional resources explore the subject in more detail, including “The 1040 Guide Book.” Recently introduced by AXA Equitable, the book is a primer for agents, brokers and financial professionals interested in exploring how an individual’s tax return can be a basic building block of financial planning.
Whether you address each client’s need separately or holistically is an individual choice and may depend on the facts and circumstances of a specific case or client. Regardless, implementing a 1040 review process can help you enhance the value you provide to your clients and your practice by uncovering planning needs.
Richard L. Olewnik, JD, CLU, ChFC is an assistant vice president-advanced markets, at AXA Equitable, New York, N.Y. You may e-mail him at [email protected].