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?”