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Financial Planning > Tax Planning

The tax men cometh

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A man is driving to the IRS building in Manchester, N.H. with a check for $30,000, when he decides to call his financial advisor to let off some steam. “You know, I’m really disappointed. We just met with our CPA, and I hate the fact that I have to write these people a huge check.” 

The advisor is Stephen Mathieu, CLU, ChFC, RHU, president of Legacy Financial Solutions in Manchester, and he happens to know a thing or two about the finer points of taxation.  “What’s the check for?” Mathieu asks.  “Well, we sold Mom’s house and there’s a $30,000 capital gains tax on the sale.” 

“Stop the car,” Mathieu says. “You don’t owe any tax on the sale of that house.”  The client turns around and drives straight to Mathieu’s office, where they discuss the finer points of grantor trusts and Section 121 of the tax code. After a somewhat heated phone call to the client’s CPA, in which Mathieu suggests a little more research may be in order, the client leaves Mathieu’s office with his $30,000 and a newfound respect for his advisor. Just another day in the life of a tax expert. 

A changing tax environment

In the world of tax planning, tiny details — a line of fine print, a few weeks’ time, the transfer of a couple thousand dollars — can have a drastic impact on a client’s financial plan and mean the difference between a dream retirement and a delayed one.  And the key role advisors play in their clients’ tax planning will only become more vital in the coming years, according to Mathieu.

The U.S. government is currently facing enormous annual deficits, he says, citing a national debt of more than $17 trillion, and unfunded liabilities for Medicare, Medicaid and Social Security exceeding $150 trillion. “The likelihood of tax increases is significant,” he adds, “especially considering the fact that our current tax brackets are at or near the lowest they have been over the 100-year history of the income tax system.” 

Economic shifts and changes to tax law have significantly altered tax planning strategies in recent years. For example, tax rates had decreased steadily for nearly three decades prior to the financial crisis in 2008, says Rick Rodgers, CFP, CRPC, CRC, president of Rodgers & Associates in Lancaster, Pa. “And people had been told over and over again that all you have to do to retire is tax defer, because when you retire, you’re going to be in a lower tax bracket. And that was probably true up to that point.” But no longer.  Rodgers, author of a book titled “The New Three-Legged Stool,” says advisors must now take a more active role in helping clients save tax efficiently for retirement because “it’s not going to happen on its own, and it’s pretty easy to end up in a higher effective tax bracket if you’re not careful.”

Advisors who are willing to put in the extra work that is required to tackle the shifting ground of tax planning can offer a more holistic approach to financial planning, providing an invaluable service to their clients and setting themselves apart in the process. 

The need is real 

Rodgers and Mathieu have seen far too many avoidable mistakes that ended up costing people significant money in taxes and fees.  “One of the biggest financial mistakes that people make is not saving in a tax-efficient manner,” Rodgers says. 

Rodgers’ practice focuses on the importance of efficiencies in financial planning, or what he describes as “only taking enough risk to achieve a client’s goal.”  He says that all too often, people who have recently retired come to him hoping to take money out of savings, but they are forced to pay taxes because the funds were left in a tax-deferred account. The mistake is then exacerbated when additional Social Security taxes are triggered. 

Ideally, by the time clients are ready to retire, they should have their money in three different places, Rodgers says — the “new three-legged stool”: tax-deferred savings (401(k)s or traditional IRAs); tax-free savings (Roth IRAs); and after-tax savings (stock/bond accounts, brokerage accounts, and other investments.)  Mathieu, too, sees a steady stream of people who are paying the consequences for a lack of proper planning.

Along with a failure to coordinate sources of retirement, the most common missteps he sees include a lack of tax diversification and liquidity, as well as mistakes when taking required minimum distributions.  And while it’s easy to place blame on the client for these errors, the financial services industry must take responsibility, as well, according to Mathieu. He says that much of what advisors have been taught over the years is no longer accurate and can lead clients down the wrong path.

“The conventional wisdom was, OK, let’s throw money into qualified plans, and you don’t need life insurance after you’re 65 years old, and you should pay your mortgage off as soon as you can,” he says. “But when you actually do the math, you find out that they’re wrong. They’re absolutely wrong.”  An emotional topic 

Clients look to advisors for guidance, and the more complicated the issue, the more attentive they become.

“Tax planning is one of the best ways to get a client’s attention,” says Rodgers. “Nobody likes to pay taxes, and most clients are very interested in any way they can reduce their tax liability, avoid mistakes, or do things more efficiently.” 

Because taxes are such an emotionally-charged topic, minor changes made during tax planning can make a huge difference to clients. It doesn’t take a last-minute $30,000 rescue to make a significant impact.

For example, Rodgers has noticed that retired clients who are drawing Medicare become extremely upset when their premiums go up. If a single filer’s adjusted gross income tops $85,000, they move into a higher Medicare bracket and their premium increases from $105 to approximately $150 a month.

“It isn’t that significant,” he says, “and you’d think somebody wouldn’t mind paying an extra $40, but it really upsets people.”  As a result, Rodgers spends extra time researching whether a client is approaching the next bracket. If so, he looks into solutions such as tax loss harvesting or moving taxable income into an annuity to ensure that their modified adjusted gross income remains below that level.One of many seemingly small details that can help create a more loyal client base

A bridge of understanding

An advisor’s intimate knowledge of tax intricacies saves clients money and builds trust, but it also provides important insight into their lives that can help advisors build a more comprehensive financial plan.  Before beginning his career as an advisor, Mathieu earned a degree in accounting and worked for six months at a public accounting firm.

“The accountant is the brave soul that comes onto the battlefield after the battle has been fought and counts the dead and bayonets the wounded,” he says with a laugh, quoting MDRT Past President Tony Gordon.  People make mistakes, he says, but advisors have the opportunity to sit down with clients and do prospective planning with them, to help eliminate the casualties before they occur.

Mathieu reviews every client’s tax return and then makes recommendations based upon their specific circumstances. “Advisors who know their stuff can do a much better job of planning for their clients,” he says.

Rodgers also views a client’s tax return as an important way to “deepen the relationship.” “If you have somebody’s tax return, you know an awful lot more about them than they might have told you,” he says.

An advisor might see that a client has rental properties, is involved in a secondary business, or has other investments being held elsewhere, Rodgers explains. “The information gathered from a tax return gives you an opportunity to get closer to that client, but also helps you do a much better job as an advisor.”  A labor of love

When a tax expert chooses to take on additional responsibilities, he or she must also be willing to put in the required extra work, according to Mathieu.  “If you’re going to be in this business and you’re going to advise people, you need to damn well do your homework. There are too many advisors who want to make the money, but don’t want to do the work,” he says.

In addition to the designations he’s earned and the continuing education courses he takes, Mathieu also teaches courses himself and recommends that other advisors do the same. Teaching helps him master the material and “stay on top of my game,” he says. “There are always one or two people in the class who raise a question and force you to think about something on a deeper level.” 

Rodgers also cites education as key, but stresses the important role that strategic partners can play when unusual problems come up. Recently, when one of his clients was planning to move overseas, Rodgers reached out to a specialized local CPA to address potential tax complications.

Another client whose adult child has a mental disability recently contacted Rodgers’ office about creating a special needs trust within his estate plan, and Rodgers contacted a local estate planning attorney for support.  He also regularly attends a local estate planning council in Lancaster, where he builds relationships with local CPAs and attorneys.

“Knowing which professional partners in town have specific areas of expertise is invaluable,” he says. And if one of those other professionals has a client who is looking to retire and needs a recommendation, “they may still give two or three referrals, but I’m more likely to be on that list,” he says. 

The reward

Remember the client whose $30,000 check was snatched from the jaws of the IRS? A couple of days later, his wife called Mathieu’s office and said, “We really need to sit down with you, because we have some other money we’d like to talk about.”  “They brought in over a million dollars to us that she’d had in a trust,” Mathieu says. “As a result of establishing that credibility on one tax issue, they walked in with a million dollars. And they’re still clients today.”


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