Helping Clients Understand Tax Strategies

Make it tangible.

Clients are often intimidated by conversations about taxes, making them more hesitant to communicate openly during meetings.

Advisors can ease clients' nerves by making conversations more visually engaging while informing them of relevant techniques.

Having a visual description of where their money goes allows clients to easily wrap their heads around more intricate concepts.

For example, let's say an advisor is referring to three tax-efficient funnels where their clients are accumulating money.

The advisor could have a visual of each funnel: the pre-tax funnel with 401(k)s and IRAs, the tax-advantaged funnel with Roths, HSAs and permanent cash value life insurance, and the post-tax funnel with various stocks and investments.

Then, the advisor can move the money clients put in the pre-tax funnel to the tax-advantaged funnel to help explain how this protects their savings.

Taking extra steps to ensure clients comprehend the way advisors help them meet their goals leads to more long-term client relationships.

Go further.

Once the basics are established, clients will feel more prepared to have in-depth conversations about tax strategies.

Advisors should take their time carefully explaining the next steps to ensure clients don't get overwhelmed and disengage from the conversation.

The more advisors can help clients understand the process from beginning to end, the more comfortable clients will be down the line during implementation.

Let's say an advisor is working with a high-net-worth client, and the client is interested in giving to charities.

A great way to achieve tax optimization here is to tap into highly appreciated stocks or investments in a post-tax account and gift them into a donor-advised fund.

This allows the client to take a tax deduction of the fair market value of their investments, if the investment is at least a year old and eligible for capital gains, rather than the actual cost they originally paid.

Gifting long-term capital-gain-appreciated assets and getting the fair market value deduction creates an advantage in charitable giving.

From there, clients can sell the appreciated asset and avoid paying long-term capital gains taxes. Then, over time, they can donate the money to charities of their choice.

By using this strategy in combination with strategies like Roth conversions or capital gain realization, clients can reach their financial goals and feel more secure in their savings due to a reduced tax burden.

Build trust by being clear.

While this is a great strategy to use for that client, they can easily get lost in the explanation of this information, potentially leading them to avoid moving forward with this strategy.

Take adequate time to break down each aspect of the process and the importance of the steps needed to help reach their goals.

Showing dedication not only to their goals, but also to helping them truly grasp the subject matter, positions advisors as trusted, reliable resources.

Saving for retirement is not an easy feat without the expertise of an advisor, but it's essential that clients understand the guidance their advisors provide.

By ensuring clients can comprehend intricate financial topics and how they may impact their financial plans, advisors can help clients secure their financial futures and remove the anxiety around having enough money for retirement.

Dave Alison, CFP, EA, BPC, is the president and founding partner of Prosperity Capital Advisors and C2P. Dave is a two-year MDRT member with one Top of the Table qualification.