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Are CPAs a Looming Threat?

Lately more articles and videos—in publications like the CPA Journal and the Journal of Accountancy—are popping up encouraging CPAs to become comprehensive financial planners.

According to an article from ThinkAdvisor, “Should Advisers Fear Accountants,” approximately 120,000 CPAs currently play a role in financial planning.

Andrea Miller, director of financial planning for the American Institute of Certified Public Accountants, said the organization is encouraging its members to evolve their skills to provide advisory services. This is evident in AICPA’s Personal Financial Specialist (PFS) designation.

“We believe that CPAs are in a unique situation to advise clients, and we want to encourage them to do more in this area,” Miller told ThinkAdvisor.

Perhaps those CPAs don’t want to do financial planning and they’d rather work with you. In that case, reach out to your clients’ current CPAs to figure out ways to better serve your clients, says a Financial Planning article “Should I …Work with a CPA?”

If CPAs are a looming threat to financial planners’ livelihood, some media reports recommend CFP® professionals become one (for more information visit aicpa.org/becomeacpa.html).

Sharif Muhammad, who is both a CPA and a CFP® professional, said it being both makes tax planning easier for his clients.

Forge Relationships with CPAs

So you’re not a CPA, you don’t want to become one, but you want to work with one. Forging a relationship with your client’s current CPAs would be a logical starting point—especially in an effort to provide your client with the best comprehensive service.

“People will always need advice around taxes, and you need to know enough to know when you’re out of your depth,” Justin Harvey, founder of Quantifi Planning in Philadelphia said in the Financial Planning article.

For Mike Alves, CFP®, CLU®, CRPC®, forging a relationship with a client’s CPA starts with the clients.

“Normally, it’s the client who introduces us to them,” Alves said. “We have an in-person meeting to set expectations.”

That initial meeting is setting the stage for the financial planner to become partners with the mutual client’s CPA.

According to the Kitces.com article, “3 Ways Financial Advisers Can Get CPAs to Actually Refer Clients,” the best time to connect with CPAs is between May and September (well after the tax filing deadline and before the swing of the next tax season). The article also noted that CPAs need help with three things; help with those, and it’s likely they’ll partner with you.

The three key things, writes author Dave Zoller, CFP®, are (get approval from your client first for all of these): (1) communicating with your client’s CPA about any money moves that have tax implications; (2) helping your client’s CPA create a list of all the client’s accounts and whether that account has a 1099; and (3) helping the CPA find missing cost basis of your client’s older investments.

But even when you forge the relationship, you should still be well-versed in tax law, Muhammad said.

“Nothing could differentiate a CFP® professional more than being well-versed in taxes,” he told us. “Especially during a massive tax change like the one we just experienced and especially when you’re dealing with small- to medium-sized businesses as well as certain families whose tax situation could be significantly impacted by the tax law.”

Ana TL Headshot_Cropped

Ana Trujillo Limón is senior editor of the Journal of Financial Planning and the FPA Next Generation Planner. She also edits the FPA Practice Management Blog. Email her at alimon@onefpa.org, or connect with her on LinkedIn

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How to Handle Clients with Estate Tax Issues: A Financial Planner’s Guide

Clients with estate tax exposure have become the unicorns of the financial planning industry. For 2019, individuals with taxable estates greater than $11.4 million are subject to a federal estate tax of 40 percent. To put this into context, according to the IRS, only about 2,000 estate tax returns are filed per year for estates of $11.4 million or more.

Despite these statistics, if you practice in parts of the United States where wealth is more concentrated, such as New York, Los Angeles and the San Francisco Bay Area, you may very well have clients with taxable estates. It is important to prepare your practice to understand the particular needs of these clients.

The Basics: Sources of Wealth

Many clients in areas where housing is expensive, such as New York and San Francisco, may hold most of their wealth in real estate. In areas where tech companies are the main economic engine, including Seattle, San Francisco/Silicon Valley and Austin, Tex., your clients’ wealth may be tied up in the stock of their employers. Regardless of the source, clients with estate tax exposure are often very concerned about having to pay taxes. This concern may overwhelm other non-tax issues that are sometimes more important. Proper planning includes the ability to contextualize taxes in relation to other issues that are important to the client.

The Conversation: No Free Lunch

Contextualizing taxes often requires educating the client. Many clients do not understand even the basics about how estate taxes work or about how the tools of financial and estate planning affect estate taxes. Most people overestimate the impact of estate taxes and believe it affects most, if not all, estates. The majority also overestimate what the tools of tax planning can do, believing these tools can be used to eliminate any estate tax liability. It is important to explain to these clients that estate and financial planning can, at most, reduce or delay an estate tax liability, but not eliminate it entirely. It is important for the client to understand that if an estate is taxable, the IRS will eventually get its share.

What might this conversation look like? First, there is the technical explanation of the estate and gift tax. Every individual is subject to a unified exemption from estate and gift tax. The Tax Cuts and Jobs Act (“TCJA”), which became effective on Jan. 1, 2018, doubled the estate and gift tax exemption from $5 million to $10 million, adjusted for inflation from 2011. For 2019, the exemption is $11.4 million. In addition, every individual has a gift tax exclusion of $15,000 each year per donee. Any gift to a donee in excess of $15,000 in a given year is applied against the unified exemption. For example, if your client gives $215,000 to their child to help them buy a home, $200,000 of that gift is applied against their unified exemption, which would reduce the available exemption in 2019 to $11.2 million. If the client later died in 2019, they would have $11.2 million available as an exemption from estate tax liability. The TCJA’s estate tax provisions are set to expire at the end of 2025 and revert back to the $5 million unified exemption, adjusted for inflation, which is estimated to be about $6 million for 2026. Your client may ask how to plan for this change in the laws. A good response is advise that they plan for the current law and not speculate on what it might be in the future. You can always adapt the plan once the new law known.

The Tools: Reducing or Avoiding Estate Tax Liability

If your client is married, and both spouses are United States citizens, they already have the most effective method of avoiding estate tax liability, at least when the first spouse dies. Transfers of wealth between spouses who are both U.S. citizens, in any amount, are not subject to estate or gift tax. The combination of the estate tax exemption and the unlimited marital deduction is a potent tool for avoiding estate tax liability on the death of the first spouse. This can be accomplished by dividing the deceased spouse’s estate between an irrevocable trust that is funded up to the amount of their available estate tax exemption (known as a “Credit Shelter” or “Bypass” trust), and then funding their remaining estate to a Qualified Terminable Interest Property (“QTIP”) trust. The QTIP trust is an irrevocable trust for the support of the surviving spouse that is includable in the estate of the surviving spouse. The transfer to the QTIP is treated as a gift to the surviving spouse and takes advantage of the unlimited marital deduction.

Take the example of a married couple with each spouse having a taxable estate of $20 million ($40 million total). For a deceased spouse in 2019 with a $20 million taxable estate and the full $11.4 million in available estate tax exemption, $11.4 million would be funded to the Bypass Trust, and the remaining $8.6 million would be funded to the QTIP trust. The surviving spouse, as a result, now has a taxable estate of $28.6 million. Use of the marital deduction does not eliminate estate tax liability, it only transfers it from one spouse to another.

This is where tools that actually reduce estate tax liability are helpful. The goal is to move assets out of the client’s taxable estate to those other than the surviving spouse. This typically consists of the client’s children or other family members, or charities. With the exception of charitable gifts, these transfers of wealth utilize the gift tax exemption to move assets to donees. Once these assets are transferred, they become part of the taxable estate of the donee. Ideally, you will transfer assets that are expected to increase in value over your client’s lifetime, so the effect on the client’s estate and gift tax exemption will be lower than if the asset remains in their estate until the client dies. Grantor-Retained Annuity Trusts (“GRATs”), Intentionally-Defective Grantor Trusts (“IDGTs”), Qualified Personal Residence Trusts (“QPRTs”) and other similar tools can be used to move assets that are expected to grow over time out of the client’s estate. The advantage to the client is that the asset is valued at its present value, and in some cases is discounted from its present value. Any subsequent gain would not affect the taxable estate of the client.

A simple example is a QPRT. A client transfers her personal residence worth $1.5 million to a QPRT that names her three children as remainder beneficiaries. This is a $1.5 million gift to the four beneficiaries. By the time of the client’s death, the residence is worth $6 million. The client has removed $6 million from her estate with only a $1.5 million reduction to her estate tax exemption. The three beneficiaries’ estates will have increased by $2 million each by the time of their mother’s death. These are sometimes known as “asset freeze” techniques because they, in effect, freeze the value of the asset at the time of the gift from the donor’s taxable estate.

It is important to emphasize to the client that these techniques come at a cost. They require the client to give away property, which may reduce liquidity or cash flow available to the client. For a QPRT, the client is giving away their personal residence, in most cases, to their children. QPRTs are commonly structured so the donors will rent the property from the donee after it is transferred to the QPRT. Many clients might not be willing to rent their home from their own children. The client must understand that reducing their taxable estate means reducing their wealth.

Tax Obsession Versus Sound Planning

Estate planning attorneys have their spin on an old phrase: “don’t let the tax tail wag the estate planning dog.” Sometimes clients must be reminded that it may be impossible to avoid taxes entirely, and the benefits of lower taxes must be compared to the cost, complexity and risk involved with implementing the tools to lower their taxes. The cost involves not only giving away wealth, but also the costs of hiring lawyers, accountants and even financial planners to develop and implement the tools and techniques of reduced tax exposure. The complexity involves setting up and maintaining the trusts, partnerships, LLCs and other tools commonly used to reduce estate taxes. The risk stems from the heightened scrutiny by the IRS and the risk that any of these tools, not properly carried out or maintained, can fail in their intended purpose of tax reduction (e.g., when the value of the asset decreases over time).

Communication is Key

Educating your client requires explaining the costs, complexities and risks of the tools explained above so the client can balance the tax and non-tax goals of their plan. Achieving that balance helps ensure the success of a carefully crafted financial or estate plan.

The conversation with a client who is fortunate enough to have a taxable estate must take into consideration the client’s relative sophistication and their motivations. In having the conversation, the financial planner better understand who their client is and the client better understand what it is they want.


David D. Little is Certified Specialist in Estate Planning, Trust, and Probate Law and an attorney with Hartog, Baer & Hand. He can be reached at dlittle@hbh.law.

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Three Ways the SECURE Act Will Impact Clients with Stretch IRAs

In late May, the House of Representatives overwhelmingly passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation, however, has since stalled, leaving many advisers wondering if the Act’s numerous retirement provisions will ever become a reality. First, we will offer a brief update on the current status of the legislation followed by a review of one of the most controversial provisions of the SECURE Act—the future of the Stretch IRA.

Given the many popular provisions of the SECURE Act, including multiple employer pension (MEP) reform and safe harbor provisions for guaranteed income solutions inside of Defined Contribution plans, there is little doubt the legislation will pass the Senate. In order for a final vote to happen, however, the legislation first needs to be brought to the floor. These procedural requirements are where things begin to get complicated. Senate leader Mitch McConnell (R-Ky.) has been reluctant to bring legislation to the floor passed by the House of Representatives in an effort to stymie the Democratic agenda. Also, a few key Senators including Ted Cruz (R-Texas) and Pat Toomey (R-Pa.) are holding out over provisions tucked into the SECURE ACT related to 529 college saving plans and taxation of benefits received by Gold Star families. Of course, neither of these provisions have anything to do with retirement planning.

So, what does this uncertainty in the Senate mean for advisers? At this point, it is still too early to make any substantive recommendations regarding client financial plans, but familiarizing clients with the potential changes is still a best practice. The reasons are: clients will be better prepared to reassess their finances if the legislation does become law, and reviewing these provisions is the perfect opportunity for advisers to showcase their expertise. Regarding the Stretch IRA provision, the three key items advisers need to know are:

  • New 10-year period for non-spouse beneficiaries. Under the SECURE Act, rather than having their annual distributions based on their single life expectancy, non-spouse beneficiaries would have 10 years to draw down an inherited IRA.
  • Existing stretch IRAs are grandfathered. The new rules would only apply to IRA owners who pass away after December 31, 2019. In other words, existing Stretch IRAs will be grandfathered.
  • There are exceptions to the new rules. The SECURE Act will provide relief from the regulations outlined above to beneficiaries who are minors, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. Further, spousal beneficiaries will still be eligible to take annual distributions based upon their single life expectancy—a handy provision for spouses under age 59½ who may need income.

With Congress returning from August recess, attention will again shift to Washington. Advisers are encouraged to closely monitor developments regarding the SECURE Act, and to keep clients informed.

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a professional adviser. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.

Matt Sommer

Matt Sommer is senior managing director, retirement strategy group at Janus Henderson Investors. In this role, he leads the defined contribution and wealth adviser services team. His expertise covers a number of areas, including regulatory and legislative trends, practitioner best practices and financial and retirement planning strategies for high-net-worth clients.