After you finish a client's tax return, there are questions you should ask that can help them, and not just from a tax standpoint but as part of a plan to help them meet their lifetime goals.
John Vento calls it "getting to Point X," in his book, Financial Independence: Getting to Point X, where the X represents the lifetime goal of financial independence, just as an X on a pirate's map marks where the treasure can be found.
Vento, a New York-based CPA, wealth manager and HD Vest representative, said that asking these questions helps people to start thinking about the financial issues they have under control and others that may need attention. "Most people spend little or no time examining their financial future," he said. "The closest they come to doing this is once a year when they have to prepare their tax return. The only reason they do that is because they are required to do it by the government. This is a great opportunity for them to do more than just have their return prepared, and actually start planning for their future."
When Vento sits with a client to prepare their return, he usually poses a number of non-tax return questions to them. "Normally, we don't just focus on income and expenses, but we also want to know what their financial net worth is -- a snapshot of where they stand financially," he said. "When I go through their itemized deductions, I encourage them not to have any credit card debt because it's not tax-deductible."
"Mortgage rates are at an all-time low," Vento observed. "If they have mortgage interest, and have not refinanced in the last few years, I always encourage them to take a look at it. If they can lower their overall interest rate, it can be a substantial saving to them over the life of the loan."
"If the client is getting on in years, I always ask if they have taken steps to protect their assets in case they need long-term care, such as an assisted living facility, a nursing home or home care. As people start aging, it becomes more and more important a question relating to asset protection," he said.
"For families who have newborn children, I always ask if they have appropriate life insurance in place. Term insurance is all they really need," he said. "I would rather see them get the full amount they need during the critical years when they're working and have young children. If they're really wealthy - in excess of $10 million -- then permanent, whole life or universal insurance becomes more important for the high-net-worth individual," he added.
ABOVE AND BEYOND
"These are not necessarily questions you need to have answered when you're preparing the tax return," Vento noted. "But we're all so busy in our day-to-day lives that many of us seldom take the time to review these things. ... We should at least point these out to the taxpayer, and at least plant a seed, even if we don't have time during tax season to talk about them at length."
If the clients have children, they should be encouraged to start saving for college and consider a 529 plan, Vento suggested. "Additionally, they should be asked at what age they plan to retire. The issue is that many know what age they will retire but they have no plan on how they're going to get there. They need to consider fully funding their 401(k) or IRA by the tax deadline."
"Lastly, I ask them if they have a will, a health care proxy and a power of attorney," he said. "These are key legal documents you may need to manage overall finances. And whenever there's a lifestyle change, you have to revisit how you own certain assets and also how the beneficiaries are named."
For example, Vento said, the adult children of a deceased father came into his office not long ago. "Their father was divorced over 30 years ago, and never changed the beneficiary form on his life insurance. His ex-wife ended up being the beneficiary of a million-dollar insurance policy and the kids ended up getting nothing."
That's one of the most important things people have to understand, according to Vento - that the will doesn't necessarily determine who is going to get what: "How the asset was owned, how a title is held, and who is named the beneficiary is going to be determinative."
"Assume you own your home jointly with your daughter with rights of survivorship, and your IRA names a son as beneficiary," he explained. "If your will leaves all assets equally to your three children, the will is going to be meaningless because what counts first is ownership - how the property is titled and who is named as beneficiary. Ultimately, the only assets that will be divided according to the will are those assets that don't pass by operation of law."
"We see this mistake all too often," Vento explained. "Mom and dad had the intention to split everything equally, and specified so in their will. But if property is not properly titled and beneficiary designations aren't correct, their intentions will not be carried out. It can even be the source of family feuds. Because of this, everyone needs to do estate planning even if they don't have a multi-million-dollar estate."
