Many firms work as many hours as possible to reach the finish line of tax season in April. This may be gratifying for May and June collections, but in the process you often miss an opportunity to help your clients at a higher level, with work that they want, need and will gladly pay for.
Of course, that work is financial planning.
To transition your clients from seeing you as a once-a-year hero into a year-round advocate for their entire financial life, and to be the resource that your clients absolutely, positively cannot live without, you need to act differently when the heat is on the highest: tax season.
It's important for tax work to be accurate and helpful, but there should be more to tax prep than making sure that Line 14 of a W-2 goes in the right place during the input process. Under the gun, the CPA is most concerned with getting the returns out timely and accurately. But in the process of attempting to maximize your realization from tax prep, you are missing planning opportunities hidden in plain sight.
The topic of discovering a client's financial planning needs from reviewing a tax return starts with curiosity. The curiosity isn't about accuracy; it is about all of the non-tax stuff that this information may lead to, and the ability to uncover planning needs simply by looking at a tax return.
You don't even need to get into the numbers part of the return to start asking intelligent questions. You can start with dependents. Besides their Social Security number and whether they live at home, ask about their children's health. Is everyone healthy and doing OK, or are there special-needs children who may require additional insurance or a more sophisticated estate plan? Also ask about their benefits, and what type of insurance they may have in the event that their life or health is cut short of the children's emancipation date. You may be surprised when certain clients can't really answer that question. You may be even more surprised when you find out how many are woefully underinsured for both life and disability.
Ask about their intentions with respect to their childrens' education. Will younger children be in public school or do the parents need to plan for private school tuitions? When it comes to college, not every parent has the goal of paying for their children's education. Many do want to pay, and many of those are not prepared. Dig in a little and ask if they know how much they need to save and if their cash flow can support that level of savings.
For the family with young children, ask about the insurance coverage for both spouses. Many people simply rely on the group insurance provided at work without realizing that it only exists as long as you stay employed by the benefit provider. For clients where one is a stay-at-home parent, find out how much life insurance is on the stay-at-home parent. Once again, you will be surprised to see how many have very little to no life insurance coverage on a stay-at-home spouse.
If the dependent on your client's tax return is an elderly parent, you need to find out what kind of estate or long-term-care planning has been done. Moving momma into the home may be a nice gesture, but many find out too late that the plan for the children to be caregivers is not possible for extended illness. Caregivers burn out, miss time at work and sometimes get resentful if they are the only one of the children providing the needed care. Ask if there is any long-term-care insurance and whether or not there should be any.
Ask about the elderly parents' estate plan. Just like younger people, there are many elderly walking around with inadequate estate documents. Don't just take their word that they have a will - take a look at the documents. The elderly parent may not recall what the documents say and sometimes there have been enough material changes in the beneficiary's lives to necessitate a change. Divorce is one common change that may impact the parents' estate plan.
Another common situation with elder parental care has the former homestead of the parents now in the name of the children. Many lawyers do this without regard to any other consequences simply to protect the house in the event that the parent needs expensive professional care. There are many problems with this plan. First may be a basis issue. If Mom bought the home 50 years ago, the carry-over basis may be so low that it causes a huge income tax bill when the children finally do sell the home. The second big problem is the assumption that the children will never have a health or financial problem before the parent, thereby putting the home equity again in harm's way.
FURTHER DOWN THE FORM
Let's move down page one of the 1040, and start talking about some line items that involve numbers.
Let's start with Schedule A. An obvious question for those with a mortgage is to inquire about the rate. Some people are still walking around with a mortgage rate higher than what is available today. Ask about their charitable contributions. For the material givers, make sure that you talk about gifts of appreciated assets, charitable gift trust accounts and if they've got any other material charitable intentions. This may lead to a discussion about a private foundation or a large pledge that they've been thinking about.
Moving over to Schedule B also gives us opportunities to prove that we care more about the client than simply getting the return out the door. For any 1099s received that will end up on Schedule B, take a close look at the owner of the account causing the 1099 in the first place. In most cases, you'll probably find that investment or bank accounts are owned individually by each spouse or in joint name with rights of survivorship. For larger clients, this is firsthand evidence that the estate plan is either not comprehensive or not being followed.
Most people whose estates approach their local state exemption or the federal estate tax exemption should have trusts and be using these trusts during their lifetime. Among many other things, the use of trusts while you are alive can help with privacy, the speed of estate settlement and is a lot easier to deal with than relying on the rules of portability. Once again, here many counsellors will say that probate is not a big deal. And while it may not be in some states, why bother if you don't have to? This becomes even more significant if there are complicated beneficiary arrangements or the possibility of a challenge from an unhappy beneficiary.
Schedule B also gives you a look at how your client invests and saves their money. From that you can inquire about their savings and what type of interest they might be receiving. You can also ask why they have chosen the investments that they have. You may find no reason at all or a reason that is equally foolish. We recently met with a new prospect who claims that they choose investments by fighting with their trustee attorney about dividend yield. The trustee only pays income (although corpus distributions would be permissible), therefore the beneficiaries argue that their stock selections should be made based on the highest dividend-yielding instruments that they can locate. Obviously not the most tax-friendly or diversified way to invest ... .
When preparing a Schedule C for a client, approach it like a case study in college, and ask all of the basic questions that we all learned as freshmen or sophomores. First is that of liability. Make sure that the client understands the unlimited liability nature of a Schedule C. Also ask about the type of insurance they have for that sole proprietorship. Do they have coverage for a business in the home, driving a business auto or business interruption insurance? They may be surprised when you tell them that the basement full of computer equipment is not covered under their basic home owner's policy.
Ask about their succession plan. Just because the business is a sole proprietorship doesn't mean that there aren't stakeholders who would benefit from a well-thought-out succession plan. Whether it is your family, employees, clients or suppliers, a smart succession plan should cover the business and its owner for temporary disability, permanent disability or their premature death.
Also inquire about retirement contributions. Teach them about their options to maximize the contribution and the obligations that it may create for employees or another business where they own more than 80 percent. It seems the most vulnerable here may be those whose Schedule C is a second or side business. Many times these clients are not aware that they may defer up to 100 percent of their income from this Schedule C with a retirement plan.
There are well over 100 more examples of great financial planning services that can be delivered by simply paying attention to more than the numbers to be put into the system. By now, I hope you get the gist of where we are going. Ask all the questions that most CPAs ignore, and it will be clear as day to your clients that you care and that you can help with more than just tax preparation.
John Napolitano, CFP, CPA, PFS, MST, is CEO of U.S. Wealth Management in Braintree, Mass. Reach him at (781) 884-2390.
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