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Gifts that keep on giving

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The moving parts in your best clients’ financial lives are so plentiful and complex that there will always be demand for a practical, critical thinker to coordinate all of the subject matter experts and the execution of the ensuing plans. And the best news is that in our complicated world, there will always be events that will give you a reason to rise to the occasion to deliver greater service as an advisor.

Frequently, the financial moving parts of your clients’ lives have significant tax consequences, keeping you front and center in most financial conversations. And many things, like a new tax act, frequently strike the tax nerve but then impact many of the financial planning matters that clients care about — matters such as estate plans, retirement distributions, tax planning, and having a dependable team or advisor to prevent things from falling through the cracks now and in the future.

A major gift

Most recently we received another gift that will keep on giving courtesy of our friends in Congress. This time it’s called the SECURE Act. There are many technical publications circulating already detailing the act’s pitfalls and benefits, and the planning needs that it creates. By reading this, I’m hoping to show you how to use this act as well as future policy changes as a catalyst for delivering a higher level of service for your clients.

The most relevant changes for your clients would be surrounding the new rules for IRAs. Contributions for earners older than 70 ½ will be permissible, required minimum distribution ages increase to 72, and the most painful change appears to be with the elimination of the lifetime “stretch” IRA rules.

One of the more significant estate planning strategies in the past was to take advantage of the stretch IRA rules. Essentially, these rules allowed named beneficiaries to spread distributions from an inherited IRA over the life expectancy of the beneficiary. Under the SECURE Act, distributions must occur within a 10-year period, but it’s not an even 10-year spread. As long as the IRA accounts are fully distributed within 10 years, there’s no penalty. This will require regular tax planning for the beneficiaries of inherited IRAs.

A more immediate concern may be for people who died before Dec. 31, 2019, as long as nothing has been done to the IRA yet. In the case of an IRA beneficiary being a surviving spouse, there are no issues. It’s business as usual, with the spouse receiving the assets as a spousal IRA. But what if the spouse beneficiary doesn’t need any of the qualified money to support their desired lifestyle?

If a client left an IRA to their spouse, who will eventually be bothered by RMDs and whose beneficiaries will be exposed to the new non-stretch 10-year limitation, an immediate tactic for evaluation may be to disinherit that IRA. If a spouse disclaims the IRA, and it flows to a properly named contingent beneficiary, a longer stretch period may be advantageous. Assume that the contingent beneficiaries are the client’s children, and the benefits can be meaningful.

For a 50-year-old beneficiary, that means taking distributions out over a 34-year period rather than the 10-year rule imposed by the SECURE Act. This can significantly mitigate the near-term tax implications of that inherited IRA. This works exceptionally well if the contingent beneficiary is in the middle of their peak earning years, when the RMDs may be subjected to a higher rate of taxation.

Beyond legislation

There are other moving parts to your clients’ lives that will give rise to the need for greater service. Among the most significant are life changes and events. Any material change in the lives of your clients may create a need for a complete overhaul or a refresh of any financial plans that have been made.

The key to ensuring that your client’s financial house is in order, and remains that way through the wide range of life changes that we encounter, is to be connected. To know your clients well enough to select a portfolio is easy. To know them and their family well enough to anticipate their needs based on the changes that will occur in their lives is what’s required to serve at the highest level. The proof for this, at least for me, lies in my personal experience.

Ninety percent of the new clients that we see had an advisor somewhere else. The old advisor wasn’t doing a bad job with the portfolio, but the problem for them was that was the only area where they served the client. Most come to us with old estate plans, no business succession strategy, no oversight of their risk management plan and insurance, etc.

Occasionally, it is difficult to unseat the incumbent due to a long-term relationship. But in most cases, after the planning process develops, clients will see just how underserved they have been — that is, assuming that your planning process is detailed enough to include all of the financial issues that one may reasonably conclude should be addressed in the course of a planning engagement.

We have created a checklist — an audit guide work program for what we believe would be included in a comprehensive financial plan. The comprehensive planning process delivered with integrity definitely takes longer. And for some accountants looking at net realization rate, the inclination is to short cut the process to save time. In my opinion, this isn’t a good idea. Going deep on literally every area of your client’s financial life is the only way that you’ll understand the situation, including the family and business dynamics that are shaping who the family is financially.

From this point, you are now in a position to continuously serve through all of the life and other changes that your clients will experience. But being in the right place at the right time only helps everyone if you are aware of your position. And in the financial planning world, that means providing proactive and holistic service. Annual (or more frequent) review meetings with your clients need to be more than a portfolio review and a checkup on their forecast for retirement or financial independence. You must cycle through every moving part of the financial plan on a regular basis. Not that the estate plan needs revision each and every year, but a conversation about the family or a change such as the SECURE Act, and the plan may need revision … even if it is only a few months old. This is the job of a financial planner. That job is not only to fix things in your initial planning engagement, but to keep them in good order throughout the course of your professional relationship and the changes that life, laws and economies will throw at it.

For the planner who is dedicated, proactive and holistic, you have the gift that keeps on giving. Your clients are one such gift, in that you will be hard to replace. The gift of long-term relationships with significant recurring revenue is highly likely unless you fall short on your promise and try to cut corners to save time.

The second gift is change. Accountants in particular don’t like change and frequently do whatever they can to keep things the same. In the financial planning world, it would be wise to embrace change, as it is inevitable and the root cause of your recurring revenue and satisfied client base. If it weren’t for the changes we will all face, why would anyone continue to pay you for a service such as asset management when the markets have turned it into a commodity service available just about anywhere at a very low price?

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