(Dow Jones) Tax issues can quickly become dangerous territory for financial advisors as they help people plan.
A wrong strategy could get an advisor sued for damages and penalties by, say, a client who invests in bonds on the advice that they are tax-exempt and discovers they are taxable.
Knowing the law can help, but doesn't always guarantee to keep an advisor out of trouble. For instance, tax lawyers are the only advisors with the power to draft legal documents such as wills, trusts, powers of attorney and medical directives. But beneficiary designations on retirement accounts or insurance policies are not technically legal documents, and can be drafted by other advisors.
To use another example, a simple decision by an advisor or bank employee to set up a joint account for a client and that client's oldest child can throw a wrench into the works of a will that leaves the estate to three children equally.
No law prevents someone from giving tax advice, but many financial advisers avoid it because of trouble it can cause, according to Bryan Skarlatos, a partner at law firm Kostelanetz & Fink, LLP, a New York law firm, who also teaches on tax issues at New York University School of Law.
Tax practitioners including certified public accountants, tax attorneys and enrolled agents face their own brand of civil and criminal penalties for bad advice under both the Internal Revenue Code and a U.S. Treasury regulation known as Circular 230.
Many advisory firms and banks have their own rules barring them from giving tax advice to clients unless they are CPAs or lawyers. They may have policies bringing those kinds of experts into the discussion.
Clients "want communication and collaboration amongst their advisors so that when an issue comes up with a tax component, they're right there," says Marc Mingolelli, a partner at Pinnacle Financial Group, a benefits and insurance consulting and brokerage firm in Southboro, Mass.
Earlier this year, Mingolelli's group worked with the board of directors of a non-profit organization that was deciding on a new executive benefit plan. One of the options involved a rather esoteric tax strategy, so the group sought opinions from several experts, says Mingolelli.
Often, the CPA acts as a kind of quarterback for a financial advisory team. An accountant usually has the closest knowledge of the client's finances because he has done tax returns for him each year, and may even do returns for any children in the family.
Mary Ann Mancini, a partner and head of the Private Client Group at law firm Bryan Cave LLP in Washington, D.C., works closely with CPAs. While she can answer a tax question with technical accuracy, the answer may not fit specific circumstances.
"I like to pull in the CPA and say, 'These are the rules, what do you think?'" says Mancini. Even an advisor who is very knowledgeable on taxes should not assume he or she knows the answer; even an accountant doing the return may mess up, say, if the client has not divulged all the important details.
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