Tax reform introduced a range of possible changes in strategy for high-net-worth clients, but what are the strategies that some planners may be missing?
“Loaded question” said Nick Preusch, a CPA and tax manager with PBMares in Fredericksburg, Va. “No high-net-worth client fits one mold, [but] one commonality for HNWs is that they tend to own several different activities or related activities.”
“Do clients truly understand what their financial planner is advising?” said Naomi Ganoe, a CPA/CFP and managing director and private client service practice leader in the Akron, Ohio, office of CBIZ MHM. “Does the financial planner understand the family goals from both spouses’ points of view? Does the planner understand the client’s non-financial goals?”
“While this reform is certainly different from the 1986 tax reform, the CPA/planner must address changes in the law with [HNW] clients immediately after those changes become public,” said Lynn Nichols, a tax consultant and host of the “Nichols Tax Update” weekly podcast. “All planners have protocols to determine the client’s tolerance for risk, but that’s not the same. Some investments, and even some tax shelters, are very low-risk but high complexity, ... requiring the client to execute a series of transactions in the proper order.”
Often planners may not realize how assets held in trusts or other entities are taxed, according to Kathy Keylor, CPA and director of tax services at MAI Capital Management in Cleveland. “These assets could be taxed at the entity level or at the trust level to the grantor or the beneficiary,” she said. “Gains generated in one account may not offset losses in another. Another area often missed are state income tax ramifications of investment decisions.”
“We almost have to be diagnosticians,” added Christopher Fundora, a CFP at Traphagen Investment Advisors in Oradell, N.J. “It’s important that each asset position be considered in terms of tax efficiency. If not, a portion of that gain could be lost to taxes each year.” Among other moves, advisors should also do projections at end of the year to help wealthy clients realize tax savings while maintaining the overall structure of the portfolio, he added.
One of reform’s biggest influences on advice for the wealthy is the potential need to alter a business entity’s structure to take advantage of the new deduction on qualified business income, according to Anish Kansara, a CPA and tax manager at Traphagen. “We analyze a client’s business situation based on 2017 numbers and what the rates would look like for 2018,” Kansara said. Other areas of planning include the new $10,000 cap on the state/local property tax deduction.
Said Preusch, “Any HNW client should be getting tax planning done right away, [especially] anyone with a business” as the QBI deduction, based on taxable income instead of AGI, offers flexibility in tax planning. Preusch recently helped one client qualify for the deduction by structuring a sizable and deductible donation to charity.
“Charitable contributions are a great tool to reduce taxable income since many of the itemized deductions utilized in prior years are no longer available,” Keylor noted. “Many clients are utilizing donor-advised funds and bunching charitable contributions into one year.”
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