“The recent tax law changes have sparked a need to review clients’ wealth management strategies,” according to Devin Ekberg, CFA, CPWA, CIMA, and Chief Learning Officer and Managing Director of Content Development at the Investments & Wealth Institute. “While some advisors are cautions of providing tax advice per se, an exceptional advisor can add significant value by educating their clients of the potential tax implications of their decisions.”
As you look to navigate the recent tax changes on behalf of your clients, here are some of the areas to be particularly aware of — and some of the solutions you can provide for clients.
As an advisor, it’s important to have a general understanding of how tax law changes can impact clients and the way their taxes are handled. Ekberg points to three wealth planning areas to consider as you move forward.
Even though the new tax law current allows for about $11 million in estate and gift tax exemption for individuals, that’s expected to drop to around $5.5 million in 2026. For advisors, helping wealthy clients make the most of their estate planning includes helping them gift as much as possible on a tax-free basis.
Because individuals can give up to $11.2 million in their lifetimes, it’s worth looking into how clients can give to their heirs now, passing on up to $15,000 (for 2019) per person tax-free per year. For clients that don’t want to make huge gifts like this, setting up certain asset protection vehicles, like a spousal lifetime access trust, can help you take advantage of the tax law and moving assets around in a way that allows them to pass tax-free — no matter what the exclusion limit ends up being.
The new tax law allows for a 20% pass-through deduction on certain pass-through entities. Interestingly, this might actually impact financial advisors as well as their clients. Financial advisors working as independent wealth professionals might be able to take advantage of this tax deduction, accounting for taxable income thresholds.
For clients with family business planning needs, though, wealth management advisors can look at the situation and see if distributing ownership makes sense for certain types of pass-through businesses. Income limitations are determined based on each partner/owner share, so in a family business, distributing the ownership to a point where everyone falls under the threshold can help clients take advantage of this deduction.
Business owners should also consider that Roth IRA conversions can no longer be recharacterized. For clients with fluctuating income, it’s now probably better to wait until the end of the year to decide if a Roth conversion is the right move. In the past, many advisors and tax professionals suggested completing the conversion at the beginning of the year and recharacterizing later, if needed. Now, with the inability to recharacterize, that planning technique should be changed.
One of the issues with the new tax law changes is that the standard deduction increased for individuals and couples. Using a donor-advised fund for charitable contributions is one popular way to help clients manage their charitable giving and tax deductions.
However, with the higher standard deduction, it might make more sense to front-load some of those contributions. If a client couple plans to add $20,000 per year to a donor-advised fund, they will be taking the standard deduction both years, especially if they are impacted by loss of the deduction for state and local taxes.
Instead, it’s possible to contribute two years’ worth at once, putting in $40,000. Now, it’s possible to get a deduction for one year, amounting to approximately $16,000 above the standard deduction for a couple.
Other strategies around charitable giving, for clients above age 70 ½, can include qualified charitable distributions, which count toward an RMD, without adding to taxable income. As an advisor, it’s important to pay attention to clients’ needs in this area because the 1099-R might not identify a qualified charitable distribution. As part of a client’s team, advisors can coordinate with a tax professional to ensure that everything is properly identified.
The good news, says Ekberg, is that you don’t have to stay on top of all the changes on your own. Continuing education, particularly in the CIMA certification, can help wealth management professionals stay up-to-date. The CIMA certification is especially useful because it requires extra hours dedicated to taxation.
“Organizations like the Investments & Wealth Institute offer financial advisors the opportunity to earn certifications and get the latest industry developments and how to apply them to their clients,” Ekberg says, citing the Institute’s on-demand webinar course on tax strategies for 2019.
A good educational organization offers conferences, webinars and continuing education courses that can help advisors remain up-to-date on their certifications and add value for their clients.
“Navigating the complexities around the recent tax changes adds another layer to wealth management,” says Ekberg. “The right tools and resources can help you help your clients more effectively.”