4 Strategies to Maximize Clients’ Legacies

Jun 17, 2024 / By Debra Taylor, CPA/PFS, JD, CDFA
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Your clients may be motivated to leave a legacy. To do so they may need your help to reduce taxes and costs while growing and preserving their investments. Here are four strategies aimed at making that happen.

A strong retirement income plan requires the discussion of several areas to ensure that the critical aspects of your client’s financial health are protected. Some of the components may seem obvious, such as making sure your client plans for large expenses, while some may not be as obvious, like aggressively managing taxes. We addressed three key items recently in this recent article.

Keep reading for four game-changing strategies to maximize your client’s legacy.

1. Create a legacy that lasts

Making sure that you have enough assets to support your lifestyle is playing “good defense.” However, once you know that you have enough assets, then you may want to maximize your legacy for beneficiaries by going on “offense.” Creating a legacy encompasses many facets. For example, not enough Americans have an estate plan in place—things like a will, financial and health care powers of attorney, etc. Indeed, only 26% of Americans have an estate plan.

Tax planning and estate planning work together to save your clients money on taxes when transferring wealth. Planning early will help find solutions that will reduce taxes to beneficiaries and ensure the right documentation is in place.

As estate taxes are a hot-button issue across the aisle, there have been many proposals over the years, mostly curtailing popular estate-planning strategies such as grantor retained annuity trusts (GRATs), family limited partnerships and so on. In addition, the currently very generous lifetime exclusion ($27.22 million for couples/$13.6 million for individuals) is due to expire at the end of 2025, and there have been proposals to decrease it before that time. Thus, if your clients could be at risk with a lowered lifetime exclusion, then you should be discussing strategies NOW with them and a competent estate planning attorney.

To make matters worse, estate planning can require years of advance planning. This type of legislation is often passed with very little warning—and can be retroactive if Congress so chooses.

Pro tip: Make sure you are aware of your clients’ net worth and wealth transfer goals and be sure to discuss legacy planning and estate planning. Now is the time with the impending sunset of the Tax Cuts and Jobs Act of 2017 (TCJA) in 2025.

2. Drive down lifetime taxes

Nothing is certain except taxes and more taxes, particularly if you have a large traditional retirement account. It is essential to create a tax minimization plan as part of the overall financial plan.

Although not discussed nearly enough, lifetime income taxes are some of the most significant expenses that retirees face and may be the most significant expense in retirement. Advisors can save clients hundreds of thousands of dollars (and maybe millions) through understanding the tax code and making tax-smart decisions.

There are so many examples of how tax-intelligent advice can benefit a client. From basic blocking and tackling (such as tax-loss trading and capital gain harvesting) to favoring a Roth account over a traditional retirement account, we are seeing more and more evidence that tax planning matters.

Most critically for those clients who are retiring, advisors must prepare well in advance for required minimum distributions (RMDs) which start at age 72 (or age 73 if you reach age 72 after December 31, 2022) and only increase from there. RMDs grow based on the IRA account size and they also increase as your clients age. There are few ways to avoid RMDs once they start. Distribution planning for clients should begin well in advance of age 73 to position accounts and institute the proper tax planning before it is too late.

As part of your financial planning process, you need to create a lifetime tax minimization plan, optimizing the client’s wealth.

More specifically, tax planning to limit the impact of RMDs is most effective when performed during the entire year and over the course of several years. When wealthy clients reach the distribution phase, their high-balance retirement accounts of $2 million and over can create a burdensome tax situation, particularly when it comes to legacy planning.

Why do we pinpoint the $2 million mark? Those with traditional IRAs of about $2 million or more today are seriously at risk as those accounts can quickly grow to $4 million to $6 million over a decade or two and dire tax consequences then ensue.

For example, we have a client (a couple) in their mid-60s that recently retired with a tax-deferred account balance of $2.5 million. Without tax planning, this account could grow to over $5 million in 15 years (assuming a moderate annual rate of return of 7%). At this time, RMDs will total close to $200,000 (and could grow to over $500,000 in their 90s)! This will create a huge tax burden in retirement as the client will likely have Social Security income and potentially other income to consider as well. With this, they will likely be pushed into the highest tax bracket (especially once the first spouse passes and the “widow’s penalty” kicks in their mid- to late-80s). Per 2024 tax rates, a single filer already enters the 35% marginal tax bracket after $243,726 in taxable income.

In addition to the items discussed above, tax legislation is changing and it’s important to position income (and the estate) for a possible repeal of the currently very favorable tax backdrop. Taxable income (generated from RMDs and everywhere else) could be taxed at an even higher tax rate once 2025 arrives, since the TCJA expires at the end of that year. If it expires without any congressional action, then tax rates will likely be increasing for those in the higher brackets. In addition, the lifetime exemption for estate taxes will be cut in half, adjusted for inflation. Following legislation and understanding how changes can impact a client’s portfolio will allow you to prepare and minimize fallout.

Pro tip: Build out your firm’s tax-planning process and incorporate it into your current financial-planning process. Make sure that each client has a tax-minimization plan. And be mindful of legislative changes coming ahead.

3. Revisit risk tolerance and perform an expense review

As clients inch closer to retirement age, advisors must consider if they are taking the appropriate amount of risk. Clients are now in a different phase of life and do not have the time to make up for a major market downturn. Investments should reflect risk tolerance and goals and clients should not be unnecessarily chasing large returns.

In that vein, we must look at and find ways to eliminate unnecessary portfolio costs, whether those are fees or taxes. Be aware of larger expense ratios on the funds clients invest in. Your clients should pay only you to manage their accounts rather than paying two fees, one to you and one to the investment company charging the larger internal expenses.

Additionally, eliminating unnecessary taxes is another obvious way to increase a client’s spendable income.

Pro tip: Have you conducted an expense review of your client’s portfolio? Have you created a tax-minimization plan?

4. Use strategies like tax-loss trading and capital gain harvesting year round

It’s never too early to start implementing tax-loss-trading strategies, and the earlier in the year you begin, the better.

Tax-loss trading involves selling securities that have decreased in value to realize a loss. These losses can then be used to offset realized capital gains and up to $3,000 of regular income. Moreover, if an investor recognizes more losses than gains or has already offset the $3,000 income cap, current rules allow for losses to be carried forward indefinitely. This flexibility offers investors a powerful tool for managing their tax liabilities over time.

Keep in mind the wash sale rule, which mandates a 30-day waiting period before reinvesting in the same security or a substantially identical investment.

Pro tip: Too many advisors wait until the end of the year to engage in tax planning, whether it is tax-loss trading, capital gain harvesting or Roth conversions. However, this thinking is unnecessarily limiting, and may cost your clients millions of dollars. Instead, think of tax planning as a year-round activity, looking for opportunities throughout the year, where it makes sense for you to deploy the strategies in your clients’ portfolios. Whether that is an overall market pullback or specific losses, do not wait until December to do this very valuable work.

We play a crucial role helping clients maximize their legacies through strategic planning and tailored approaches. By implementing techniques such as tax-loss harvesting, thorough estate planning, and strategic tax planning, advisors can ensure their clients’ wealth is preserved and effectively transferred to future generations.

Debra Taylor, CPA/PFS, JD, CDFA, is Horsesmouth’s Director of Practice Management. She is also the principal and founder of Taylor Financial Group, LLC, a wealth management firm in Franklin Lakes, NJ. Debra has won many industry honors and is the author of My Journey to $1 Million: The Systems and Processes to Get You There, a book about industry best practices. Debbie is also a co-creator of the Savvy Tax Planning program and co-leader of the Savvy Tax Planning School for Advisors. Several times a year she delivers her Build a Better Business Workshop for advisors.

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