PERSONAL FINANCIAL PLANNING

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1 PERSONAL FINANCIAL PLANNING AICPA PFP Section Thought Leadership Panel By Lyle K. Benson, Jr., CPA/PFS, CFP Download a full issue of Estate Planning Review The Journal

2 24 PERSONAL FINANCIAL PLANNING AICPA PFP Section Thought Leadership Panel By Lyle K. Benson, Jr., CPA/PFS, CFP In January, just before the AICPA Advanced Personal Financial Planning Conference, a group of leaders in the CPA Financial Planning profession gathered to discuss some of the key issues affecting financial planners in The agenda included a wide variety of technical as well as practice management topics. Here is a summary of some of the items and trends discussed by this group. Personal Family Financial Planning Personal Financial Planning (PFP) is becoming family finance as the need to integrate multiple generations into the planning process becomes more important. We often find ourselves working initially with one generation as they focus on key issues like retirement. As we move further into their planning, it often becomes important to integrate planning for their parents and their children as well. The CPA financial planner needs to be positioned as the planner for the entire family, so that we can build rapport with the next generation as well as to be able to serve the family well. When considering your clients needs, it is important to know whether they will be required to provide resources to their parents or adult children. If, however, their parents are in good financial shape, perhaps there might be an inheritance that should be part of the clients planning. Another aspect of multi-generational planning that we are seeing a lot Mr. Benson is President and Founder of L. K. Benson & Company, a CPA/Financial Planning firm in Baltimore, Maryland, specializing in personal financial planning, tax and investment advisory services for high income individuals and families as well as corporate executives and entrepreneurial, closely held business owners. Mr. Benson is the chair of the AICPA PFP Executive Committee and is a member of the CCH FINANCIAL AND ESTATE PLANNING Advisory Board. of lately relates to Boomers helping children for too long and impacting their own retirement. Essentially, your clients may be giving away money that was not in their plan as they become the family bank. These kind of multigenerational issues need to be explored when you talk to clients about their planning. Retirement Planning in a New Environment There are a number of issues that we face when working with clients in retirement planning that add new dimensions to planning. As we think about the inflation rate we are using in our planning with clients, it might make sense to think about the impact of a significantly higher inflation related to health care costs. As we age, many of us will find that health care costs are rising much faster than general inflation. Dealing with aging clients and dementia can present a whole host of issues as we think about our client relationships. If we start to see cognitive functions diminish in our clients, when and how do we get other family members involved? With the uncertainty around the Social Security system, clients may have different perspectives on whether there will be benefits once they reach retirement age. Will their benefits be reduced or perhaps means tested in the future? The complexity surrounding the issue of when to take Social Security benefits has risen as there are many different strategies to consider based on both spouses ages, life expectancy, and their cash flow needs. Income Tax Planning After ATRA After 2012, income tax planning changed dramatically, especially for high income clients. However, with the myriad of income levels at which elements of the American Taxpayer Relief Act of 2012 (ATRA) 2014 CCH Incorporated. All Rights Reserved.

3 FEBRUARY 20, (P.L ) take effect, you need to be careful not to overlook clients who are in the $200,000 $400,000 income levels, many of them may be impacted by provisions of these changes. Many of your client s financial plans may not be ready for the full impact of the ATRA changes, especially the impact on their investment planning. Smart tax planning now demands looking at multiple years to see if there are opportunities to manage tax brackets and shift income to years when clients are in a lower bracket. With the many different phase-out points, it has become that much more complex. You also need to look at related taxpayers and entities. Like the broader financial planning issues, tax planning is very much a multigenerational exercise now. The investment aspects of tax planning are more important than ever. Asset location between regular (taxable) accounts, IRAs, Roth IRA, etc. is much more important in this tax environment, especially for higher income taxpayers. Estate Planning Beyond the Tax Aspects In the estate planning area, we need to encourage dialogue with our clients and their families about the new estate planning environment. For clients whose combined estates are over the lifetime federal exclusion amount of just over $10 million, many of the estate planning strategies we have used in the past are still relevant. While there is the potential for the future elimination of strategies like family limited partnerships, grantor trusts, and grantor retained annuity trusts, these are all currently still good viable planning strategies. For clients under this level, we have seen a shift back to a focus on what their non-tax goals are for their estate (probably where it should have been in the first place). How do they want their wealth to pass and what are the values they want to pass to their heirs along with their money. Of course, state estate taxes can still be an important issue, depending on what will be your clients state of residence (domicile) at death. This state tax aspect is a changing landscape as numerous states consider changing their estate tax and gift tax rules. Another aspect of estate planning to consider is whether your clients estate planning records are in the cloud and easily accessible from anywhere, at any time. In today s mobile society, there are going to be times when, for example, mom falls in her home in Maryland, but her children living in California need to access documents like a power of attorney or health care directive. The importance of having ready access to documents in digital format is something many CPA financial planners are focusing on today. When someone dies, often their passwords die along with them and we regularly hear horror stories about surviving spouses and children having a lot of trouble trying to access accounts and information. Planning for these digital assets is becoming an important part of estate planning. The Role of Life Insurance in Planning In this new income tax and estate planning environment, we should be taking another look at our clients life insurance policies, as this area can be an integral part of the overall plan. Getting an inforce ledger so that you understand the current status of the policy is a great starting point. As always, you should start with an understanding of how much insurance is needed and whether it is for income replacement or estate taxes. This may have changed in recent years due to the client s situation or the tax environment. Using term insurance to protect future income streams is still a viable approach. The low interest rate environment should be cause for a closer look at any universal life insurance policies to understand their status and the interest crediting rate. Also, it is not unusual to have clients with orphan policies, ones they bought years ago and have simply not paid attention to over the years. Don t overlook your clients insurance/risk management as you help them with their financial goals. Investment Planning Coming off a year like 2013 always makes investment planning that much more important and challenging. There are a number of aspects of investment planning that have generated recent research or writings that should be considered. How do we measure and define risk, keeping in mind that an individual s perspective should be different from that of an institution? Are you doing enough to understand your clients risk tolerance and risk perception and making sure that this is part of your process in developing and

4 26 ESTATE PLANNING REVIEW THE JOURNAL monitoring portfolios? Human capital is a key part of the asset allocation decision. Too often the wealth management profession focuses on the golden eggs (investments) and not the goose that lays those eggs! The income your clients will generate over their lifetimes is as important of an asset as their current investment portfolio. We also often overlook the liability side of the client s balance sheet. Especially in this low interest rate environment, we need to make sure we are managing our clients debt picture as closely as we monitor their assets. As mentioned earlier, the income tax aspects of investment strategy have become much more important. Understanding how to potentially add return by being tax efficient in your investment approach, also known as tax alpha, has become an important part of the financial planning process. Looking at after-tax returns is even more important now after ATRA. The intersection of investment strategy and retirement planning has also gotten a lot of attention recently. A recent article by Michael Kitces and Wade Pfau lays out the suggestion that many retirees would be better off if we increased their equity allocation as they age in retirement. Their research presents an interesting alternative view to the traditional approach of reducing equity exposure as we age. This will certainly cause CPA financial planners to add another element to their thinking as they work with clients in developing the ideal asset allocation for them in their retirement years. Financial Planning Assumptions It is important to think about how external factors impact assumptions in your financial plan. You should constantly challenge the assumptions in your PFP process: required rate of return, inflation, life expectancy, etc. In these volatile times, it is so important to build a plan that gives your clients a high confidence in knowing they will reach their goals. The Value Proposition In defining the value of PFP, how do we quantify the value of advice? A recent Morningstar paper is a good start in this discussion. How do you define the value you add in your relationship with your clients? Putting the client at the center of the circle, and making the conversation about planning, not just investment management, is an important step in this process. Is the value proposition different for your younger clients, the 30-year olds? Do they want a different kind of relationship with their advisor? This is a critical issue for the profession moving forward as we work with the next generation of clients and advisors. Succession Planning for the Profession and Our Firms How we train the next generation of CPA financial planners is something that is on the mind of many in the planning profession. Demographics are transforming our population and also the CPA financial planning profession. CPAs have a great background to help clients address broader financial planning issues, assuming they get the requisite training, knowledge, and expertise that PFP requires. Helping the next generation of CPAs realize that this is a viable career path is a key step toward building the bridge to the next generation. This leads to a discussion about succession planning. How do the founders of CPA financial planning practices develop a succession plan which focuses on the needs of the client relationships while not ignoring the time and effort that went into building the business? These are just a few of the issues that this group focused on in our discussion in January. We are at a great inflection point in the CPA financial planning profession. The next generation of planners and clients are here now. The demands and needs of our clients has never been more complex and more important as people grapple with the complexity of personal finances. Tax planning is playing an increasingly important role in financial planning. It is time for the CPA financial planner to take the lead and move the entire financial planning profession forward. ENDNOTE 1 I would like to thank the members of our Thought Leadership Panel, all of whom are leaders in the CPA profession in this area: Ted Sarenski, Jean-Luc Bourdon, Larry McKoy, Susan Bruno, Sue Stevens, Scott Sprinkle, Dirk Edwards, Clark Blackman, Lori Luck, Tom Trainor, Randy Abeles, Ernest Clark, Sid Kess, and Michael Goodman. A special thanks also to Andrea Millar, who leads the AICPA PFP Section, for helping us to orchestrate this group discussion CCH Incorporated. All Rights Reserved.

5 YOUR COMPLIMENTARY ACCOUNTING TODAY WEBINAR Insurance Trusts: Practical Planning and Practice Development Ideas for Lots of Clients Life insurance trusts have been a key component of estate and financial plans for decades. With the increased importance of income taxes relative to estate taxes, many clients will benefit from the use of grantor trust swap powers, tax free build up inside life insurance policies held by trusts, and the income shifting opportunities these trusts can provide. Topics discussed: A practical review of how recent tax law changes and planning conventions have changed how practitioners can help clients plan for existing and new irrevocable life insurance trusts (ILIT) How practitioners can provide additional planning services to clients in the new tax environment Resources for financial and estate planning Presented by: Martin M. Shenkman, CPA, MBA, PFS, AEP (Distinguished), JD Martin M. Shenkman, CPA, MBA, JD, is an attorney in Paramus, New Jersey and New York City. His practice concentrates on estate planning and administration, tax planning, and corporate law. Recognized by: Worth Magazines top 100 attorneys in 2007; CPA Magazines Top 50 IRS practitioners in 2008; Top 40 Tax Accountants in 2009; and the recipient of the New Jersey Bar Association's Alfred C. Clapp Award in Source for numerous financial publications: Forbes, The Wall Street Journal, Fortune, Money, and The New York Times Appearances on numerous television shows: The Today Show, CNN, NBC Evening News, CNBC, MSNBC, and CNN FN. Published: 42 books and 800 articles. He earned a BS in economics Wharton, MBA University of Michigan, law degree Fordham University, and is admitted to the bar in New York, New Jersey, and Washington, D.C. He is a CPA in New Jersey, Michigan, and New York.