Top 3 client questions financial planners should be ready to answer

As the Biden administration floats new tax proposals — and tax hikes — advisors should have answers to these queries ready.  

As a slew of tax reform proposals float around Capitol Hill, planners should be readier than ever for questions from clients — in particular those who want to minimize their tax liabilities as they plan for retirement and estate transitions.

Each of these three concerns take on a fresh urgency amid the prospect of rate increases and other tax changes.

The Roth IRA conundrum 

Take, for example, the question of whether to convert a conventional IRA to a Roth IRA. Of course, the defining feature of a Roth product is that the tax is paid on the front end — on the contributions — while the gains realized upon withdrawal aren't taxed.

All clients’ situations will vary, of course, but planners should be prepared to take a fresh look at the conversion question in light of proposals to raise the top marginal rates and limit itemized deductions. Is it worth it for a client to capture their tax rate now, when they are likely lower than they will be if the proposed reforms go through? This may be the last, best chance to lock in at a lower rate; if rates go up, who knows (if ever) when they'll come back down?

On the other hand, converting to a Roth will present an immediate tax bill. Planners must always be ready to discuss with clients whether it's prudent to take that chunk of money out of their investment pools.

Estate planning changes

Advisors should also be considering how to help clients navigate potential changes to the rules around estate planning. At present, the threshold for estate tax is $11.7 million per person. For the vast majority of Americans, the tax isn't an issue. But there are calls to lower that level to $3.5 million, which would obviously create new tax implications for a great many more households.

Consider the client whose wealth hovers slightly above that proposed threshold — say $4.5 million. If the proposed estate tax change begins to look like a reality, planners should start talking to their clients about ways to take money out of their estates, whether through gifting, spending or liquidating investments.

Irrevocable life insurance trusts

Finally, clients may be concerned about the threat of the IRS invalidating irrevocable life insurance trusts, a key part of estate planning through which clients can provide their heirs liquidity that can cover estate taxes. If the IRS eliminates ILITs as a planning tactic or adds those policies to the value of a client's estate, that’ll have serious estate planning implications, and financial advisors need to be ready to talk their clients through it.

The hypothetical scenarios are endless, but the more planners are ready to answer client concerns, the more trust they will build over time.

Bruce Willey, JD, CPA, is the founder of American Tax & Business Planning, LLC. He has been advising individuals and business owners in accounting, tax and wealth-building strategies for more than three decades. To speak with him or another ATBP expert, please reach out here or at https://www.americantbp.com/contact-american-tax-and-business-planning.