Recent news indicates a new U.S. Department of Labor rule will be set forth in the fall of 2019. But don’t be distracted. There’s another piece of legislation that needs your attention.
Pending tax reform, which will likely be addressed when Congress reconvenes in January, puts several tax benefits in question for retirees and their beneficiaries. And, some are critically important in the transfer of wealth.
The Great Tax Transfer
It’s estimated that trillions of dollars of wealth will pass to the next generation over the next two decades. It will come to the surprise of many beneficiaries, however, that most of their money will be taxed.
One of the changes that the Retirement Enhancement and Savings Act addresses is the ability to stretch qualified accounts at death of an IRA owner. It would limit the amount to just $450,000. Everything else would have to be received as a lump sum or within five years of the death of the IRA owner. This places a significant amount of tax due at the time of death.
As I travel around the country, I sense that the increased federal gift and estate tax exemption limits have lulled planners and their clients from looking at the income tax payable at transfer. That’s dangerous – they could be dropping an income tax bomb on their beneficiaries.
Defusing the Bomb
Like any obstacle, legislation can become an opportunity for the financial services community. There are several ways that you can position your clients – and their beneficiaries – to win, regardless of what happens in Congress.
So, the government is likely to continue regulating the way we interact with our clients. But Congress is likely to have a larger impact due to the tax consequences on our income strategies. Focus on creating income that is efficient for both clients and their beneficiaries.
Don’t let the DOL distract you. Pay attention to regulation that can impact your clients’ future.
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About the Author
Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.
The proposed rule from the Department of Labor takes up a lot of conversation these days. While we await the final rule, it’s clear that we are likely to be acting in a fiduciary role soon. Many have predicted lower sales and as much as 25 percent of the sales force shrinking. However, with any change, there is opportunity to capture additional market share – even with increased regulation.
A large advice gap exists in the United Kingdom, where similar legislation went into effect in 2012. Many financial institutions moved up market as they did not find the mass affluent market profitable. Unlike in the United Kingdom, we will still be able to write commission-based products. Let’s not lose sight of that fact in the conversations surrounding the Department of Labor. For those financial professionals who can work efficiently in the mass affluent, there will likely be opportunity to thrive in the post-DOL world.
It will take efficiency and effectiveness – two business building blocks – in order to succeed in this market with the proposed regulations. Professionals earning a commission must be able to repeat a sales process with every client to assure the planning process remains holistic. In order to capitalize on the opportunity that involves key components in the proposed rule, in 2015-16, you must think about strategic maneuvering:
New regulation does not mean you automatically have to change your business plan to a fee-based or assets under management model. However, it will require some thought about how to take advantage of some of the opportunities. I urge everyone to begin the thought process around a post-DOL Conflict of Interest era. The plans you make today are likely to help you and your clients succeed in the future.
Mike McGlothlin is the Executive Vice President of Annuities at Ash Brokerage. His strength is helping advisors become more efficient and effective in their businesses. He and his team provide income-planning solutions focused on longevity and tax efficiency, and they also assist advisors with entering defined-benefit termination planning and structured settlement markets.
© 2018 Ash Brokerage LLC.