It’s ironic, isn’t it, that as individuals, most planners hate change, yet we work in an industry notorious for it. And make no mistake—the Secure Act has changed the game. But, despite the changes it’s brought, success is still possible. We just need to be more purposeful in our planning, and more diligent in our conversations with our clients.
While the new legislation brings guaranteed income to the front of mind, there are several pitfalls that are harmful to our clients. These can’t be ignored and must be addressed for our clients to have success in retirement and legacy planning. Several questions need to be asked during each and every client interaction – regardless of whether it’s a new client or someone you’ve been working with for years.
By always asking these three important questions, you’ll make sure to steer your clients clear of the hidden traps within the Secure Act.
The answer to this question probable hasn’t changed with the passage of the Secure Act. The path travelled to pass assets to heirs, however, probably should. With the modifications to the stretch provisions, there are reasons to name additional beneficiaries in certain situations. Naming a trust as beneficiary to complete your clients’ legacy wishes needs to be reviewed, especially for those trusts requiring required minimum distributions to be disbursed to spendthrift individuals.
Understanding the “why” behind these beneficiaries is helpful when advising clients on the proper path. The more your clients understand, the more confidence they’ll have in you and in their financial plan. Too often, we just add a person on the beneficiary line without explaining the rationale behind the decision.
When discussing changes brought about by The Secure Act, this is a big one. If the goal was to just let the client’s family receive a lump sum, there is probably no need to change. But many people have specific income plans to either distribute or inherit family wealth, and a lump sum isn’t going to meet their needs.
The Secure Act provides a new angle to the sandwich generation. How you receive an inheritance and pass your assets to your heirs is affected by the new legislation.
Your clients are stuck in the middle of $30 trillion of wealth transfer over the next quarter century. The assets they receive and give away are greatly affected.
Your clients need to understand the ramifications of the new qualified plan payout rules from every perspective – control of the asset, taxation and family wealth transfer. As their advisor, you have an opportunity to provide them with the information they need to retire securely. You’ll be strengthening your relationship at the same time.
Granted, for the most part, tax still needs to be paid. The Secure Act accelerates the taxation on qualified dollars to pay for some of the other benefits of the act. Many clients have set a target amount, after tax, that they hope to be able to transfer to the next generation.
Many tax levers create a complicated system. Due to the acceleration of the payout, it’s easy to pull a lever that triggers unexpected taxation if you’re not careful. Business owners taking advantage of the Qualified Business Income, for example, might forfeit that benefit due to an inappropriately planned inheritance. Means testing and other taxes tied to income thresholds like Modified Adjusted Gross Income (MAGI) will be pierced, causing additional taxation on inheritance.
Given the massive amount of wealth scheduled to transfer in the next 25 years, this simple acceleration of the payout will likely increase overall tax revenue. Clients don’t need the surprise of additional taxes, especially those high-wage earners that are using the Tax Cut and Jobs Act to control taxation.
How to Help Your Clients Navigate the Changes
Once you have answers to these important questions, you have what you need to start creating solutions. There are many ways to simulate the previous stretch provisions and control taxation of the inheritance.
Some things to discuss with clients after understanding the above three questions:
Sit down with every client and review these three important questions. Then help them understand the solutions that will help them achieve their goals.
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