Archive for March, 2019

For Tax Compliance and Planning, Collaboration is Key

Posted by Melissa Olszak, CFP®, CFA®

8 Tips to Ensure High Net Worth Investors Get the Most Out of This Tax Season

It’s that time of year again when high net worth clients and their advisors are getting inundated with 1099s, K-1s, estimates and other tax documents. Although this inundation of data is not new, there are many changes with the 2018 filing versus the 2017 filing, making this year one of the more challenging years for CPAs to meet deadlines–and also not miss tax filing requirements or opportunities for their clients.  

Many CPAs have software that organize and track a list of 1099s and K-1s, and prepare a checklist for the following year. That being said, this software is only as good as projecting the information from the previous year, so it is important to watch for a few items that are new or not recurring to ensure there are no opportunities being lost during the filing process.

Here are 8 tips to help CPAs and high net worth clients reduce the chance of missed items or opportunities.

  1. New Bank Accounts or Investments. When working with a wealth management advisor, the advisor will likely have a good inventory of any new or closed accounts and any new direct or limited partnership investments.
  2. Purchase or Sale of a Home or Refinance of a Mortgage. It’s best practice to collect a closing binder of the sale or purchase and share it with your CPA, as this documentation should contain the majority of information needed such as legal owner, deductible expenses versus capital expenses, and financing documents if there is a mortgage. Aside from the closing binder, the other information your CPA will need is any additional basis records if the home was sold to determine any gain (or loss if the property was an investment property).
  3. Purchase of a Fuel-Efficient Vehicle. There are certain tax benefits when it comes to purchasing new, fuel-efficient vehicles, but there are also required rules and records that must be provided to your CPA in order for you to benefit. Your wealth advisor also may be aware of such a purchase and can help track down the required information.
  4. Low Basis, Concentrated Positions. Some clients and families have large positions in stock that either came from the family being one of the original founders or investors, or that may have simply been passed down through generations. In either case, when positions are held for a long time, the custodians who hold them may not have accurate basis information. Given this scenario, it’s important to pay attention to any sales of securities to ensure your CPA has accurate basis to be able to determine any gain or loss, and that there’s time to go back and build a basis history. These scenarios may be something your wealth advisor can also help sort through.
  5. Tax-Deferred Accounts. Although the IRS has certain reporting that gets generated on tax deferred accounts, it’s important to provide information on any tax-deferred account transactions such as rollovers, required minimum distributions or charitable donations, to be sure they are not missed and are properly reported. 
  6. Loans. There often is not any automatic reporting for family and friend loans, so it’s important to not lose track of these types of loans and share copies of the promissory notes and any interest and principal payments with your CPA. Your CPA may also be able to spot if a reasonable interest rate is being used, such as the Applicable Federal Rate (AFR) for related party loans, to reduce any gift exposure.
  7. Charitable Donations. With many other deductions (state income tax and real estate taxes) being reduced, charitable donations may be more valuable to clients. Therefore, ensuring proper records are obtained is critical to not missing out. These records include receipts for any cash gifts over $250, and appraisals for in-kind property donations. Your wealth manager can work with you to establish the best strategy for giving (such as through a donor advised fund to take advantage of fewer receipts to track while also being able to donate low basis securities and controlling the timing of the deduction and ultimate charitable contribution).
  8. Gifts. Whether your CPA or estate attorney files your tax return, it’s critical to look back over the year and provide information on any gifts made, which could include outright cash gifts or more complex giving such as the funding of a Grantor Retained Annuity Trust (GRAT), a QTIP Trust or forgiveness of a loan. By providing this information, your CPA or attorney can advise on the filing requirement and impact on remaining lifetime and generation-skipping exemptions.

The list above can be overwhelming, but if you, your CPA and your wealth advisor work together to compile the list of data and any new investments or transactions that occurred, it can become much more manageable and reduce missed filing requirements and opportunities. 

Charitable Giving Through a Donor Advised Fund

Posted by Leah Upton, CFP®, CRC®, CDFA®

Benefits, Risks and Getting Started with this Flexible Charitable Option for High Net Worth Investors

High net worth investors have the ability to take advantage of the benefits and flexibility that come with donating cash, securities, or other non-publicly traded assets directly to qualified 501(c)(3) organizations.

Charitable donations allow you to transfer wealth out of your estate while also receiving a tax benefit and making an impact with the qualified organizations you support. However, the value and timing of the tax benefit realized depends on the type of asset, the year in which it was donated, and the overall tax situation of the investor.

One way to maintain control and realize the benefit of your donation in the year that is most valuable to you is to utilize a Donor Advised Fund.

What is a Donor Advised Fund and what are the Key Benefits of this Type of Charitable Account?

A Donor Advised Fund is a charitable account that is sponsored by a public charity. This type of account offers several key benefits to you as the donor:

According to the National Philanthropic Trust, Donor Advised Funds have been gaining popularity in the U.S. over the last few decades as investors have been catching on to this useful tool for charitable giving that provides additional flexibility within a wealth strategy.   

Although this investment vehicle was created in the 1930s, it’s been gaining traction steadily since the 1990s. The number of funds, donations into the funds, and recommended grants out of the funds have all risen year over year for at least the last eight years. In 2017, assets in these funds also surpassed $110 billion–a new record!

Capitalizing on the Flexibility of a Donor Advised Fund

Because you can realize the maximum allowed tax deduction in the year the assets are donated to the fund, you’re able to pick and choose which tax years are most beneficial for your personal situation–such as a higher income year than normal–while continuing to make grants to the charities that are most important to you year over year.

In addition to providing timing flexibility, this charitable vehicle also makes it easier to donate non publicly-traded assets and private interests that a charity otherwise may not be able to take directly.  

As a high net worth investor, you may have already started a Private Foundation for some of the same benefits that a Donor Fund provides, such as being able to recommend investments, granting out to other charities at later points in time, and helping with family legacy planning by enabling the next generation to take over grant-making decisions. However, there are some differences worth noting that may make the Donor Advised Fund more appealing:

Some Risks of Utilizing Donor Advised Funds

Not all assets hold the same weight when it comes to the tax benefit that will be received in exchange for the donation. Donating long-term, highly-appreciated assets instead of cash is more beneficial and reduces the amount of capital gains tax that would have otherwise been paid if you sold the assets first.  Just like all donations, you need to be mindful of which assets are being donated into the sponsored fund.

Additionally, you’ll want to make sure the fund is titled in a way that you would want to be recognized (i.e. The Smith Family Gift Fund). However, grants out of these funds can usually be made anonymously, which you may prefer.

Also, you cannot recommend legally-binding pledges from your Donor Fund because you cannot receive an incidental benefit from the grant, which may put the irrevocable nature of this account at risk. Therefore, a Donor Fund can’t make a grant that would relieve you of your financial obligation. However, you can make a non-legally binding intention to qualified charities of your choice.      

Finally, just like any donation, the gift is irrevocable, meaning that wealth is no longer included in your estate and can no longer be used for personal needs once it is donated.  

How to Take Advantage of a Donor Advised Fund

Getting started with a Donor Advised Fund is simple and usually requires a minimal initial donation amount to be made. The fund can likely be opened with your existing custodian (such as Fidelity, Charles Schwab, or your community Foundation), which makes it even easier to keep track of and use for your charitable giving!