Finance Tax Time

It is probably safe to say that most IRA owners really don’t put much thought into who they designate as their IRA beneficiary, but even IRA owners who do may very well have not done their planning correctly. This is especially true in that the IRA beneficiary designation rules are so complex.

With traditional IRAs (not Roth IRAs) one must generally start taking minimum required distributions when the beneficiary reaches age 70.5. Because investments held in IRAs grow tax-free, many taxpayers try to structure their affairs so that the bulk of the funds can remain in the IRA for the longest period of time.

The number of clients who ask about these planning opportunities seems to be on the rise. The facts are typically something like this: The husband owns the majority of the couple’s assets, which includes a couple of million dollars held in the husband’s IRA. Both the husband and the wife own their house jointly and it is now valued between $1 or $2 million. The husband and wife are younger than 70, so they haven’t begun taking minimum distributions from the IRA.

The husband wants to prepare his estate plan. His primary concern is how to leave the IRA funds to a trust so that his wife can benefit from the funds and not have any obligation to manage the funds and upon the wife’s demise the funds will pass to the couple’s children.

After running through the options with the husband and encouraging the husband to merely name his spouse or his children or a charity as the IRA beneficiaries, the husband almost always wants to name a trust as the beneficiary (see http://www.irstaxtrouble.com/2005/10/trust-as-ira-beneficiary.html>Trust As IRA Beneficiary post for more info).

One of the ways to structure this, the one that is outlined in the IRS’ recent Revenue Ruling (Rev. Rul. 2006-26), is to designate a marital trust created under the husband’s will as the IRA beneficiary.

If structured properly, if the husband predeceases the wife the husband’s executor can elect to treat the IRA as qualified terminable interest (QTIP) property for estate tax purposes. This allows the IRA to qualify for the 100% estate tax marital deduction upon the husband’s demise, which allows the IRA assets to avoid estate taxes upon the husband’s demise (the rest of the husband’s estate passes to a spousal trust created under the husband’s will, to use up the husband’s estate tax unified credit or applicable exclusion amount - thereby making that portion free of estate tax).

As outlined in the Revenue Ruling, the surviving spouse will be considered the sole beneficiary of the IRA if he or she has the right to the trust income at least annually and/or an equivalent power to demand access to the income and there are no non-individuals who are beneficiaries of the trust. This is a pretty common arrangement.

The problem lies in situations where there are distributions from the IRA to the trust that are not currently distributed to the spouse. In that case, the spouse is not considered the sole beneficiary of the trust. Depending on the terms of the trust, this can cause the IRA payout to have to use the measuring life for purposes of IRA distributions of that of the oldest - i.e., the wife - beneficiary - even after the wife’s demise. This can significantly reduce the number of years that the IRA can have continued tax-free growth and reduce the amount that will pass to the couple’s children.

In addition, taxpayers would still have to examine each individual beneficiary, rather than just the spouse, to ensure that the IRA beneficiaries are all individuals and not trusts or other entities.

The interesting tax issues that the Revenue Ruling addresses is what happens if the trustee, under state law, has the power to adjust between principal and income and/or convert the trust to a unitrust (for the non-tax folks, this allows the trustee to decide how much income to distribute to the wife during her lifetime, essentially regardless of what the trust provides).

The Revenue Ruling concludes that the trustee can in fact make such allocations between principal and income or can convert the trust to a unitrust and these decisions will be respected for tax purposes.

While most estate and trust attorneys are very familiar with the trust principles, I don’t think many have planned for whether the trustee could or should convert the trust to a unitrust and/or make allocations between income and principal.

This seemingly presents yet another planning opportunity where the attorney - working with the IRA investment advisor and trustee - should be able to structure the trust and IRA so that they achieve one or more of the IRA owner’s goals in a very tax efficient manner.

Of course, given the complexities of the IRA rules it is imperative that IRA owners speak to their trusted financial advisors. This is especially true for owners of larger IRAs.

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Integrating tax planning into your financial planning practice may help grow your business, but it must be marketed effectively and consistently.

The key elements in developing a winning marketing plan are positioning and using the basic communication channels.

Are you positioned?

Your challenge is not only to communicate your new services to clients, but to differentiate yourself from the competition. Differentiation leads to ‘top of mind’ awareness, which leads to business growth and financial success. However, before you get to the end result, you must start with aligning your value proposition with what’s important to the target audience. In this case, affluent clients need help with understanding taxes and tax planning and you need to communicate how you can help them deal with these issues.

How important is positioning yourself as an expert or as a problem solver? “Over 73% of affluent investors want to consult with an expert,” said John Bowen, Founder and CEO, CEG Worldwidea leading research, consulting and training firm for financial advisors. Many advisors may be uncomfortable with the concept of being called ‘the expert’. Keep in mind that you don’t have to know everything to be called an ‘expert’. In fact, many ‘experts’ only have a very narrow range of information that they tout, but they exude such confidence that they are perceived as experts.

What’s the payoff?

Being perceived as an expert in your targeted audience will create magnetic marketing opportunities. These opportunities translate into more income. Here’s a stark contrast for you: among advisors earning less than $75,000 less than 5% of them were positioned as technical experts and less than 5.4% were positioned as ‘problem solvers,’ said Bowen. However, among advisors earning more than $150,000 almost 38% were positioned as ‘experts’ and almost 40% were positioned as problem solvers. More experts made more money, said Bowen.

What other tools should you use to announce your tax planning?
There are three basic communication channels - relationship, credibility and direct response. If used properly, these channels can produce an abundance of highly qualified leads and clients.

Relationship

The relationship communication channel is characterized by strategic alliances and referrals.

For strategic alliances, many advisors are taking advantage of referrals from CPAs. CPAs tend to be very good at tax planning, but few have mastered financial planning. Thus, they are generally eager to find a reputable advisor for their clients that won’t jeopardize their tax preparation business and can serve as a source of referrals.

For referrals, try building from within your client base. By approaching your best clients with the tax planning concept you will gain insights and experience. As you demonstrate the value of your new service to those clients you are perfectly positioned to initiate an aggressive referral program.

Don’t be afraid to spread your strategic alliances over various industries that might be of interest to your target audience. For example, depending on your practice it might be prudent to form relationships with real estate agents, mortgage lenders, insurance agents and even travel agents. At some point in your client’s life, they will probably need one or more of these individuals. If you have a professional friend that you can send them to, it makes you look like an expert.

To determine who you should target for strategic alliances, look no further than your target audience. Choose demographics like age, wealth and activities to determine what these groups are most likely to be interested in. For example, affluent retired seniors might be interested in doing a lot of traveling or purchasing a vacation home. You would certainly want to have a real estate and travel agent on speed dial for them.

Credibility

In the credibility channel, the name of the game is getting published. Creating articles and white papers related to tax planning issues within your target audience is essential. They can be distributed from your website, a sponsored e-zine, or through professional journals read by members of your target audience.

Direct Response

The direct response channel includes vehicles like public or sponsored seminars and direct response mailers. Targeted seminars continue to be effective marketing tools if done properly. Direct response mailers in different formats or in organized campaigns are also extremely effective.

If you are looking for more training and education on marketing and tax planning, go to BuildYourMarket.com (http://www.buildyourmarket.com/) and look under Marketing for more material. You will find everything you need to market tax planning and to build your business!

Does your CRM just lay there? Bring it to life with ‘Build Your Market’ (http://www.buildyourmarket.com/) the original web-based brand management tool for financial advisors. This one application integrates your CRM with your website and generates 4 color print-on-demand newsletters and postcards. If you are a registered rep, all your marketing communication is linked to your compliance officer’s desktop.

Reprinted with permission from the Ezine: AdvisorMarketingNews.com- “Delivering Today’s Trends the Advisor Professional” (http://www.advisormarket.com/)

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Advisors are constantly looking for a marketing edge to push them ahead of the competition. For many advisors that edge is right under their nose - tax planning. Successful advisors focus on tax planning year around and here’s whyin a recent CEG Worldwide survey, one of the services most requested by affluent investors was income tax planning.

“It turns out that even affluent investors have substantial lack of understanding when it comes to avoiding taxes,” said Catherine McBreen, managing director of Spectrem Group, in a recent issue of Financial Planning. “These investors may be missing out on important opportunities to save tax dollars because they aren’t up to speed on many of the best approaches, including 529 plans, annuities and in-kind charitable giving,” said McBreen.

Top Advisor Coaches Tom Gau and Ken Unger pointed out a couple of years ago that less than 10% of all advisors are currently offering their clients any tax planning.

Are clients confused about income tax planning issues? Apparently. Is this an area where you can differentiate yourself? You bet.

Where to start?

Income tax planning begins with the tax return, the form 1040. If you aren’t familiar with how to read a tax return then you need to go to BuildYourMarket.com and download “Reading and Using the Tax Return” training program. That streaming video and the accompanying handout will walk you through a basic reading of a client’s tax return.

Many advisors tell us that they don’t do tax planning for clients because they are afraid to ask for the tax return. Once you start asking you will be surprised how many clients gladly provide that information for your review. If you need assistance with building a script to help ask for the tax return, go to BuildYourMarket.com and you will find one there to download.

What are the main benefits of offering tax planning to your clients?

1. Differentiation. Adding this overlooked service to your practice will steer clients to you and will drive away competitors.

2. The tax return is a cornucopia of information about your client’s financial situation that you can use to make better recommendations. It opens the books and shows you all the different types of investments in the client’s portfolio. The Schedule D shows you the capital gains and losses. The Schedule E shows you any self-employed income, and so on.

3. Build stronger relationships. It’s true that clients care very little for what you know until they know you care. When you walk through their tax return and discuss each item in their financial inventory you can’t help but communicate concern and empathy. Your attention to their complete financial picture demonstrates more integrity and helps build trust. Understanding why they made certain investment decisions helps you understand how their ‘money personality’ works. All of these insights will help you build stronger client relationships.

How do you communicate your new services?

Now that you understand the value in adding tax planning to your services, how do you communicate it? One of the best ways to communicate your new service is through drip marketing. The concept is simple, you send out several promotional pieces over a period of time to a subset of sales leads. Your objective is to ‘get your message out’ constantly and consistently!

This concept was developed in response to the “Law of 29″ in which many marketers believe that an average prospect will not convert to a client until they’ve seen your marketing message at least 29 times. Of course this is not an exact science, but converting prospects to clients and motivating current clients to reach their financial goals requires constant and consistent contact. You will not get the job done with a phone call or a meeting every now and then. You must “drip” on them to reach maximum success!

To effectively use drip marketing you must have a plan of action and follow it though. Don’t just put one together and push it out the door! Take your time to develop a strategic and measurable plan. For the best results you should incorporate a drip marketing campaign into your yearly marketing plan.

You can use drip marketing in your postcards, newsletters, e-mail newsletters and any promotional or sales brochures. To get the best and most consistent results, automate the process. Your cards and newsletters need to go out automatically and at regular intervals.

Seminars are a great venue to promote your new service because you have a captive audience. People have chosen to come hear you speak, so incorporate your tax planning service at a prime opportunity in your presentation.

Highlighting your new service in routine client meetings is a two-fold, good measure. Not only do you pass this information to current clients, but you can ask them to do some word-of-mouth advertising for you.

Once you make the decision to increase your focus on income tax planning you will need an action plan. Here’s an introductory To-Do List:

1. Find the training on Reading and Using the Tax Return.

2. Start the positioning for your tax planning services with your target market.

3. Decide how to handle processing the tax returns and reporting the observations and recommendations.

4. Create the marketing pieces and strategies to announce and follow-up on tax planning leads.

If you are looking for more training and education on marketing and tax planning, go to BuildYourMarket.com (http://www.buildyourmarket.com/), and look under Marketing for more material. You will find everything you need to market tax planning and to build your business!

Does your CRM just lay there? Bring it to life with BuildYourMarket.com (http://www.buildyourmarket.com/), the original web-based brand management tool for financial advisors. This one application integrates your CRM with your website and generates four color print-on-demand newsletters and postcards. If you are a registered rep, all your marketing communication is linked to your compliance officer’s desktop.

Reprinted with permission from the Ezine: AdvisorMarketingNews.com- “Delivering Today’s Trends the Advisor Professional”(http://www.advisormarketingnews.com/)

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