Smart money moves: Tax strategies for life's biggest transitions

[00:00:00] Stan Gregor: it's too late. At that point, you are going to pay the tax.  

[00:00:03] David Pickler: Outside of death, divorce is really one of the most significant life events that a client can expect.  

[00:00:09] Todd Bryant: When retirement, it's not quite as easy as it seems, you know, back in decades ago.  

[00:00:18] Chris Davis: Hello and welcome to Investment News TV. Today, we're addressing tax and tax efficiencies. Joining me is Stan Gregor, CEO, Summit Financial. Todd Bryant. founding partner of Signature Wealth, and David Pickler, president and CEO of Pickler Wealth Advisors. So Stan, how do you integrate proactive tax planning for major life events such as retirement and receiving certain wealth? 

[00:00:45] Stan Gregor: Yeah, great, great, great question, Chris. You know, you think about the universe that we're in today, the increased asset values, the complexity of how people have... really grown their estate values it's so critical and important that planning is a big part of it so in our world and within the summit financial world um integrated financial planning is a key component of how we manage a relationship whether it's the investment side uh the protection side we call it the insurance side and then the estate planning piece the tax efficiency or really setting up for the inevitable the day that you know we do pass on how do we How do you preserve what we built as a family, right, to move on to the next generation? So the thresholds, you know, when you look at, you know, what level passes on to the next generation, fairly simply, is a low number compared to what a lot of these estates are worth. So it is critical, and we tell our clients this all the time, if you have a business, if you have any possibility of some kind of, you know, monetization event or some kind of wealth event. you need to prepare now and you need to move those assets out of your name into a protective class if sooner than later many times we come across clients that that they have the event and then they come asking for sheltering and it's it's too late at that point you are going to pay the tax man and that's that's a critical flaw that wasn't leveraged in the past when it should have been leverage so The planning of how those assets are labeled, how they're classified, getting them out of your individual names or moving them into trust or gifting. These are all strategies that clients should be having conversations with their financial advisors and their financial planners ahead of time. And then equally as important, once those assets are, I'll say, titled or registered in the right structure. structure, there's also a management of tax efficiency along that way. So the way we all grew up was the stock market goes up, your value goes up, the stock market goes down, your value goes down. With so many different investment theses and styles right now, clients should be leveraging some of the tax loss harvesting that even when the market goes up, how do you create losses or how do you create write-offs against those gains? So it minimizes the tax bite on the back end. So it's both components. It's the transferring of the assets into the right titling. And then it's also how we manage assets currently as well. 

[00:03:36] Chris Davis: Thank you. Thank you. And David, I wondered if you could help us sort of understand and navigate tax planning within divorce, Aaron. 

[00:03:45] David Pickler: You know, Chris, if we think about major life events, when life happens, that outside of death Divorce is really one of the most significant life events that a client can expect. It can happen. And it does create incredibly interesting and very complex tax issues, especially if you're dealing with retirement plans, if you're dealing with employee stock options, if you're dealing with any sort of employee benefit packages, you know, where there may be an equity ownership. Then one of the most important things, as Stan talked about. is the idea of comprehensive financial planning and really understanding on the front end the nature of all of the assets and how we go through that process. Because as you're negotiating and navigating a divorce, and ultimately you're going to end up with some sort of an asset division, typically called a marital dissolution agreement. And you may also have a parenting plan involved where you're dealing with both alimony and child support issues, as well as the asset transfer. Each of these elements has a different tax implication. The world has gotten a little bit simpler in divorce over the past few years because previously, alimony payments were... were actually deductible to the payer, and they were taxable income to the recipient, whereas child support payments were non-deductible to the payer and were non-taxable to the recipient. Now, neither the alimony payments or child support payments are taxable to the recipient, nor are they deductible to the payer. So you've at least simplified that issue. But when you talk about the assets... as assets are transferred through that marital dissolution agreement, careful attention has to play to the nature of the assets. So for example, if you're in a situation with a couple that there are significant assets and their decision is made as to how much are they going to receive in terms of alimony or child support in terms of ongoing income payments versus how much they receive in terms of property settlement and what is the nature of those assets. Because if you are receiving assets through what they call a qualified domestic relations order, the transference of retirement assets from one part to the other, then those assets, as you use them for income, could be taxable. Whereas non-taxable assets, assets that are held outside of a retirement plan, might be more accessible and have less of a tax burden. So you've got to look at that. You also have to look at the nature of highly appreciated assets to make sure that you're addressing the issue. cost basis. So if there's an asset that's officially sold after the divorce, then are you dealing with capital gains issues and having literally, quite frankly, inheriting through the divorce a significant tax burden that you weren't expecting? So it's highly important as you're going through a divorce, not only working with the divorce attorneys, but also to work with someone like a certified divorce financial advisor, someone who actually understands the nature of the assets that are being transferred. so that you understand the complexities of this. So at the end of the day, when you look at this major life event of divorce, the intent is that both parties will end up in a situation that they can move forward effectively, efficiently. And tax-efficient planning is one of the most significant, but quite frankly, forgotten areas of divorce planning. 

[00:07:16] Chris Davis: Thank you. Thank you. And Todd, I'll move over to you. I'm wondering if we can talk about tax-efficient investing and asset allocation, how the strategy should... adapt as client life circumstances change? 

[00:07:31] Todd Bryant: Yeah. Thank you, Chris, for that question. And I'm here down in sunny Florida, and we have people flocking down here every day, retiring and kind of living the dream down here. And in retirement, it's not quite as easy as it seems. Back in decades ago, where people just retire with their pension plan, they worked at the same company for 30 plus years, and then they've got Social Security. count on. These days, most people do not have pension plans, social security, who knows what's in the future for that. So planning for retirement is so important, but also planning for retirement tax efficiently. And like David and Stan already touched on, where the money is held and how that money is held for the protection of the money, just not only for the retirees, but also for the future generations is important for our firm. We do a lot of retirement planning and a lot of retirement plans, and taxes are a huge impact on that. Right now, we're still in pretty historically low tax brackets, but that's not always going to be the case. So we want to make sure that clients are retiring in a way where they're looking at, you know, what are the needs that I have for my retirement? How much of that could be met with Social Security? How much could potentially be met with pensions? But when we look at our investments, how much do we need to start pulling from our investments? And where do we need that to come from? And one thing that we do a ton of within my firm is modeling out Roth conversions and looking at the lifetime of your money. What makes it more efficient? Is it keeping it pre-tax, which is what the majority of 401 s and IRAs are, or is it shifting it to after tax, which could be more beneficial to the client within their lifespan and not be subject to RMDs, but certainly more beneficial. the way that the rules have changed the past few years for when the money's inherited to the next generation. And a lot of times, we see these kids that are in their 30s or 40s making really good money and inheriting these IRA assets. And now it becomes a pretty big tax burden to them where they have to pull that money out over that 10-year plan from the Secure Act 2.0. So looking at taxes and and being proactive alongside the CPA as well. I'm not a CPA myself, so I'm always trying to build that team approach with my clients, with their CPAs. And we're looking at on an annual basis, should we be looking at Roth conversions? Should we be taking advantage of QCDs? How are we managing the RMDs? And I think that that's very important. And I'll also echo what Stan mentioned as well. Kind of pre-retirement or into retirement with direct indexing, it's a very powerful tool for clients to be able to continue to see growth in their portfolio, but for tax purposes, show a loss. And I know for my clients in particular, they love those types of strategies. 

[00:10:27] Chris Davis: Thank you. Thank you. And David, I wonder if we can talk about income needs with tax optimization, including managing required minimum distributions, Roth conversions, or withdrawal sequencing. 

[00:10:43] David Pickler: Certainly. I mean, I appreciate that question because when we think about the whole area of retirement income and we think about the life stages that someone is going through, we really have to have an understanding of not only the nature of the assets, as we've talked about, you know, the asset location. You know, are they in tax qualified investments? Are they in non-retirement assets? You know, but also understanding the nature of the underlying investments within each of these accounts. and making sure that you have both Todd and Stan talked about, making sure that you're placing the right types of assets, the right types of investments in the right types of accounts. You don't want to have accounts that have a significant amount of trading activity in non-retirement accounts because you could find yourself with a lot of hidden tax issues. And quite frankly, an individual client could end up spending thousands upon dollars every year in additional taxes just if they're not paying. adequate attention to the types of assets in the types in what location that they're in. So you have to understand that first. Then you also have to understand the nature of the income that will be coming forth, whether it be from Social Security, whether it be from earned income, whether it be from those required distributions that are coming out. And understand the nature of those assets, that income is going to be flowing, that would be taxable, such as the RMD assets. And then comparing that, you're developing the income strategies. or your non-retirement assets. Also understand the nature of how you build and structure those portfolios, or in some cases, restructure those portfolios to take appropriate advantage of tax loss harvesting. As you're trying to look at building, as Todd indicated, as you look at things like the direct index, as both Todd and Stan discussed, as you're building out that portfolio that currently may not be as efficient as it needs to be. I think that we as advisors, they've got to go in there initially and look at all these elements. The types of assets, the location of the assets, the tax structure, the efficiency of how we're drawing the income, and the income that's going to be coming out, whether it be through RMD, pension benefits, Social Security, and the total need for the client to be as efficient as you possibly can. 

[00:12:55] Chris Davis: And Stan, how do you structure estates to be as tax efficient as possible, including estate taxes and beneficiary designations? 

[00:13:04] Stan Gregor: Yeah, so that goes to my earlier comments about registering. assets correctly early on versus when it's already probably too late to do that. So when sitting with a financial advisor, a key component that the client should be working on with that advisor is looking at their entire picture. So it's not just the investable liquid assets. It's most people think about their net worth tied to the stock market or liquid investments they may have with the financial advisor, but it's a much broader picture. So what is your business worth? what is... What is your inheritance worth coming in from different structures? You're looking at different assets. You have to take a full picture of that. And you have to, right? A good financial planner does a deep dive, does a what-if scenario, right? So great, you're alive and healthy today, but there is going to be that day of what-if. And preparing for that day of what-if is so critical. So the titling of how those assets are structured, how they are invested, it's what Todd mentioned earlier. Right. So while those assets are being managed while you're around, is there a more efficient way to do that as opposed to your traditional set it and forget it approach? And what David said is it's critical around knowing the where those assets are invested. So if you're looking at a taxable account and there's a lot of velocity, there's a lot of trading going on. Those will be short term gains that that will not be a tax efficient approach for a client. And that's where we may go into some more longer term strategies where we're trying to get capital gains out of it, or we may take an approach where we're more ETF or index correlated. So a core position of a client's portfolio is in that long term strategy. And from our standpoint, when it comes to investment management, we try to put a significant core portion in something that's protected from, I would say, ordinary income components. more of a long-term approach. And around the periphery is where we see a lot more clients getting involved with private investments, which are usually long-term in nature. and not your traditional investment strategies that have been out there for so many years. So it's a combination of all those components put together. And that's what I think we're all referring to as a purely comprehensive financial plan for the client. It's not just a 15-question questionnaire that you fill out and you have an answer for. It's complex.  

[00:15:36] Chris Davis: Absolutely. Thank you, Stan. And Todd, how do you structure a state for the next generations? 

[00:15:42] Todd Bryant: Yeah, I think... just like I mentioned before, it's critical to be working with the CPA from a tax standpoint. You want to be working with the estate planning attorneys as well. Just this week, I've had two appointments with clients of mine with an estate planning attorney. We will have attorneys that we can have that can review documents for them. And then I'll recommend local attorneys to help rewrite the documents because a lot of times you'll meet somebody and they'll be like, yeah, I've got a trust and the trust is dated. 2002 and things have changed a lot since then and they need to be updated. So, um, you know, working hand in hand with that estate planning attorney is pretty critical to, to make sure that the wishes then had, that have certainly changed over the years, are going to be continued to be met throughout their lifetime. Um, and that's going to help with, with the assets passing down. Um, I know with, um, with Stan and myself, we like to have different family meetings with clients to you know especially for very wealthy clients that they might be getting older in age. We want to build relationships with the younger generation who are ultimately going to become our clients at some point down the road and make sure that they have a good understanding of how the asset transfer works and where the money's held and what to expect. And I think that all three of us, I'm sure, have seen plenty of times where the younger generation now gets this money. And either it wasn't set up properly or it has to go through probate or the person gets it and they just blow the money. I think there's story after story of those types of scenarios. And the clients that we have have worked really, really hard to accumulate what they have and being able to make sure that it uses the wishes for their lifetime, but also for their children and maybe grandchildren and charitable organizations. Whatever it is, we want to make sure that that's seen through. as as their financial advisor to the next generation. 

[00:17:38] Chris Davis: Thank you. Gentlemen, thank you for speaking with me about such an important subject. And thank you for watching Investment News TV.