Ask follow-up questions to better serve client needs

When a client asks for something specific, it’s tempting just to say “Sure, I can do that,” and move on to the next to-do item. But sometimes a better way to serve the needs of the client might be by deeper digging and asking follow-up questions.

“Can you put $100,000 of my fixed-income money into municipal bonds?”

“Of course,” you say. But before you take action, ask the follow-up question: “Why you want to do that?”

“Because I’ve read the income will be tax-free, and I don’t like paying taxes.”

“Well, that’s true, at least for federal income taxes and maybe for state taxes, too. But the income will be lower than you could get from non-exempt bonds of comparable risk because the issuers know they don’t have to pay as much to attract buyers who will benefit from the tax exemption. Overall, it can be a good deal for very high-income high-tax-bracket clients. You’ve got plenty of money but you’re actually in a middle bracket. We can do some comparing, but you’re going to do better in taxable bonds, where you are now.”

Another client asks, “Can you transfer $50,000 to my bank?”

“Certainly.” Again, dig a little deeper: “But may I ask … what’s up?”

“It’s my 50th college reunion year and I want to make a substantial contribution,” the client says.

“Ah, that’s great! But instead of having to sell investments in your taxable account and incurring capital gains taxes, why don’t we make a qualified charitable distribution from your IRA? The money will go directly to your school and — the key point — it won’t count as taxable income to you,” you explain. 

“Also, since you haven’t taken your required minimum distribution yet this year, the QCD will count as part of the RMD, meaning you won’t have to take as much out of your IRA this year, so you’ll have less taxable income. You didn’t spend all your RMD last year, but you had to pay income taxes on the whole amount. 

“Finally, if you were to take the full RMD and then made the gift yourself, you wouldn’t get a full offset on your federal taxes because you’d lose the value of the standard deduction. And Massachusetts doesn’t have an income tax charitable deduction, so a direct gift won’t save any money on your state return — Massachusetts will tax you 5% on the RMD income and with no offsetting deduction.” 

“Can you transfer $25,000 to my bank?” another client requests.

“Of course. What’s going on?”

“My church is having a big capital campaign and I want to contribute $25,000 this year and the same next year,” the client explains.

“Terrific. $25,000 plus your allowable $10,000 deduction for state and local income taxes will put you over the standard deduction by about $10,000, so you’ll get some extra tax savings by itemizing this year — worth roughly $3,000 to you. But would you like to know how to save even more money?”

“Well — certainly!”

“Three things, then. Instead of giving cash, donate appreciated securities. You’ve got some assets that are up five to 10 times what you paid for them, so they’re perfect for this. If you were to sell them, you’d be stuck with capital gains tax on the appreciation. By giving them to a charity, you avoid the gain, and the charity is tax-exempt, so it won’t pay a tax on the gain either.” 

“I like that! What’s the second thing?”

“Instead of giving $25,000 for two years, combine it into a single gift. One year you’ll get a big tax deduction by itemizing, and the other year you’ll get the standard deduction.

“But I don’t know if my church can handle gifts of securities — especially twice.”

“That’s my third point. Open a donor-advised fund. We can do that online with the charitable arm of your current brokerage firm in about five minutes. Then we’ll transfer $50,000 of your most highly appreciated securities to your new DAF, earning you a $50,000 federal charitable deduction this year. You’ll ask that the DAF send $25,000 to your church this year and the same next year. This way you’ll maximize your charitable deduction and can also stick to the giving schedule you wanted for your church.”

“Terrific. This is exactly the kind of advice I pay you for,” the client says.

(OK, that last sentence didn’t really happen, but I’d like to believe it’s what the client was thinking!)

[MORE: The diverse parade of advisory clients]

Michael Broad is a financial planner and investment advisor in Newton, Massachusetts. Got a good client story or problem you’d like to see in a future column? Email Michael Broad.