In Focus

(Highlights from particularly compelling content.)

First, ICYMI, Jeffrey Levine and Ben Henry-Moreland break down:

• The IRS's New Final Regulations on RMDs
• New rules for Trusts & Annuity treatment
• New Proposed Regulations

Key point:

"The IRS's Final Regulations effectively mirror the Proposed Regulations, subjecting different requirements for 2 groups of Non-Eligible Designated Beneficiaries based on when the original account owner died. Thus, when planning for Non-Eligible Designated Beneficiaries, advisors must ascertain whether the owner died before or on/after their Required Beginning Date.

Non-Eligible Designated Beneficiaries who inherit(ed) a retirement account from someone who died before their Required Beginning Date only have to empty the inherited retirement account by the end of the 10th year after the owner's death.

By contrast, Non-Eligible Designated Beneficiaries who inherit(ed) a retirement account from someone who died on or after their Required Beginning Date are subject to both the 10-Year Rule and to the 'old' (but still applicable) Stretch rules. In other words, at a minimum, Stretch-style RMDs must be taken in years 1–9 after the year of death, with any and all remaining amounts in the account distributed by the end of the 10th year after death."


Next, Stephanie Bogan on:

• The challenges of stalled organic growth
• 2 ways to stand out in today's digital marketing landscape
• How to effectively & sustainably implement growth tactics

Key tip:

"We all know it from experience—consumers have a magnetic relationship with ease and convenience. It’s not a mystery why Apple remains the most popular smartphone brand in the U.S. From watches and phones to laptops and headphones, everything is seamless. Why not apply that model to your client experience? Are you leveraging technology to provide smooth interactions? Are your touchpoints with clients personalized and impactful? The average client experience is so unremarkable that it can be a genuine game-changer to focus on client experience that truly differentiates."


Finally, Brad Johnson opens up about:

• Why he believes all entrepreneurs need therapy
• His experience with couples therapy & the benefits
• Why therapy needs a re-brand

Key takeaway:

"Fast forward, the gift that Michael gave me that day was he made therapy okay. He said the therapist told him it’s the healthy people that come see me, that don’t bottle things up, that don’t have toxic relationships, that actually work through their stuff."

…

"The truth was the stress of being an entrepreneur and the strain and the weight of that when you have a team of five trying to compete with teams of hundreds in our space that’s very competitive can be often very cutthroat. The stress and the strain I was putting in at the office, I would come home and I wasn’t showing up as the husband that I needed to be. I wasn’t showing up as the dad I needed to be."
​

Grab Bag

(An assortment of content from around the industry.)

Ed Slott: Why A Lump Sum Beats An IRA Rollover For Some Clients [Melanie Waddell, ThinkAdvisor]

"'So, the plan has to happen in one calendar year after what we call a triggering or qualifying event, that’s age 59.5 or separation from service.'

The other qualifiers are death and disability.

'If you take the stock down, that would empty the account because the other funds from the 401(k) were rolled over,' Slott continued.

'You take it. You don’t sell the stock. That’s one of the mistakes — people blow it. You take the stock out in-kind as stock and transfer it to a taxable account, that million dollars, you only pay tax on the cost, $100,000, that original cost. That other $900,000 comes over to your taxable account absolutely tax-free. And whenever you do take that money out, you sell the stock, you automatically get long-term capital gain rates.'

Added Slott: 'So, this applies to a lot more people because more people have company stock, longevity at the job, and the market['s] runup.'”

Optimal Withdrawal Frequency For Sustainable Retirement Withdrawals ($) [Stephen Horan, Financial Planning Review]

"Retirement portfolio success rates are invariant to the pattern with which withdrawals are made from the account provided the withdrawal patterns allow money to be invested for roughly equivalent periods of time. We find that although withdrawal sustainability is negatively related to volatility and positively related to return autocorrelation, the frequency of withdrawals is irrelevant. This result is robust to using simulated as well as historical returns. It is also consistent with a continuous time approximation to withdrawal sustainability.

This seemingly inconsequential negative result has surprisingly important implications. First, financial planners may mistakenly believe that increasing or decreasing the frequency of withdrawal may improve a retirement portfolio's probability of success. This is false. They should instead focus their attention on withdrawal rates, volatility, and taxes.
Second, financial planners and retirees should focus on matching retirement withdrawal frequency to cash flow patterns to increase retiree utility and decrease transaction or financing costs."

Using IRC Section 1042 for Retirement and Exit Planning for Business Owners: A Guide for Financial Planners ($) [Alberto Toribio del Pilar, Journal Of Financial Planning]

"As an incentive to promote employee ownership and enhance employee retirement investment security, Section 1042 of the U.S. tax code provides the seller of a business, under specific circumstances, the ability to defer the recognition of long-term capital gains resulting from the sale of their business to an employee stock ownership plan (ESOP). 

For instance, if eligible under Section 1042, a seller of a business with a taxable long-term capital gain of $30 million can defer recognizing that gain and, as such, defer taxes of approximately $7 million based on current applicable federal taxes. In other words, selling to an ESOP could allow a seller to retain about 23.8 percent more of their sale proceeds compared to selling to a traditional third party. This means the seller can invest a significantly larger amount of capital after the transaction. Moreover, an ESOP transaction can generate significant retirement investment value over time for employees participating in the plan and preserve a business owner’s legacy within their community." 

In Focus

(Highlights from particularly compelling content.)

First, Preston Cherry covers ($):

• Common misconceptions about the advisor's role in addressing financial psychology
• Behavioral finance's impact on firm growth rates
• The advice clients want from advisors

Key stat:

"Schwab suggests that over half of the firms in their study use behavioral finance aspects in their client interactions, and those firms that use BeFi earned 3.3 times more assets from existing clients. Sanduski mentions that delivering a superb client experience helps the 'feel factor' of the client–adviser relationship. For firms that say growth is not their concern, firm shrinkage by client attrition is. Building a connection with your client that bridges unique human elements with quantitative financial strategies produces outcomes that clients can feel most."


​Next, Jen Goldman on:

• How the "I.D.E.O.S." framework can streamline your operations
• The underlying principles behind the framework
• How to implement I.D.E.O.S. with your team

Key idea:

"IDEOS™ is about working smarter, deliberately, and following a plan of continuous improvement. This simple mantra increases capacity to serve more clients and staff, keep operational costs from climbing, improve the client experience, flexibly scale your business without sacrificing profit margins, and create a sustainable integration of work and life.

… 

This mantra helps everyone devise solutions to streamline business, staff, and client experience. When you think or document a repeatable process, ask yourself the following for each task in the process….. How Can I Integrate, Delegate, Eliminate, Outsource or Staff this task to improve it?"


​Finally, ICYMI, Jaqueline Hummel shares:

• Tradeoffs between hiring an Employee vs. an Independent Contractor
• How to make your first hire and meet your compliance obligations
• Registering requirements for Investment Adviser Representatives

Key takeaway:

"According to the IRS website and the Fair Labor Standards Act, the difference between an employee and an independent contractor boils down to the following factors:

1. Behavioral control. Employees work specific hours and use the company's tools and resources (e.g., laptops and software) to perform their duties.

2. Financial control. Employees are paid an hourly wage or salary. The employer withholds tax contributions and determines the frequency of payment.

3. Relationship. Employees are likely to dedicate their working hours to the company and receive certain benefits (e.g., pension plan, insurance, vacation pay, etc.). Contractors may work for other clients and perform specific tasks as agreed to by contract."


Grab Bag

(An assortment of content from around the industry.)

Michael Kitces On Time Management & Building Your Model Week [Libby Greiwe, The Efficient Advisor]

"I will track the amount of what I essentially call 'Flex Time,' which is unscheduled time on my calendar. That might be to catch up on miscellaneous task work, maybe that's grabbing a meeting with someone, [or] maybe that's just because I need to decompress a little bit. And I'm pretty rigorous about scheduling everything, in part because there are a lot of competing demands on my calendar. I just have to schedule things or things start clashing.

I have found that I need a certain amount of scheduled flex time, scheduled white space on my calendar every week or it just starts feeling a little too overwhelming, a little too 'drown-ey.' I just literally can't find the mental breathing space I need for my brain to do the 'creative-y' things that it's going to do."

Should I Act Now Before TCJA Sunsets? [Jeffrey Levine & Ed Slott, The Great Retirement Debate]

"The slam dunk of situations today would be for a married couple with significant wealth using something called a Spousal Lifetime Access Trust. A SLAT. The big problem with gifting assets during life is you really have to gift them. You have to give them away. But people want to use their assets. They don't necessarily want to give them away. The Spousal Lifetime Access Trust, or SLAT as it's known, is sort of the best example we have in the estate and gift tax planning world of having your cake and eating it, too: you're giving money away, but still able to use it yourself. Now, you have to have a spouse. And you have to trust your spouse. But that's a potential option here. One that people can think of today ahead of the 2026 scheduled changes."

Outsourcing: A Competitive Edge For Financial Advisors? [Danny Noonan, Morningstar]

"Outsourcing = Time Freedom

Outsourcing can be great for unlocking financial advisors’ time. Fidelity’s study shows that advisors who outsource investments create about nine hours per week of extra time.

Effectively, outsourcing the investment function to a third party has the potential to free up about an entire workweek every month.

And it seems to be delivering results.
​
​Fidelity’s study shows that freeing up time to focus on your highest priorities creates strong business outcomes. Advisors who are outsourcing are seeing more asset growth, higher revenue, and signing up more new clients.​"

​"Financial Planner's Corner" is a periodic series sharing advanced financial planning techniques, foundational planning principles, practice management tips, and more.

What About 60/30/10 Instead of 60/40? [Ben Carlson, A Wealth Of Common Sense]

"There’s a difference between going all in or all out and carving out a small allocation in your portfolio for behavioral purposes. If having that 10% piece of your portfolio allows you to stay invested in the other 90%, that’s a win.

Many investors have a hard time ever getting to a place where they can admit they need a behavioral release valve. Knowing thyself is a huge part of the investing process.

There is no such thing as the perfect portfolio but if one did exist most people probably wouldn’t be able to stay invested in it anyway.

The suboptimal strategy you can stick with is far superior to the optimized strategy you can’t stick with. The right allocation is the one that matches your risk profile, time horizon, and temperament."


The Best Way To Get Things Done [Nick Maggiulli, Of Dollars And Data]

"​My solution to this problem takes it a bit further than Burkeman. Not only should you prioritize the right things, but you should also ensure that there’s always some slack in the system. In other words, make sure you’re almost never fully utilized. Why?

Because when you’re already at 100% of your operating capacity and an unexpected emergency hits, the whole system fails. You’ve probably felt this feeling before. It’s overwhelming and you can’t figure out what to do next. It’s the same thing that happens to your computer when you have too many programs open. It doesn’t know which program to prioritize, so it freezes, and then crashes.

The same thing happens with people when we get too busy. We don’t know what to do and we can crash. Unfortunately, that single crash can decrease productivity more than a slow day once in a while. That’s why your goal should be to be about 80%-85% utilized. You may have a less productive day here or there, but this slight inefficiency will prevent larger failures when fires inevitably pop up from time to time. I firmly believe this is one of the reasons why I haven’t burned out despite working full-time and blogging every single week for over 7 years now.

My secret to getting so much done is rarely operating at full capacity."
​

Why Minimizing The Costs Of Investment Products Must Be A Priority [Stefan Sharkansky, ThinkAdvisor]

"As many researchers in academia and industry have found over the years, cost is the single most reliable predictor of future performance. Morningstar reported that expense ratio is a better performance predictor than its own star ratings.

But few investors have a full command of all the costs of owning funds and the downsides of higher costs. In addition to loads and other explicit transaction costs of buying and selling funds, there are three ongoing costs that fund investors and their advisors need to consider: explicit management fees, disclosed in the expense ratio; portfolio trading costs, which are largely opaque but can be estimated from the reported turnover ratio; and taxes on distributions in taxable accounts.

None of these costs are entirely avoidable, but all have deleterious effects on the investor’s wealth and can be controlled to some degree. All can be estimated from widely available data and should be assessed by an advisor when deciding which funds to add, retain, or sell in a client’s portfolio."


Everything To Know About RMD Planning For 2024 [Roger Wohlner, ThinkAdvisor]

"For clients who are still working once they reach the age when RMDs must commence, there is an exemption from RMDs on their employer’s 401(k) as long as they are not a 5% or greater owner of the company. This is not automatic: The employer must have made this election for their plan. Note that RMDs must still be taken from other accounts such as traditional IRAs, old 401(k)s and others as required.

In some cases, it might pay to transfer retirement assets from other accounts to the employer’s 401(k). Employers again determine whether this is allowed. Generally, only retirement assets that were contributed on a pretax basis and the earnings on those assets are eligible. A key issue with this strategy is to determine if the investments available in the employer’s plan are worth investing additional retirement assets into."


What Makes Advisors Happy With Michael Kitces [Diana Britton, The Healthy Advisor]

"We measured, ultimately, it was 100+ different variables that we were testing through this process, but we found it kind of grouped into four main domains.

The first was autonomy. ... Autonomy in the context of advisors seems to show up in two particular ways: do you have autonomy in how your clients are served? 'If I can't serve my clients the way that I believe they should be served, I get really frustrated as an advisor.' It sort of makes intuitive sense, but we live in a highly regulated compliance-driven industry. So, when those lines start to clash between 'I can't serve clients the way I want to serve them and believe they should be served because I'm having limitations to my firm,' the unhappiness starts to rise.

The second domain we found around autonomy is autonomy of time. So, do I have control over my time and where and how I'm spending my time. If I'm not in control of my own schedule, if I'm kind of a slave to the business, or the boss, or the clock, or their agenda, or anything to that effect, advisor wellbeing starts to go down when those various autonomy factors start to go down."​


Benefits Of Gifting Privately Held Business Interests [Anthony Venette, WealthManagement.com]

"When gifting shares of a business, your client may take advantage of minority discounts. These discounts reflect the fact that a minority interest in a business is typically less valuable than a controlling interest in a business, due to the lack of control and marketability. By applying a minority discount to the value of the gifted shares, a client can effectively transfer more wealth to their heirs without using as much of their lifetime estate tax exemption."


Why Do Investors Keep Their Advisors? [Morningstar Team, Morningstar.com]

"When investors are given advice, they want to know why that recommendation is good for them. In other words, advisors need to communicate their value, not just in generic terms but as they apply to the goals of each client.

However, advisors must not only take the time to help clients articulate meaningful goals but also ensure that communication regarding their portfolio (such as its construction and progress) highlights how the given advice is valuable to those goals. In many ways, it’s less about what the market did and more about how much progress the investor has made toward their priorities."

What To Have On Your Tax Radar For 2024 [Christine Benz, Morningstar.com]

"[Ed Slott]: Even the IRS said a few years ago, let’s say, [the federal estate tax exemption] is $13 million; I’m just rounding it off. Let’s say you use the whole $13 million now. So, the question [that] came up is, 'Well, what if it goes back to $7 million or so? Will you have to claw back what you took out?' Because the exemption—we call it an estate exemption, but it’s also a gift exemption. You can use it during life. If you already used it, IRS has already said, 'We’re not going to claw back. You can use it now.'

In essence, what IRS is saying is use it or lose it. So, you may want to look at ways to start gifting funds out to lower your estate. A sneaky way to lower your estate is to do a Roth conversion, especially a large Roth conversion, because the tax you’ll pay will come out. Obviously, you’ll have less money. Your estate could be lower, and the beneficiaries get the benefit of inheriting a Roth, plus you have no RMDs for the rest of your life. But you should look at reducing your estate if you feel that when it goes back to half—and I don’t know if it will, but it’s supposed to in 2026—think about ways, you have two years now, to reduce your estate. And there’s so many easy ways to do it. Without fancy estate planning or trusts or anything, you can just give money away each year, annual exclusions, you can give money away, make direct unlimited gifts for medical or tuition, and you can use the exemption itself during life. So, you don’t have to do anything fancy."


The Real Reason Your Midsize Firm Isn't Growing [Angie Herbers, ThinkAdvisor]

"All these challenges lead us back to intellectual capital. Who on your team can make sure the right implementation happens? We have to keep in mind that the firm owner or owners already have plenty on their plate handling day-to-day operations.

Carpenters like to say that they measure twice and cut once, to avoid wasting wood as well as time. The same principle applies to advisory firms. Unless owners have the capital to invest in extra talent, they must prepare well and then handle the heavy lifting of implementation. There’s no doubt that it’s the hardest stage of the process.

Firm owners often hope that the playbook that got them to the middle tier of the industry takes them to the next level. But what they really need is to ask for more help and to embrace a data-driven, more tightly focused leadership style. In other words, substantially expanding their leadership abilities is often the answer."


​ICYMI: Avoiding Client Power Of Attorney (POA) Rejection By Taking A Comprehensive ‘Kitchen Sink’ Approach [David Haughton, Nerd's Eye View]

"An increasingly important aspect of estate planning involves 'digital assets'. In many instances, clients may have created their POAs before the concept of digital assets was fully appreciated. Therefore, the document may not even contemplate that a fiduciary may need to access online accounts or other electronically stored content as part of managing the incapacitated person's affairs.

An increasing number of states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which lays out the statutory framework for dealing with digital assets. The RUFADAA requires explicit authorization in the applicable legal document for a fiduciary to access a person's electronic communications. Therefore, a generic POA (or an old one) may be missing specific language empowering the agent to access certain digital assets, making such access legally prohibited by this statute.

Which is why it is increasingly critical in today's information age, where digital assets and electronic communications are increasingly integral to personal and financial affairs, to explicitly provide an agent with the specific power to access these electronic communications. This inclusion ensures that the agent's authority is comprehensive and adapts to the evolving digital landscape, covering all critical aspects of asset management and decision-making on behalf of the principal."


​Employee Or Independent Contractor? DOL Issues New Guidance [Bryan Strickland, Journal Of Accountancy]

"The new economic reality test calls for employers to consider six factors when determining whether a worker should be treated as an employee or independent contractor, without any 'predetermined weight' given to any one factor:

• Any opportunity for profit or loss a worker might have;
• The financial stake and nature of any resources a worker has invested in the work;
• The degree of permanence of the work relationship;
• The degree of control an employer has over the person's work;
• Whether the work the person does is essential to the employer's business; and
• A factor regarding the worker's skill and initiative."

New Law Could Reduce RMD Rules For Annuitized Annuities - But Proper Valuation Is Needed [Ian Berger, IRAHelp.com]

"However, there’s a big problem: To use the new rule, the RMD for the annuitized part must be calculated using the usual rule (prior-year 12/31 account balance divided by the owner’s life expectancy factor). But that requires a valuation of the annuity as of the prior 12/31. The annuity provider is supposed to report the fair market value of annuities annually on Form 5498. However, once an annuity is annuitized, that doesn’t always happen. It’s possible the IRS will allow valuations to be obtained in other ways, but there hasn’t been any guidance on that yet. So, unless the insurance company can provide a proper valuation, it would be risky to use the new RMD rule."


Here’s A Way To Delay Some RMDs—And Put Off Your Tax Bill ($) [Joanne Cleaver, WSJ.com]

"The 500-hours rule means that an older worker could continue formally as an employee, working independently on projects or seasonally, and postpone the RMD from that employer’s 401(k) plan. 

Doing this would allow more money to accrue in your 401(k), likely boosting your monthly income when you do take RMDs. It could also buy a saver time to convert some other savings to Roth IRAs or otherwise plan distributions to minimize the overall tax impact. 

Strings are attached to this potential latitude, says Margaret Berger, a partner in the law and policy group at Mercer, a financial-services firm that specializes in work and retirement matters. 

An older worker can delay taking the RMD only on the assets contained in the 401(k) offered through their current employer, Berger says. While that could include money from prior employers’ 401(k) plans that is rolled into the plan of your current employer, it wouldn’t apply to plans still administered by former employers. And the delay in RMDs wouldn’t apply to other types of tax-deferred accounts, such as traditional IRAs."


Tim Steffen: Smart Tax Moves For 2024 And Beyond [Christine Benz & Jeffrey Ptak, The Long View]

"In terms of the timing on that [potential TCJA sunset legislation], presumably that happens sometime toward the latter half of 2025, December seems to be a popular time for Congress to finally pass things that will apply for the next calendar year. It’s possible it could even drag into 2026 and then be made retroactive to the beginning of the year.

What we’re all fairly confident on is that nothing is going to happen in 2024, with it being an election year, I think everybody just wants to ride out the election, see who is in charge in Washington come January of 2025. And from there, we’ll have a better sense of exactly what might happen with this. The one thing we can all agree on is that no one wants to be the party in charge when a large tax increase happens. So, presumably, regardless of how the election works out, there will be some sort of compromise on these sunsetting provisions and not everything will happen exactly as it’s planned."