Tax Planning Trade-Offs
Prudent planning often involves conflicting tax and non-tax consequences. As CPA’s, our professional advisors are uniquely qualified to evaluate the tax consequences of planning strategies. As experienced investment professionals, the advisors of Kyle Financial Services, Inc. are cognizant of the practical effects of tax planning strategies on investors and their heirs. Examples include the following:
RETIREMENT ASSET ALLOCATION
Retirees face challenges in choosing asset allocations for their retirement years. Absence of a paycheck leads many to prefer bonds, hoping to replace lost income. Investing too conservatively reduces returns and makes retirees vulnerable to inflation. Striking a balance between the desire for stable cash flow and the need for growth in the face of inflation requires thoughtful planning. Popular advice suggests that IRAs are the place to hold bonds due to historically higher income. The tax deferral afforded by IRA’s implies longer time horizon that might be better suited for holding stocks. As CPAs, we fully grasp the unique tax aspects of various investment vehicles. As investment advisors we avoid “tunnel vision” with respect to taxes and give consideration to the practical effects of taxes on investment policy.
ESTATE PLANNING TRADE-OFFS AND PRACTICAL CONSIDERATIONS
Wealthy investors are confronted by challenging estate planning trade-offs. Estate reduction strategies (e.g. gifting) can be effective, but maintaining adequate assets to meet cash flow needs is paramount. Kyle Financial Services, Inc. has developed a proprietary tool to assist clients in evaluating the adequacy of assets to meet lifetime cash flow needs. Gifts and inheritances often cause unintended consequences and can destroy incentive to be productive. Assets left in trust require important decisions regarding appointment of Trustees to carry out decedents’ wishes. Our professional advisors have extensive experience in administering trusts and working closely with Trustees and beneficiaries. We are uniquely qualified to assist clients in evaluating the tax effects of various estate reduction strategies as well as the practical effects of such strategies on clients and their heirs.
BYPASS TRUSTS – MIGHT WANT TO RECONSIDER
Bypass trusts were commonly used as a means of ensuring use of estate tax exemptions. However, with portable estate exemptions of approximately $5.5 million (adjusted annually for inflation), such trusts might constitute “overkill” and result in costly loss of basis step-up on the second death. In many cases, a disclaimer approach might be a worthwhile alternative. Estate documents that were drafted years ago employing a bypass trust approach should likely be reviewed in light of the new estate tax laws. Our professional advisors regularly review Clients’ estate documents and work with Clients and their attorneys to update documents in light of changing circumstances.
COLLEGE SAVINGS OPTIONS
College savings options include Coverdell accounts, §529 plans, custodial accounts and direct payments to education institutions. Coverdell accounts afford tax-free growth but income limitations apply and contributions are limited. §529 plans are popular but, for wealthy investors with taxable estates, contributions to §529 plans absorb valuable gift-tax annual exclusions, whereas payments made directly to educational institutions for tuition do not. While custodial accounts are administratively simple, once children reach the age of majority, the assets are available to be spent however they choose and there is risk the assets may not be used for education. As CPA’s, sensitivity to income and estate taxes as well as the practical effects of various strategies distinguishes the advisors of Kyle Financial Services. Further, given the rate of inflation of college costs, especially that of private colleges, the costs of education can have a significant impact on the adequacy of capital to meet long-term cash flow objectives. Our proprietary Monte Carlo modeling tool is extremely helpful in analyzing the adequacy of assets to meet education and other long-term spending objectives.