What is the most challenging planning issue one of your clients has faced over the past year and how did you help them? Did they realize they had a problem or did you flag it for them?
Rethinking65 recently posed these questions to financial advisors and received a variety of responses on topics ranging from tricky tax and estate planning dilemmas to medical problems that blindside families and can unravel retirement nest eggs in a New York minute.
“As financial planners we don’t need to watch TV — we have our client’s issues,” says David Demming, CFP, of Demming Financial in Aurora, Ohio.
Unexpected Early Retirement
Less than a year ago, one of Demming’s clients went from sitting at a red traffic light to lying in a hospital bed after another driver ploughed into her car and totaled it. Demming helped his client and her husband figure out how to pay for a replacement car, a financial hardship for them. Fortunately, the client recovered nicely from the accident, says Demming, “but I’m sure it was a catalyst in the sense that she is now going to be retiring this coming year, and it’s going to put a tremendous burden on them as a couple.”
The couple had purchased a home “beyond their affordable means,” says Demming. To boost their cash after the husband retired several years ago, they refinanced then; they gave up a 15-year mortgage in the low 2s for a 30-year loan of around 3%. Losing the wife’s good income will make it harder for them meet financial obligations, says Demming. He is encouraging them to exercise more financial prudence and has suggested the wife consider part-time work after she retires.
Another one of Demming’s clients traded in her role as a higher-level executive for less lucrative part-time employment when rheumatoid arthritis and other disabling conditions made it impossible for her to maintain the more demanding pace. He almost always suggests clients wait until 70 to collect Social Security benefits. But in late December, this week he and this client, 68, concluded that waiting until 70 no longer makes sense for her. “She’s burning so much of her [retirement] money and Social Security should abate a lot of that burn,” he says.
Sometimes he advises clients to start drawing down retirement-plan assets at 4% to 5% with the stipulation they cut back on these annual distributions once they start collecting Social Security.
Dementia, Divorce and More
For Demming, client crises are all part of a day’s work. “This morning’s call was about a daughter’s pending divorce,” he says, noting that parents often put their own financial health at significant risk when helping their children. A few days ago, a longtime client died of dementia.
After the wife began her long descent into dementia, making nursing care likely, Demming helped the couple draw down her assets while leaving the husband’s assets intact. Years earlier, Demming helped them acquire a long-term-care policy to minimize their risk since the husband has serious heart issues. The $5,000-a-month policy helped defray the wife’s nursing home fees. And when the husband told Demming the facility was pressuring him to pay before he received the insurance check one month, Demming called the insurer and learned it had missed the payment.
Demming will also help the client roll his wife’s assets into his IRA and make sure the couple’s joint assets are properly retitled. But providing emotional support to clients is as important to Demming as helping them get their finances in order.
Especially with longtime clients, “there’s an emotional commitment there. We care about these people,” he says, and they know it. That’s why when this client’s wife began her final decline “he called me to say she was no longer eating, she’s in hospice,” says Demming. “He didn’t have to say it loud and clear; we knew that her death was imminent.”
Unloading the Family Home?
Rob Schultz, CFP, a senior partner and wealth manager with NWF Advisory in Encino, Calif., also mentions the emotional aspect of financial planning. “The most difficult challenges for planners are those where you can’t calculate an answer and emotions are involved,” he says.
He recently spoke with a client couple whose parents relocated to an assisted-living facility. They’re in a quandary about what to do with the family home, a several-hour drive from the facility.
“The easy answer is to sell the house and take the cash although it isn’t necessarily needed since they have long-term care,” says Schultz. However, “the catch is there would be several hundred thousand dollars in capital gains tax so my client and her sibling would receive less inheritance.”
The house is in California, a community property state, So when the first parent passes, the surviving spouse gets a full step-up in basis and the capital gains tax goes away, says Schultz, “but you don’t wish for a parent to pass just to save tax.”
“They could rent the house for a little income but that is also a hassle,” says Schultz. Or, “they could leave it vacant — but with squatters occupying houses, it would be a constant stressor.” Instead, he recommended the family finds an “ideal renter” and give them a good deal to maintain the property. He connected his clients with a local realtor to help them source a renter.
Rental Policies and Insurance Concerns
The tenant should be “highly creditworthy and understand that instead of calling the landlord for basic maintenance, they would be responsible for it,” says Schultz. The rental agreement should include a clause outlining the maintenance agreement, he says, adding, “it’s always better when expectations are set out at the beginning.”
What kind of property/casualty insurance is needed with a maintenance agreement and a tenant who might, say, fall off the roof when cleaning out the gutters? “I would recommend switching over from a personal residence policy to one for an investment property, as well as adding on an umbrella insurance policy,” Schultz says.
Further Considerations
There would be a second step-up in basis when the second spouse dies and the property passes to the children, Schultz says. “But since the only reason for holding onto the house is to avoid the capital gains tax, there would be no reason to continue to hold after the first spouse dies.”
The family hasn’t decided whether to rent or sell the home. “Times like these are difficult because you weigh the ease of selling versus a financial reward,” he says. “Also, you want to maintain harmony in the family because strife that results in breaking up a family isn’t worth any capital gains tax.”
Sometimes the most frustrating planning issues are the ones where clients make costly mistakes because they forget your advice — and you realize you need to remind them more often.
Peter Palion, CFP, founder and head of Master Plan Advisory in East Norwich, N.Y., discovered that a longtime client made a bunch of charitable contributions – $7,000 or $8,000 worth – from her regular checkbook, “for which she’d get no tax benefit,” he says.
Palion had already told her she should use her IRA checkbook to make qualified charitable distributions (QCDs) because that’s the only way she’d get a tax benefit; she takes the standard deduction. QCDs are also an above-the-line deduction, meaning that “if you give $10,000 away as a QCD, it never shows up on your tax return,” he says. This could save money for taxpayers close to hitting IRMAA surcharges for Medicare, he adds.
A QCD also satisfies a required minimum distribution, Palion says, “so to me, this is the no-brainer of all no-brainers.”
Although his client forgot to use her IRA checkbook, “I don’t blame her because you have so many other things to keep in mind, even if you’re retired,” he says. He’s making a bigger effort to remind her to use QCDs going forward.
No ‘Tricks’ nor ‘Fiery Hoops’
Like many donors, the client doesn’t itemize her deductions because they don’t exceed the standard deduction. To hit that figure, “you would have to rack up a lot of expenses,” says Palion. For tax year 2024, the standard deduction is $14,600 for a single taxpayer, $29,200 for a married couple filing jointly. A taxpayer who is 65 or older, or blind get an extra deduction of $1,950 (single) or $1,550 (married).
The $10,000 cap on state and local tax (SALT) deductions makes it difficult for taxpayers in high-tax states to meet the threshold for itemizing deductions, even if they’re paying a combined $30,000 on real estate and income taxes, says Palion.
“Sometimes it’s possible to cram [deductions] into one tax year to go beyond that limit, but a QCD is very simple and straightforward,” says Palion. “There are no tricks. You don’t have to jump through any fiery hoops like you would if you wanted to get a deduction through itemizing.”
For example, he points to medical expenses. The IRS lets taxpayers deduct unreimbursed medical care expenses that exceed 7.5% of their adjusted gross income. Someone earning $80,000 a year can deduct medical expenses over $6,000 ($80,000 x 7.5%), he says, “but in order to have that $5,000 to write off, you really need $11,000 of medical expenses.”
Important Reminders
While regular IRAs are great for charitable distributions, using a Roth IRA for this purpose “would be actually counterproductive, as in shooting yourself in the foot,” says Palion. “You would be taking money out of a tax-advantaged account to gain absolutely nothing out of it.”
He also reminds clients that QCDs may only be used to contribute to qualified 501(c)(3) charities and that checks must be paid by Dec. 31.
Job Classification Conundrum
Michelle Rand, CFA, founder and president of Cascade Investment Advisors in Oregon City, Ore., is helping a client begin to explore a work-related issue that recently cropped up. The client does freelance public relations and marketing.
“One of her best sources of work, and a long-time friend, asked that she become an employee,” says Rand. Her client is now wondering whether or not to do this. Rand is encouraging her client to find the answers to important questions regarding her friend’s request before making a decision.
“First of all, why did they ask this? We don’t really know at this point. Second, would this enable her to receive benefits from that company? We don’t know that yet either. Third, would her formal employment knock out her ability to work for others? Likely!” says Rand.
The client also runs another business that decorates venues for events — from weddings to company parties. “Will employment affect that?” says Rand.
Another big unknown: What will the tax impact be? “And then, personally, does she want to do this? It could be less schedule flexibility, more travel, taking assignments she doesn’t like, etc.,” says Rand
She has encouraged her client to ask the friend why she made this request. In addition, she has suggested that the client may want to touch base with a lawyer.
“This client always brings me interesting issues,” says Rand. “I am grateful she views me as a valid consultant!”
Jerilyn Klein is editorial director of Rethinking65. What challenging issues are you helping your clients with? We’d love to hear from you! Email us.
