For High-Net-Worth Retirees, Tax Planning and Estate Planning Are the Main Events

I spend more time within our tax planning software and on the tax tab of our financial planning software than anywhere else in our tech stack — significantly more than I spend in our investment analytics tool.

Probably the only thing I spend more client time on is asking questions about their values and goals so that I know we are walking together down the path that leads to their destination.

For retirees with $2 million to $10 million invested, tax planning is often among the most impactful technical work we can do. For clients with more than $10 million invested, we tend to shift to estate planning, as they flirt with federal estate exemptions.

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This is not to downplay investment management. We manage investments for all our clients and have a large, well-credentialed team that focuses only on investments. Even with that, the outcomes are much less definitive than the tax and estate planning work that we do. Let me give you some examples.

Dramatic tax changes surrounding retirement

Bill is retiring at the end of the year. Because he has so much of his savings in pre-tax accounts (IRAs and 401(k)s), he has redirected his savings into the Roth 401(k). It seems like a good deal to be able to save more than $30,000 a year by putting his money into an account where the gains won't be taxed.

Here's the problem: He is in the 35% tax bracket. He is essentially spending 35 cents on the dollar to get money in there.

When he retires, we estimate that he will drop to the 12% bracket as he lives off savings and his revocable trust account. That is the period to get the money into the Roth via Roth conversions.

We rely on the tax module of our planning software to project current vs future rates. The Roth bet is that your current rate is lower than your future rate will be. If that's the case, you are essentially paying the taxes on sale.

I would not make that bet without doing the projection. Here is the free version of what we use.

The illiquid millionaires

Mary and Joe approached me after they had retired. Fortunately for them, the $3 million they had saved in retirement accounts was plenty to fund their lifestyle in retirement.

Here's the challenge: They had spent down their savings relatively quickly. While they had $3 million in retirement accounts, the only other liquid account they had was about $100,000 in a handful of tech stocks with large gains.

In a situation like this, where all the money is in retirement accounts, every spending decision involves a tax calculation. It's uncomfortable. It was especially uncomfortable for them because they were moving south and needed about $30,000 for movers and new furniture.

Fortunately, they found us at the end of the calendar year, and they had basically lived only off savings that year. They were able to sell $80,000 of that $100,000 at the 0% capital gains rate.

We were able to recognize this only because we run every prospective client through a tax analysis in which we upload the previous year's return and then add expected numbers for the current year. This tells us how much room we have in every tax bracket before the bill goes up.

We recently welcomed a client who is projected to be in a very similar situation when she retires in three years. We want to get ahead of it, so we diverted a large amount of her retirement savings into her trust account.

It may not be the most tax-efficient move in the short term, but it will save her a lot of headaches in the future because she'll have an account she can tap without a 1099-R coming in the mail.

The charitably inclined decamillionaire

One of our clients became a decamillionaire the old-fashioned way. Work, save, work, save, buy AAPL in the '90s. He now has a large concentrated position that has continued to build his balance sheet.

Here's the problem: In his 80s, he doesn't want to be paying attention to how many people bought the new iPhone.

His portfolio now swings dramatically with positive and negative market news. It's more than he is comfortable with. We just finished his third contribution into a charitable remainder unitrust (CRUT). At a high level, he contributes appreciated stock into this irrevocable charitable trust. He receives a charitable deduction for a portion of the contribution.

He then gets an annual distribution equal to a percentage of the value of the account. Once the funds are in the account, the stock can be rebalanced into something he is more comfortable with.

This is especially beneficial for this client, who is above the estate exemption in their state and will likely get above the federal exemption. Assets in the CRUT are outside of his taxable estate.

Tax planning and investment management

As mentioned earlier, we do not take clients without also managing their assets. It is a very important part of our value proposition.

However, there is no way to accurately quantify the value of investment management returns without a crystal ball. You can definitely save clients money by reducing investment expenses, unnecessary turnover and tax-inefficient asset location.

But there I go again, talking about tax planning. Tax planning, estate planning and investment management go together. I don't believe you can do any one of these well without addressing the others.

Examples are based on real client experiences; names and certain identifying details have been changed to protect privacy, and the scenarios described may not be representative of other clients or situations. The views and opinions expressed are provided for informational and educational purposes only. They do not constitute individualized advice, a recommendation, or a guarantee of future results. Outcomes vary based on individual circumstances and other factors.

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