Ignoring Tax Planning is Expensive | Brandon Averill, Justin Dyer | AWM Insights #87
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Episode Summary
Congress is set to pass a large spending bill before the end of the year that will increase the tax bills of many. Tax planning is something every athlete deserves incorporated into their financial advice, yet few are actually getting.
An advisor that is making recommendations without looking at the tax impact is costing you money every single year. This is unnecessary wasted wealth that you can never get back. Tax planning is easily the most missed opportunity and it’s up to clients to demand it.
Tax loss harvesting, backdoor Roth conversions, avoiding unnecessary capital gains, accelerating, or deferring income, asset location, individual 401ks, and duty days are just some of the menus of options when it comes to managing your tax bill. If you ignore tax planning, you are choosing to pay unnecessary taxes.
Episode Highlights
(0:51) News: Rivian went public at a targeted $54 billion valuation but due to strong demand debuted at a $91 billion valuation.
(1:17) Pfizer has created an antiviral pill that reduces the risk of hospitalization from COVID and is pending FDA approval.
(2:00) Economic data for the economy is slowing and Congress is debating Biden’s Build Back Better Plan that will increase taxes and is an increase of around $2 billion in spending.
(3:55) Backdoor Roth contributions have been talked about being eliminated. This has been a great tax planning strategy over the last decade for those that took advantage.
(5:17) Tax planning and investments should go hand in hand. Wall Street brokers cannot legally give tax advice.
(6:05) Tax loss harvesting and how it benefits the client.
(7:30) Systematic planning over the long-term adds up to significant tax savings and large account balances.
(8:28) Understanding tax planning when gifting can increase the impact for the charity and save taxes for the client.
(9:00) Goldman Sachs gives zero thought to tax planning. Unnecessarily realizes gains to the detriment of the client.
(9:45) Separation of duties doesn’t work in the real world. Your CPA isn’t checking the work of your investment advisor. Find an auditor if you want to catch fraud.
(10:54) Chase Carlson and other fraud attorneys evaluate if you are being taken advantage of.
(11:34) The wealthiest families have a multi-family office that integrates tax strategies and investments.
(12:18) Even if you're not ultra-wealthy, an independent RIA that integrates tax planning will be to your benefit.
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Justin Dyer: LinkedIn
Brandon Averill: LinkedIn
+ Read the Transcript
Brandon Averill (00:00):
Hey, everybody. Welcome back to AWM Insights. It's Brandon and Justin, and each week, you know we cut through the noise of what Wall Street is trying to sell you to bring you the knowledge, skills, and access that you actually need to invest like a pro. And today, we're going to tackle a topic near and dear to everybody's heart. Nobody likes to pay them, but they're a necessity in life, and that is taxes. We're going to hit on a little bit of why you should be proactive with your tax planning, why this shouldn't be the first time your advisor's talking to you this year about it and hopefully, you've gotten ahead of it a little bit. But before we do, let's jump into some of the news that's out there, Justin.
Justin Dyer (00:39):
Sounds good. So we're... Excuse me. We're recording this a little bit earlier in the week than we normally do, but by the time this airs, Rivian will likely have gone public. So Rivian, really cool electric vehicle company making trucks backed by Amazon and Ford. They released their plans to go public a couple weeks ago, and they're targeting a $54 billion valuation, which seems a little rich out the gate. Even though Ford is backing them, it's basically the valuation of Ford or close to it. So we'll see where that goes. Pfizer said its COVID pill reduces the risk of hospitalization and death by 89%. See if the FDA will have approved this again by the time this airs. That'd be great news. It's an at home, kind of over the counter type pill, which can... Let's continue to get out this pandemic era.
Justin Dyer (01:36):
Other economic data overall. So as we wrap up earning season here, just last week, we heard about the jobs economic data is starting to taper off or the trajectory of growth... I want to be clear. The trajectory of growth is slowing, which, again, is kind of expected here at this stage in the cycle. But then kind of more importantly, and on topic with what we're talking about here is Congress continuing to inch forward on both tax proposals, infrastructure and the overall budget bills. It would be fantastic. I think if by the time this airs that something is actually voted on and passed, but we'll see if they can get their act together.
Justin Dyer (02:20):
Brandon, you said, it's a topic near and dear to everyone's heart. There's the billionaire wealth tax that is projected to only impact 700 people in the entire country. Does that actually raise enough revenue? Who knows? But certainly, a headline item across the financial media and then the big debate for the higher tax states. What's going to happen with the SALT Cap? So with that, we're going to get into how we think about this from a planning standpoint. And like you said, I think kind of spoiler alert, this isn't the first time you should be planning for taxes right now.
Brandon Averill (02:58):
Yeah. I think that's the big point here, right, Justin, is something that we're looking at these new proposals. I was just visiting with a family yesterday that has kind of that multi-generational wealth. We're in a situation where we're definitely transferring their wealth to the next generation and multiple generations beyond that. And just thinking through, there's all these different things that could be coming into play. And how do we most effectively play within the new rules? And I think that's changing a lot of stuff. People are trying to, again, predict. Right? And so they're running to these state planning attorney's office and they're putting new structures in place. A large part of these proposals is trying to close some of those gaps. One thing I think speaks to the proactivity, hopefully, that you've been doing over time, but something as simple as the Roth conversion.
Brandon Averill (03:52):
If you haven't been, if you're in a tax bracket above the limit where you couldn't actually take a deduction for an IRA contribution, hopefully, you've been doing backdoor Roth conversions over the past few years. This is something that's likely going away or has been at least mentioned as part of the proposals. It seems to change every day. But if you hadn't been doing this, it's too late now, and so this is something that I think so many people get fixated on the end of the year when it comes to tax planning at best. Sometimes it's, "Okay. We're going to collect all our forms in April, which is absolutely the worst." But it's, again, I think roles and responsibilities here. This is your advisor's role and responsibility. So many people think it's the tax accountant that's going to come up with these things and the practicality of real life. Oftentimes, it isn't.
Brandon Averill (04:51):
This is your advisory team that's helping you plan through this throughout the year, put together multiple tax projections, really understand what's available to you.
Justin Dyer (05:00):
Yeah. This is what I love about our model, how we service clients. Most of what we talk about on this podcast is investing related but the holistic approach is what works. And so tax planning dovetails incredibly well into investment planning. Those two things need to go hand in hand. If you're investing and you have a big firewall between your tax man, tax person, tax woman, whoever it may be, and your investment advisor, you are missing out, hands down.
Brandon Averill (05:38):
Absolutely.
Justin Dyer (05:38):
Again, we've said it time and time again, on a number of firms, the big Wall Street firms' websites, they say, "We cannot provide tax advice. Consult with your tax advisor." Well, with the multifamily office model, it's all integrated and it gives you the optimal rate of return overall, your net worth, your effective tax rate, all of that stuff we talked about. Again, how is that actually applied in practice? Well, throughout the year, so tax loss harvesting. March of 2020 was an excellent example of that. Fortunately, we didn't have a lot of opportunities or any opportunities in 2021. The market's been pretty much up the entire year and we don't want to just harvest losses for a tiny, tiny little loss on the books, right? It needs to be substantial enough to actually benefit the client, et cetera, et cetera. But it's something that is constantly being looked at from a portfolio optimization standpoint.
Justin Dyer (06:33):
Can we harvest a loss? Does it make sense? Is it large enough to actually impact the client, et cetera, et cetera. And then Brandon, to your point on the Roth conversion, we can actually convert in kind. Okay. Let's take emerging markets, that's a great example. We would take that position, put that into a Roth IRA, getting a little technical here, I know, but you think about that.
Justin Dyer (06:54):
Instead of just doing it in cash, we're taking an asset that actually has an incredibly high expected return over the long term. And if you're putting that into a Roth IRA, you're all but forced to keep that for the long term, assuming you still have a few years until retirement, and that's converting that asset to tax free basically for the rest of your life and it's incredibly powerful. Again, if you're doing this right now and you're trying to get a single Roth conversion process, you're talking about very small amounts of money and yeah, they could still be potentially meaningful over the long term, but what really matters is the systematic planning process that is put in place over the long term, over many years. We've been doing this for what? 10 plus years, right?
Brandon Averill (07:42):
Oh, yeah.
Justin Dyer (07:43):
Since it was, I guess, first allowed, let's call it. So you think about that iterative process and constantly doing it, and you're like, "Oh wow. There's actually a meaningful amount in there." And maybe yes, that's going away and the playing field or the rules of the game are changing a little bit. And then what we're going to do is we're going to adapt. We're going to figure out, "Okay. What is now the optimal way to manage a portfolio within the new tax regime if anything gets passed?" Again, there's a lot of speculation here. It doesn't make sense to make any knee-jerk reactions to what is being proposed because it's a constant moving target.
Brandon Averill (08:21):
I think that's just great insight, Justin. It made me think of gifting, right? If we're a charitable intent, if you're not on the same page, if your advisory team's not on the same page with your tax team, how do you know what to gift? I think so many people lose the opportunity for impact because they give cash. It's the easiest thing. It's just what you think of. But if you are actually thoughtful, this is integrated. Maybe you're looking for appreciated securities and that's what you're gifting. The benefits all around are massive when you start to think like that and do like that. We talked about it a couple episodes ago, but the Goldman Sachs proposal I saw, zero thought to tax planning, right? They were just pulling out of thin air. They're going to realize gains but their pitch was actually somewhat around how being tax efficient, because they were going to use a fund that does some tax loss harvesting.
Brandon Averill (09:13):
And it's just fascinating to me how the wealthy really continue to miss out on the impact that they actually could have on their families, their community, the world at large, because they're just wasting wealth because they're not willing to pay attention and they're just getting sold quite frankly by some of these big, shiny firms. And I think the argument oftentimes out there and is very, very logical. I understand where people are coming from, but it's the, "Well, we want separation. We want separation of duties. We want to make sure that our tax person is looking over the work of the investment person and the investment person is looking over the work of the tax person." All makes sense in theory. In practicality, we all know that it's complete hogwash and that actually never happens. If you think that happens...
Justin Dyer (10:06):
They can't provide tax advice.
Brandon Averill (10:08):
I know.
Justin Dyer (10:08):
How does that work?
Brandon Averill (10:09):
But if you think your CPA is looking over your portfolio and making sure everything's good there, I think you just go ask them a very simple question, "How am I allocated? What are the expenses? What kind of taxes were realized in my portfolio?" At the end of the day, what the tax accountant gets at the end of the year, right, is the consolidated 1099. And they're plugging that in their machine and they're filing the taxes. So I caution anybody that thinks that that's what they're actually getting. If that's your argument for keeping things separate, I think you have to go down a different train of thought. There's great audit accountants out there. Right? And that's what you're actually looking for. You're looking for somebody called Chase Carlson, the fraud attorney, or somebody, these other people that will actually come in and take the look that you're hoping to get. And then you don't lose the effectiveness and the efficiency of having this all in one place and really, really effectively planned for, efficiently planned for.
Justin Dyer (11:11):
Yeah. Well, and unfortunately, in practice, what ends up happening is in a year like 2020, we harvested a substantial amount of losses. If an accountant generally saw that on average, they say, "Well, this advisor is realizing losses. They're not doing you a good service and it's completely missing the forest for the trees."
Brandon Averill (11:32):
Yeah.
Justin Dyer (11:32):
That's where you go. The wealthiest families have a family office, a multi-family office model where all of this is integrated for this exact reason that we're hitting on and it's just incredibly powerful for you at the end of the day. And look, let's put a teaser question out there. We want to explain this to you in these podcasts. It's not necessarily the easiest concept to always get, and there's some nuance around it in detail. So let us know if this is helpful or how we can expand on it further and all that, because that is the purpose of these podcasts.
Brandon Averill (12:08):
Yeah, absolutely. I think that's a great point, Justin. And if you're below the highest tax brackets, you still deserve this as well. You should be looking for an independent registered advisory firm, so an RAA, somebody that can actually provide you this advice that you're looking for. And if you happen to be in the highest tax bracket, the type of clients that we serve and really love working with, you need to seek out a family office because the integration here is so critically important. And so I just encourage everybody to take a look at that. And if you want more information, like you said, Justin, please reach out to us. You certainly... If you like these, go ahead and head over to AWMInsights.com. You can sign up for the release of these future podcasts. You can also get more information. You can download our value of a family office guide there, but we're around. We're happy to help. And we just really enjoy bringing these lessons to you. So with that, until next time. Own your wealth, make an impact and always be a pro.