A Question for Financial Advisors

With two months left in the tax year, most business owners and taxpayers have a pretty good idea what they have already made in 2013 and what they will make in the balance of the year. The question is what are you doing to help your clients reduce and defer taxation on their 2013 income?  The other question is what can your clients expect their CPAs to come up with in terms of solutions and tax reduction idea generation? Historically, don’t expect much in this area.

As a financial advisor whose income depends on the client taking action, it is frequently the advisor who is sufficiently “cojonudo” to get the client to take some action. The advisor’s life depends on it but so does the client’s unless the client is resolved to single-handedly take care of the national deficit by himself!  What are the big ideas that allow  the client to avoid writing a large check to Uncle Sam or get a refund on quarterly estimates?

Here are a few ideas to consider for your clients.

1. Family Investment LLC – If your client does not have a business, this is a way to create one. This is a valid business purposes for both state and federal tax purposes. Here are a few things to do with the Family LLC once you have it set up.

A. Family Defined Benefit Plan – The client pays himself a management fee and the spouse a management fee. Create a defined benefit plan, profit sharing plan and 401(k) plan. These plans will allow the client to make tax deductible contributions into these qualified retirement plans. If the client works for “The Man” and has W-2 income, these plans are separate from the employer’s plan except for the 401(k). This strategy can convert taxable investment income and consulting income as an independent contractor into tax deductible contributions and tax deferred income. The contributions might even create a net operating loss which may be carried back three years and forward indefinitely. Generally, the you can use the NOL if it does not exceed the taxpayer’s basis in the LLC.

B. Charitable Contributions – The client can create a donor advised fund and contribute a non controlling interest in the LLC to the donor advised fund. The client at this stage of the year will receive a deduction up to 50 percent of AGI as the LLC interest will be short term capital gain property. The client will retain management control over the LLC assets as the managing member and control the amount and timing of LLC distributions to his donor advised fund. The LLC income will be income and estate tax free to the extent of the donor advised fund’s ownership interest in the LLC. Asset protection benefits as well.

2. Discriminatory Defined Benefit Plan – Yes I have been pontificating the virtues of this plan. It works for young business owners as well as old business owners. A defined benefit plan contribution exceeds the value of the maximum defined contribution at any age. In the first year, the client can make a double contribution into the Plan. Here’s the story. Your client excludes the employees from participation through an arrangement that has the employees covered under a collective bargaining agreement. The business owner can cover himself, spouse and other highly compensated employees without including the employees. The benefit is very significant. The worries about unionized employees are greatly exaggerated unless your client is running a coal mining operation.

3. Health Care – Drop the group coverage today (not tomorrow). Most rank and file employees will qualify for tax subsidies on the exchange. Yes, once it is working and they can sign up. The employees and employer will save alot of money. The business owner will set up a medical expense reimbursement plan. This strategy works at any level. The small business owner may save himself $5-10,000 per month!

The business owner can take the savings and contribute more money into the discriminatory defined benefit plan outlined above. Quit moaning and groaning about Obama Care. Your Congressman tried 40 times to defund and repeal the law. However, it is the law of the land. Spend your time thinking about how to maximize it for your clients.

I work with a third party administrator that specializes in this strategy.

Remember to count your blessings to day.

About gerrynowotny

I am a tax and estate planning attorney with a JD and LL.M in estate planning from the Univesity of Miami School of Law. I have worked in the life insurance industry for twenty three years and the last eleven in private placement life insurance.
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