It is wonderful when a light bulb goes off and people realize they should not put all their assets in the same basket. If they have accumulated many baskets and do not have someone to guide them, then they may remain in the dark.
When a widow in her mid-70s first met with Plancorp, a St. Louis-based RIA firm that manages $4.2 billion in assets, she was in a similar situation. Shortly after her husband died, a client of the firm whom she knew personally referred her to the firm because he thought she might benefit from additional assistance.additional assistance. Her $15 million net worth was primarily made up of farmland and liquid investments held with multiple advisors.
The client thought spreading her assets among different advisors would reduce her risk, but none of them helped her do comprehensive planning. It could have been a fiscal disaster for her.
“When we showed her we could do full financial planning-review estate documents, insurance, tax planning, etc.-instead of just investing her assets, she was sold,” says Sara Gelsheimer, a CFP and senior wealth manager at Plancorp. Furthermore, they explained to her the benefits of diversifying her portfolio.
Gelsheimer and her colleagues recommended that the client file a Form 706 estate tax return for her deceased husband to elect portability for his unused exclusion, which was $5.25 million at the time of death. If the client dies before the estate tax exemption sunsets in 2025, her estate would pass tax-free to her heirs by combining her estate tax exclusion ($11.58 million) with the exclusion captured from her husband.
It was fortunate that the client sought assistance when she did, because Form 706 must be filed within nine months of the decedent’s death. An extension of six months can be requested if necessary. In the absence of her husband’s exclusion, the client’s assets over $11.58 million would be taxed at 40%.
In addition, Gelsheimer discovered that her client had not taken a step-up in basis for a joint account she owned with her late husband.
Gelsheimer suggests assuming the couple invested $1.3 million in various stocks and their account was worth $2 million when the husband died. Each of their stocks gets a step-up in basis to the market value at the time of his death. In this case, her client’s cost basis would be $1,650,000 instead of $1,300,000. If the client sells all assets, she will realize $350,000 in long-term capital gains instead of $700,000. Gelsheimer notes that at a capital gains rate of 15%, that translates to a tax saving of $52,500.
Most clients initially bring all their assets to Plancorp. However, sometimes, as in this case, “it’s best to get the client onboard and build rapport over time to get more assets,” says Gelsheimer. Even if they don’t receive a management fee for these assets, Plancorp includes accounts managed by other firms in a client’s financial plan.
As long as I think it’s best for clients, it’s always worth it to me,” she says. It charges a minimum planning fee so that if someone needs planning but does not have much in assets, the firm is still compensated.
Plancorp has software that allows it to pull daily updates on accounts outside its management. This information is incorporated into its retirement plan analysis. Gelsheimer says it is difficult to offer sound advice without knowing all the details.
She and her colleagues have also encouraged this client, who is very charitable, to make qualified charitable distributions (QCDs) directly from her taxable IRA. As of current tax law, individuals can gift up to $100,000 directly to charity to satisfy their required minimum distribution (RMD) and not include it in their ordinary income.
Gelsheimer says this is the best way for anyone over 701 to donate to charity. Because of the doubling of the standard deduction, taxpayers have become less inclined to itemize deductions, she says, so this allows them to still claim charity as a deduction.
According to Gelsheimer, the client made a qualified charitable distribution of approximately $20,000 in 2018. Donor-advised funds cannot receive qualified charitable distributions. It is important to coordinate distributions from multiple IRAs managed by multiple advisory firms to comply with tax laws, she says.
Gelsheimer’s client inherited a lot of farmland from her parents, but they did a poor job relaying pertinent information. She has expressed concern to Gelsheimer that she does not want her heirs to feel that way.
“We’ve encouraged her to start those conversations as early as possible so she doesn’t leave her family in a similar position,” says Gelsheimer. Younger heirs shouldn’t simply be speculating about whether they wish to retain family property, she says.
Gelsheimer’s client has made it clear that she does not mind if her children and grandchildren sell the farmland she left them.
Gelsheimer understands clients may feel uncomfortable discussing their net worth with their children. If the children know how much they’re slated to inherit, some worry they’ll fail to do anything productive with their lives. However, “we can take that off the table and not even discuss numbers,” she adds.
The family meeting can begin with an estate plan diagram that shows what types of accounts are owned and who would take over if Mom or Dad passed away, she says. Everyone will know what tasks they need to complete.
This Plancorp client has been focusing on getting organized. “We have been able to create a comprehensive financial independence analysis that includes all her income, assets, and expenses,” says Gelsheimer.
Gelsheimer says this analysis shows the client’s cash flow and her chances of living a successful retirement. Because longevity runs in the client’s family, she has built a plan for a lifespan of 100 years (instead of 95 years).
Despite working outside the farm by choice, Gelsheimer’s client is very frugal. She has more than enough money to be more generous with herself. Recently, she has begun taking nice vacations with her grandchildren.
“I feel like she’s more energetic and spunky than I am, and she’s a lot older,” says Gelsheimer.
Building Rapport
In spite of their big age difference, Gelsheimer, who has been in the industry for 11 years, says she was able to quickly build a rapport with the client. The meetings were initially attended by an older colleague as well.
Gelsheimer says she and her client discuss life for the first 15 to 20 minutes of their meetings. During their subsequent conversation, she brings up anniversaries and trips the client mentions in the system.
She started out as a social work major before realizing, while taking a finance class, she could use her love of math to help people.
According to Gelsheimer, showing a client she cares is more important than putting together a cool spreadsheet. Relationships are the most important aspect of the business.”
