Interview with Jeff DeMaso and Rick Winters
What impact will the new tax code have on your financial planning and your legacy? Here are some strategies to consider.
What impact will the new tax code have on your financial planning and your legacy? Here are some strategies to consider.
Jeff DeMaso: Hello, this is Jeff DeMaso, director of research at Adviser Investments, with another “Adviser You Can Talk To” podcast. Today, I have as my guest Rick Winters, who is a portfolio executive as well as a member of our portfolio review committee. Rick has been at Adviser Investments since 2001 and has been honored as a Five-Star Wealth Manager six times in Boston Magazine. Rick has also earned his CFP®, CRPC® and AWMA® designations, which tells you Rick still loves to learn and is passionate about financial planning. Rick, thanks for joining me. So let’s talk a little bit about the tax code. I often look at it from the investment side of things, what it means for corporate earnings, and future investment and repatriation of cash. But you’re talking to individuals and what they’re doing with their money day-in and day-out and what their long term plans are. So what are you talking to them about in regards to the new tax code?
Rick Winters: Right, it is absolutely the center of conversation because it all came in so quickly at the end of the year. The main thing that we’ve been talking about with clients is: How does it impact them? And on the front end of it, besides the brackets moving around, there’s still seven individual brackets whether you’re single filing or jointly. But the big change is the fact that you’re getting massive change in the standard deduction. Which is going to be a big player on those things that everybody was always looking for, which is itemized deductions, being able to deduct that interest on the mortgage, being able to get deductions from your charitable giving. That is actually the biggest change. The next thing that you’re actually looking at is the personal deduction. Which actually has gone away. But they’ve actually shifted over to a much larger credit for kids. So for those people that actually have children this is going to be a big play for them.
Jeff DeMaso: Alright, well you mentioned charitable deducting, so let’s talk there. Has the new tax bill affected how you think about charitable giving? And is giving to charity really all just about taxes?
Rick Winters: Well with the charitable giving, one of the biggest things that we always focus on is obviously there’s taxes at play. And that was always something that was motivating at the end of the year, to figure out how you can maximize your giving to all of the various charities that you want to support. Maybe you had a conversation with your accountant or your adviser, they said, “Yeah you should probably up your giving.” But with this tax law change, they’re going from 47 million people who itemized in 2017, or expected to, down to an expected number of like 19 million. So those that were really motivated to give to charity based on tax impact, that may be a major shift for some of these charities.
There are strategies that you can try to employ to still give people a reason, tax-wise, to give to charity. Like, you know, bundling gifts, or you know, if you usually give $10,000 a year, I don’t go into a big number here, because you have got to get there to actually make the deductions worthwhile. But maybe you’re doing that every two years at $20,000. So you can get to that. But the other things that you’re also looking at, there’s obviously to each individual a number of different strategies you can employ, but yeah, charitable giving is really at the root of it. Your main interest is to give to charity, not to get a tax deduction.
Jeff DeMaso: Absolutely, and I guess with the caveat that we can’t give individual tax advice.
Rick Winters: Sure.
Jeff DeMaso: But in terms of, there’s still a little bit of a tax benefit in terms if you think about giving to a donor-advised fund. In terms of you can donate appreciated shares, so maybe you could talk a bit about donor-advised funds. What are the ins and outs, and the key points that people should know about? Rick Winters: So donor-advised funds are really, I mean, they’re been around for a long time, but you know, for most it may not be something that you’re just generally comfortable or aware of.
If you go to Fidelity or Vanguard, they talk it about as their gift fund. But if you look in, just kind of, I guess jargon talk, it’s a donor-advised fund. The benefit there is that if you do need to give larger amounts, you can give in a year, let’s say those big numbers that I was talking about, $10,000, $15,000, or $20,000, for any number of reasons, you could put it all into this donor-advised fund. Which doesn’t go right out to the charity, it’s something that allows you to, maybe want to give $100 to support a run that a friend’s doing. Or at the end of the year, you know, you like to give a couple thousand dollars away to charity, but not ready to give $20,000. So you put it in the donor-advised fund, it stays invested, you can let that grow, ideally. And if you don’t ever really push it out to a charity, you can turn it into a substantial account that can be used for legacy planning, get your family involved. That’s where these things actually wind up going, as you’re working with you adviser to try to make sure you’re making smart tax and investment planning decisions.
Jeff DeMaso: So, you mentioned planning, but how does that figure in to planning for people’s future? And also you mentioned bringing family members into the conversation, how do you have those conversations with new family members?
Rick Winters: Yeah so, you know, if you talk to people about charitable giving, it really gets down to the check that they wrote, or the church that they belong to, or something that they feel strongly about. But one other thing that you, you know, if you went into a business and they said, “Yeah we have no mission statement or vision statement, we just kind of do our thing, and you know, get through the day,” well the business wouldn’t be successful. So if you’re really someone that’s focused on trying to direct your dollars to a cause or an effort with meaning behind it, you should start off with something as simple as, “What’s your mission? What’s your vision? Can you share that, and can you communicate that with your family and your kids?”
Because guess what, if you do a good job about it, you’re probably going to, you may not out-survive your gifting effort. And that money would pass on to a family that would have no idea how to continue that effort that you started. I think that the idea that you have to go in with a plan, and this doesn’t sound a whole lot different than when I’m talking to someone about retirement, or just getting started saving. If you don’t go in with a plan, you’re probably not going to come out with a very good end result.
Jeff DeMaso: Alright, so that’s probably pitfall number one, whether we’re talking charitable giving, retirement, or any type of investment strategies, have a plan—
Rick Winters: Trying to get my kids to go to bed on time.
Jeff DeMaso: Yeah (laughs). Are there any other pitfalls when it comes to charitable giving, that people should be aware of?
Rick Winters: There are a couple of really cool strategies out there. I actually thought that this one was going to be killed by this most recent bill, the qualified charitable deduction. If anybody’s not familiar with that, but if you’re of required distribution age, from your IRA, at age 70 and a half, you’re required to take a distribution every year. And now that the standard deduction’s all the way up to $24,000 for a couple filing, you’re probably, if you find yourself outside that itemization range, where you no longer can itemize your deductions. And why is that meaningful in the world of charitable giving? Because if you’re already taking a $24,000 itemized deduction, and you give an extra couple of hundred bucks, or $1,000 to charity, then you’re not going to get the deduction. But if I’m able to use my require minimum distribution, take that distribution and give it to directly from the trustee, the custodian holding your money, and get it right over to that charity, that actually takes that income off my tax return altogether.
That’s still a really effective strategy for anyone that’s older than 70 ½, taking required distributions. You can actually go all the way up to $100,000 so there’s even way more tax planning that goes behind that beyond the charitable giving. But anyway, not to get too lost in that answer, but yeah, that’s one of the things I think there’s really exciting opportunity within the charitable-giving space, to take advantage of that.
Jeff DeMaso: Alright, so not to hype what we do, but it’s, you know, in your role you can be a financial quarterback between the client and their accountant to talk about some of these different strategies.
Rick Winters: Oh that’s, we can’t do it on our own, no way. If you’re working with anybody that’s really trying to get, accomplish things in a very effective, meaningful way, you have to be working with their accountant and their estate attorney. Because if I’m doing things on my end and it gets to the accountant’s desk and they’re like, “What are you doing, this doesn’t make any sense.” Or if it gets to the estate attorney, (which I don’t call on my own because they bill by the hour) I’m glad to be on a phone conversation with a client at the time they’re already planning on talking to them. The accountants are a little more forgiving when it comes to that billing.
Jeff DeMaso: Great, so clearly a lot going on there, very complicated, and involves having a plan and communication. Are there any other elements to the new code, or the new tax code, that you think people should be aware of from a financial planning standpoint?
Rick Winters: Yeah, I mean, so moving forward, obviously living in a state like Massachusetts, or clients in California, New York and otherwise, I mean, one of the things that I know I was paying close attention to was the mortgage deduction. You can obviously take a mortgage out to up to $750,000 and still deduct the interest. That is definitely something that helps when someone is considering that month-to-month mortgage payment that they have to make. How much of that interest I’m paying am I going to be able to actually deduct from my tax return? The other is that, just make sure that you are working with someone that has a better understanding of the new tax law.
I know I’ve read a number of 80-page documents, trying to give me the full details of these reports, or of the various changes, and I’m still learning every day. So I love it when a client asks me a question and I get to answer, “I don’t know.” Because that means I get to go and figure out what the answer is. And you want to hear that from your adviser occasionally, because there is no way that everybody knows the answers to all these questions right on the tip of their tongue, when that questions being answered. Sometimes I do, but it do like it when I have to go back and look stuff up.
Jeff DeMaso: Yeah, no, the markets are humbling in places as well, on the investment side we try and say I don’t know as well, we don’t know what the market’s going to do tomorrow. Complicated strategies don’t always have an easy answer.
Rick Winters: You just want to get in there with your best foot forward make sure you’re standing on your toes and not your heels, so when the next situation that pops itself up, you’re ready to deal with it.
Jeff DeMaso: Great.
Rick Winters: I should also point of the fact that one of the major changes had to do with, the acronym that’s being used is SALT, which is state and local taxes. The big issue with this change is that if you’re in a high income-tax state, like Massachusetts, New York, California, New Jersey, you are generating quite a bit of state income tax just off your paycheck. So the new limit now is you can no longer deduct more than $10,000 worth of state and local taxes. Now that’s okay if it’s just from your paycheck, for most people, but this also includes your property taxes. And in these states that I just mentioned, and many others, I don’t want to exclude anybody that’s going to be impacted by this tax law change. Yeah, not being able to deduct that property tax just made that school system cost a little bit more than some of the other things that you had been paying for and being able to take as a deduction on your tax return. So Jeff, I would definitely point that out, and I probably should’ve mentioned that even earlier, but I’m glad we didn’t miss it.
Jeff DeMaso: Alright, this is Jeff DeMaso, and I want to thank you for listening to another of our “Adviser You Can Talk To” podcasts. I’ve been speaking with Rick Winters. If you enjoyed this conversation, please subscribe or check us out at adviseryoucantalktopodcast.com. Your feedback is always welcome, and if you have any questions or topics you’d like us to explore, please email us at firstname.lastname@example.org. Thank you.
A donor-advised fund helps you stay invested. And if you don’t ever really push it out to a charity, you can turn it into a substantial account for legacy planning.
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