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Oct 1989

From tax return to financial planning engagement. (Personal Financial Planning)

by Blaustein, Martin I.

    Abstract- Accountants can use the preparation of tax returns as an opening to offering a client expanded financial planning services by using marketing skills. A checklist can be used during the preparation of the personal tax return as a way to structure the financial planning process and as a basis for the marketing presentation of further financial planning for clients. The checklist should break down the tax return preparation process into several planning areas, including: risk management; cash flow planning; and estate planning. Using the checklist, the accountant can use well planned questions pitched to clients to expand the tax return preparation process into additional billable engagements.

It is the annual marketing meeting of the Cute and Cuddly Canine Cousins Company, a leading manufacturer of pet supplies. Sales have been constant, but relatively flat. Ah, what to do? Finally, the Eastern sales managers, Polly Poodle and Germaine Shepherd, come to the conclusion that the answer lies in introducing another line of products. This seems natural, since Canine Cousins already has a sizable market share of canine owners. They do not have to reinvent the distribution system. All they have to do is expand the product line to sell to customers already in place.

Traditionalty, accounting professionals are not as marketing oriented as other business people. Yet, if they were to review their practices and examine the relationships with their clients, they would realize just how much clients seek their advice and just how expandable their services are to an existing client base.

The review of the tax return, Form 1040, during the preparation, as well as periodically during the year, can give very meaningful openings into expanded financial planning services to clients, which will be welcomed and profitable.

A checklist to be used during the preparation and review of the client's personal tax return is a simple way to begin the financial planning process. In addition, with the checklist, the staff person who actually does the preparation can easily be trained to identify the possible financial planning topics to be discussed with the client. We can break this list down into several of the basic personal financial planning areas. Risk Management

Very often, the area of risk management, of which insurance is only a part, is overlooked. It is, however, crucial to a client's financial well-being. Here are some of the key questions that can be asked.

1. Does the client have umbrella" liability insurance? This is inexpensive coverage designed to pick up when the limit of auto and home liability insurance is insufficient.

2. Does the return indicate there is only one wage earner in the family unit? This may call for a review of the need for disability insurance.

3. Does the disability insurance in place consider and properly cover the special occupation of the client, i.e., a surgeon?

4. Are there major medical and dental bills not being reimbursed by insurance, indicating the need for more medical coverage?

5. If the tax return shows real property on Schedule E or Schedule C, does the amount listed as insurance expense appear to indicate adequate coverage?

5. Is the personal residence adequately insured with the property coinsurance and replacement cost riders?

7. if social security is being received, has coverage under Medicare part B been elected? Cash Flow Planning

1. Does Schedule A indicate an abundance of personal debt with a very low percentage of deductibility? Should a home equity loan be considered to consolidate the debt?

2. Does the existence of several loans indicate the need for a budget analysis?

3. If the investment income appears to be decreasing, should a review of spending habits be made to evaluate the trade-off between consumption and savings? Estate Planning

1. Does a review of the return indicate a high degree of nonliquid assets, such as limited partnerships and real estate? Does this create the need for insurance to provide liquidity in the first or second estate?

2. if there are children or other dependents, are there adequate and recently reviewed provisions for guardians of the person as wen as guardians of the property?

3. Is there property in more than one state that could lead to domicile questions and tax problems?

4. Does the client's age and health seem to indicate the need for a living trust?

5. Does the tax return indicate the existence of life insurance loans and should these policies be turned into a life insurance trust?

6. Does the tax return indicate that the client is very charitable? Should a charitable lead trust or remainder trust be considered?

7. If there is a closely held business, is there a plan of succession and liquidity? Are buy-sell agreements in order?

8. Have the income and estate tax benefits of a well planned gift giving program been explained to the client? Retirement Planning

1. Does Form W-2 or Schedule C indicate coverage under a retirement plan? Are maximum contributions and deferrals being made?

2. Does the tax return indicate other sources of income, such as director's fees, which might qualify for a Keogh contribution?

3. Will the client qualify for maximum Social Security benefits under the current level of wages?

4. Does the apparent level of investment income, debt and spending appear to be in line with what may be needed to provide the desired retirement level at the projected time? Again, the trade-off between spending and savings must be examined. Education Funding

1. Are there children in the family?

2. Has the client been told of the benefits of a gift giving program?

3. Does the Kiddie tax present problems in the gifting of assets to minor children?

4. Are children of working age receiving wages from family-owned businesses?

5. Are funds previously set aside for educational needs being adequately invested for the best return? investment Planning

1. Does the tax return indicate an inappropriate concentration of investments in one particular area?

2. Are there excessive trades on Schedule D which may indicate the lack of a cohesive plan or the existence of an aggressive broker?

3. Considering the client's age, health, stage in life, does the investment mix seem appropriate to meet the short and long term needs of the client?

4. Does the apparent ownership of the assets of the client and the spouse indicate that they are in accordance with the estate objectives?

5. Does each spouse have enough individually owned assets to take advantage of the unified credit against estate tax if that spouse should be the first to die? jointly owned property and qualified pension plans (unless disclaimed) are not unified credit assets.

6. Does the investment risk propensity of the client seem to match the investment mix?

These are some of the many questions that should be thought provoking to clients, staff and accountants. The expansion of these thought processes into billable engagements is the next step. However, with the use of a series of well planned questions, the transition should already have begun and should easily be completed.

Martin I. Blaustein

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