Wealth manager Rehmann shares his advice for 2022
Business owners and high net worth individuals who have adopted an outdated wealth management plan should make 2022 a year of review and change, according to a local financial planner.
Ron Knipping, Chartered Financial Planner (CFP) and Director of Rehmann’s Wealth Management Division, spoke to the Business Journal this month about the ongoing tax and economic changes that will make 2022 a good year to reassess his charitable giving , retirement and estate plan, life insurance and investment strategy.
Most business owners will already have their financial ducks in a row by the end of 2021, but Knipping said just in case, they should make sure they’ve maximized their tax-deferred retirement account contributions and allocated 401 (k) profit- split the amounts, and if they’re looking for even more potential tax savings, consider putting money into a cash balance plan for each employee. An overview of the cash balance plans is available at bit.ly/smartassetCBPexplainer.
Wealthy people can use their free time during the holidays to plan their charitable giving for the next two years, Knipping said.
“Successful people usually realize that their community was a big part of it, and they want to give back, whether it be to the larger community, a school, a church or any other philanthropic group, and the end of the year is really a good time to reflect and revisit all of these things, whether it is for yourself, your family or your community, ”he said.
Knipping recommended for those who have experienced a liquidity event in 2021 (or are expecting one in 2022) – including an inheritance, the sale of a business, the buyout of a partnership, or the accumulation of bonuses from actions – consider creating a fund advised by donors to channel their donations in a way that maximizes their tax benefits.
“When people go through a liquidity event, like when they sell a business or are bought out of their partnership, this will be their highest level of income for the rest of their lives, and it will also be their year of business. highest tax. the rest of their life, ”he said. “A donor advised fund acts in the same way as a private family foundation”, allowing individuals to invest up to a certain percentage of their adjusted gross income into the fund without the additional expense of operating the fund. a private foundation.
The individual can then invest the fund in stocks or bonds and watch it grow while getting a tax deduction. In addition to putting money into the donor-advised fund, people can transfer shares they own, or even sometimes real estate, into the fund without incurring taxes, he said.
Knipping said setting up donor-advised funds would make sense for people planning to donate to charity above the standard $ 24,000 deduction in their high-income year, as well as for people who were already planning a certain amount of charitable giving, say, over the next 10 years, and their liquidity event allowed them to put that entire amount for 10 years into the fund at a time.
“This is one of those (scenarios where it goes) doing good doing good,” Knipping said.
Those who are 70 and a half or older should make sure they have withdrawn their minimum required distributions (RMDs) from their individual retirement accounts (IRAs) by the end of 2021, Knipping said. A planning tool in the arsenal related to this is to allocate a qualified charitable contribution as part of their RMD, which reduces the tax payable on the distribution.
Knipping said it would be wise to hire a CFP or CPA to perform a general review of a retiree’s estate planning strategy, both for the retiree and their beneficiaries.
“Looking forward to 2022 and beyond, for people who have retirement accounts, IRAs, or 401 (k) s, typically over $ 5 million, you really want to take a look at your retirement strategy. distribution, ”he said. “… The rules for distributing pensions changed last year, and the first year of entry into force is 2021, but in reality 2022 will see more people affected. “
He said that when people start to be forced to take RMD at age 70 and a half, “the first two years are not bad.”
“But if you only take the minimum, your account will probably grow and grow, and by the time you are 80, you are withdrawing large amounts, like 10% a year. Not only are you taxed on that larger dollar amount, but it also impacts the rest of your regular income, ”he said.
One rule that has changed that has an impact on estate planning is that when unmarried beneficiaries inherit the IRA from their parents or loved ones after they die, they must empty the IRA within 10 years.
“Say you’re 45 or 55, in your peak earning years, and inheriting a million dollar IRA from your mom and dad, which is a good thing, but you must withdraw it over 10 years. period. So you’re in your peak income window… and then you have to withdraw IRA dollars, which is regular income (for tax purposes), ”he said.
“So what’s more important than ever, in 2022 and going forward, is the ARI distribution strategy. This could include just withdrawing the money from the IRA, this could include Roth conversions, but that should be a plan, as Million Dollar IRAs are a good thing, but they can also be considered a “tax bomb,” and you don’t want to be near a bomb when it explodes.
Another upcoming change is the fact that the exclusion threshold for inheritance tax will drop in 2025 from $ 11.7 million per person, as it was under the administration of President Donald Trump, to $ 6 million. , as before the days of Trump.
“It’s one of those things that people really need to review, because people have become insensitive to the idea of inheritance taxes – a lot of people have – because they’re like, ‘ Oh, me and my wife, we have $ 23 million exemption, and our domain is only worth $ 15 million. Well, by the end of 2025 it will be taxed again, ”Knipping said.
“They should really work with their CPA or wealth manager to see how the potential estate tax changes that will occur at the end of 2025 will affect them, and then determine how much they want to benefit their family members.” , what they want to do. for contributing to the community and how much tax they are willing to expose their estate to.
People whose parents are already retired – especially if a family business is at stake – should encourage them to create certain types of trusts and / or make a Roth conversion so that the next generation receives wealth benefits, not cash benefits. tax penalties of their inheritance. , Knipping said.
Another element of wealth management that business owners and individuals should consider in 2022 is life insurance, Knipping said.
“Life insurance is a financial instrument,” he said. “Most people with a mortgage, another common financial instrument, consider refinancing and check whether that mortgage is appropriate at least every three to five years. You should do the same with life insurance. You don’t just have to buy it and put it in the drawer and never look at it again.
One of the consequences of not having enough life insurance is that it could affect the transfer of ownership of a business in the event of the death of a family member.
“Let’s say two brothers own a business. They have a buy / sell agreement, so if one brother dies the other brother takes over, ”Knipping said. “A lot of times it’s at least partially funded by life insurance, so when my brother dies there is cash to pay her family so they can go on living, and I’ll pay the rest over time.” . Life insurance and buy / sell agreements are usually never reviewed, but they should be. “
Often times, a person sets up a life insurance trust to help pay estate taxes after death, but if premiums are not paid before death, the policy could be invalidated, Knipping said.
“Life insurance policies are quite complicated and should be reviewed every five years,” he said. “Bad things could happen, both in buying / selling and especially in life insurance trusts or estate planning, which can really make a big difference in a family’s financial success in the future. . “
People who haven’t rebalanced their investment portfolios for some time should plan to do so in 2022, Knipping said.
“The last five years have been pretty good for the stock market and pretty bad for bonds, so a lot of people have more stocks in their portfolios now than they did five years ago, so they’re exposed to more volatility and decrease because of this allocation, ”he said. “By reviewing their allocation at least once a year, you have the ability to keep the stocks and bonds in your portfolio within your original risk tolerance, so that you don’t expose yourself to larger and larger amounts. of risk.
He said one way to manage risk might be to sell some growth stocks, like Apple or Google, and buy less risky dividend-paying stocks, or invest in real estate instead of bonds.
“If you re-evaluate your investments every year, you have the opportunity to make a positive decision about how you want your portfolio to act, instead of just letting it run,” he said. “The answer might be to let it go, but if you don’t (re-evaluate) your investments every year, you’re just rolling the dice to see what happens. “
Knipping said that with today’s economy, individuals and business owners should also consider seeking help hedging their portfolios against inflation.
“There are certain types of investments… (which) are good enough if there is no inflation, and which are really good if there is inflation,” he said.
Knipping said those who anticipate will be the most successful.
“If you don’t have a financial plan, work with someone to create one. If you have a financial plan and haven’t reviewed it in a few years, get someone to review it. … If you don’t have a plan, you are more likely to fail.