Published on Apr 20, 2022 by Jamie Hargrove in Wealth Management

Effective tax and estate planning is key to growing AUM when clients experience financial windfalls.

Accumulating additional assets under management seems to be a perennial goal for financial advisors who hope to scale up their enterprises. Strategies for expanding access to AUM include wealth-focused networking, traditional marketing methods, the application of a scalable pricing model and more.

But perhaps one of the most effective—and frequently overlooked—methods advisors can use to build their AUM portfolios is finding ways to provide preemptive value to their most valuable clients when it comes to financial windfalls.

If a client is anticipating a major financial event to materialize—mergers and acquisitions (M&A), a large inheritance, the sale of an expensive asset, etc.—they will likely turn to their financial advisor for some initial guidance. However, just because the advisor provides base-level guidance, that doesn’t necessarily mean this new or otherwise transformed wealth will be allocated to the advisor’s portfolio. By offering measurable value by way of tax savings, for example, prior to the material event, advisors can dramatically increase the likelihood these assets will ultimately end up under their management.

What are some of the best ways to offer clients preemptive value prior to the materialization of a major financial event?

1. Helping to Compare Multiple Offers

As business transactions or other capital events are underway, clients will almost certainly receive multiple offers. And while, in some cases, comparing these competing offers might be as simple as looking at their underlying dollar value, the use of differing financial structures can make the analysis a bit more difficult.

For example, if one offer is for a straightforward asset sale and the other includes a stock sale (but lower dollar total), which should the client pursue? Ultimately, there is no universal answer to this question. The exact figures, discount rates and other factors will all need to be considered, including the client’s personal financial goals. These confounding factors are why working in conjunction with a tax-oriented legal team as well as forward-thinking tax advisors is so important.

2. Assessing Common Income Tax Issues

There are many sophisticated strategies that can be used to avoid certain taxes, such as evaluating 1031 exchange options in real estate transactions or opting to use LLC membership units instead of preexisting corporate stock. And, of course, there are plenty of situations in which these innovative strategies might make a lot of sense. But there are no one-size-fits-all solutions in the world of M&A and failing to consider certain tax implications can potentially cost a client millions of dollars.

One issue that some buyers (or sellers) might overlook is the emergence of recapture taxes or recapture tax credits in the event of the sale. These taxes can vary by state, meaning that the location of both parties can make a material difference. In some cases, these mistakes can match 10% of the sale, or even more.

Further, large transfers of wealth have meaningful implications for estate planning for multiple generations. Maneuvers facilitated by an estate planning attorney before or at the time of a capital event can help to accomplish a client’s long-term goals while reducing the eventual 40% estate tax. In other words, there are several estate planning techniques to be considered when it comes to a client’s short-term and long-term goals.

3. Finding Effective Strategies to Minimize Taxes

If the business sale transaction is taking place in a state that has income taxes, then addressing options on how to avoid the income taxes can be of great material benefit to the client. In some cases, simply restructuring a deal can help clients avoid state income taxes altogether (currently, nine states have no income tax while California has a top marginal income tax bracket of 12.3%). Depending on the state, an asset protection trust might be the most financially viable option—again, this illustrates why, in order to deliver the most value for their clients, financial advisors might need to work with estate planning and tax attorneys.

There are some tax advisors who will say that state tax saving strategies can be applied only to stock sale transactions, and that is just not true. In fact, there are three planning tools available for asset sale transactions and any one of them can be applied to bring about significant tax savings.

4. Exploring the Benefits (and Drawbacks) of Charitable Planning

Even if they plan to make a large charitable donation someday, many clients will consider charitable planning to be a low priority that they can address later. However, future charitable planning goals will often affect how a deal should be structured today.

Through the use of informed preclose tax planning strategies, not only will clients potentially be able to significantly reduce their initial tax bill, but advisors can also help set them up to make a larger charitable donation now or in the future, and with potentially significant additional tax savings.

5. Combining Multiple Future Financial Goals

As any experienced estate and tax attorney or financial advisor will agree, one of the reasons large transfers of assets can be so complicated is that the best strategy for one situation will rarely be one that works exactly the same in another. Other variables, including potential exposure to the 40% estate tax, the need to protect certain assets from familial or problematic claims, and more can all necessitate a complete overhaul of an M&A strategy.

And, perhaps most importantly, each client’s personal preferences and long-term financial goals will need to be considered. The existence of simultaneous, often competing, interests will ensure that the human element of financial, estate and tax planning will never truly go away.

The Bottom Line: Effective Tax and Estate Planning Is Key to Growing AUM

Ultimately, whether a client is anticipating a major M&A or any other significant wealth transfer, they will want to work with someone they can trust. And when they see that their financial advisor can offer a truly comprehensive overview of their financial situation—with the support of other professionals—they will be much more likely to want to work with that advisor for years to come. In other words, by going above and beyond during the preclose process and providing supporting services like the ones mentioned in this article, financial advisors will be more likely to secure and maintain their client’s additional assets under their management.