The New Year marked the expiration of a two-year temporary provision granting unlimited federal insurance coverage on deposits held in noninterest-bearing transaction accounts. These typically include certain business, non-profit and municipality checking accounts as well as lawyer trust accounts and that require quick access to large amounts of money.
Effective Jan. 1, 2013, the Federal Deposit Insurance Corp. (FDIC) reduced its coverage of these accounts to $250,000, the same limit it imposes on all interest-bearing accounts. With this change, the FDIC no longer considers noninterest-bearing transaction accounts separate ownership categories with their own distinct coverage limits. Rather, they are now aggregated with all similarly titled accounts held at the same institution and protected only up to the legal maximum of $250,000. Account balances above that amount are not insured and therefore not recoverable should the bank fail.
The government instituted unlimited insurance coverage of noninterest-bearing accounts at the height of the financial crisis in order to instill confidence in the country’s financial institutions and discourage depositors from withdrawing funds en masse from the nation’s community banks. With coverage limits reverting to pre-2010 levels, now is the time to meet with your accountant to evaluate your exposure to risk and review tactics that thoroughly protect you and your funds, including:
- Ensuring all accounts are properly titled
- Ensuring account balances do not exceed the $250,000 limit
- Spreading your deposits over multiple accounts and/or multiple banks
- Reviewing alternative cash-management and investment strategies and their related tax implications
President Obama signed into law a Congressional bill called the American Taxpayer Relief Act that will mean increased taxes for many taxpayers but prevented steeper increases while delaying debate on fiscal issues that could rock the economy. The newfound tax certainty under the American Taxpayer Relief Act was a welcome holiday-season gift. But political fights over federal spending cuts and U.S. government debt are likely to erupt during this year’s tax season ahead.
The president and the Congress clarified tax policy but came dangerously close to pushing the nation off the so-called “fiscal cliff,” or allowing simultaneous tax increases and government spending cuts to begin this month, as previously scheduled. Congress soon will return to the “cliff,” however, and the associated economic risks of fiscal austerity.
Features of the act unrelated to taxation include delaying until March a wide range of automatic federal spending reductions, known as the “sequestration,” that had been scheduled to start this month. The broadest immediate impact of the new legislation is an instant increase in the Social Security payroll tax rate to 6.2 percent of income from the temporary 4.2 percent level.
Love it or hate it, the new law is timely, at least. The law’s enactment calmed concern about the pace of tax-return preparation and processing in the current tax season. The enactment of the American Taxpayer Relief Act during the first few days of January should minimize any delays at the Internal Revenue Service in processing 2012 tax returns and disbursing refunds. Protracted political efforts to pass the law could have kept the IRS from revising tax forms and software companies from updating tax programs until the late stages of the tax season.
The wealthiest taxpayers face bigger tax bills on this year’s income, to be sure, as a result of the new law. But taxpayers with annual wages above thresholds as low as $200,000 could pay more taxes, too.
Relief from the threat of the alternative minimum tax is part of the package. The American Taxpayer Relief Act permanently indexes the amount of individual income exempt from the alternative minimum tax to the rate of inflation. It also sets the exemption amounts for 2012 at $78,750 for married taxpayers who file joint tax returns and $50,000 for filers of individual tax returns.
But the new law also limits certain deductions. For example, medical expenses above 10 percent of an individual’s adjusted gross income are now deductible, up from the previous threshold of 7.5 percent. Exceptions apply to taxpayers and their spouses who turn 65 between now and the end of 2016. For them, the threshold will remain 7.5 percent.
Also new this year is a Medicare tax equal to 3.8 percent of the lesser of (1) the individual’s net investment income during the year or (2) the amount the individual’s adjusted gross income above a threshold amount, which tops out at $250,000 for married couples filing joint tax returns. Examples of investment income include annuities, dividends, interest, rents and royalties.
Laws other than the American Taxpayer Relief Act also took effect this month and added to taxpayer liability. For example, the 2010 health care reform legislation this month raised the hospital insurance portion of employees’ Social Security tax, also known as the payroll tax, from 1.45 percent of covered wages in excess of the threshold to 2.35 percent. The threshold is $250,000 for married couples filing joint returns and for surviving spouses, $125,000 on married people filing individual returns, and $200,000 for other types of taxpayers.
Except for an increase in the top rate for the wealthiest taxpayers, the American Taxpayer Relief Act provides a permanent extension the individual income tax cuts during President George W. Bush’s first term in office under two public laws: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).
The American Taxpayer Relief Act preserved the six marginal tax rates on individual income under the 2001 and 2003 laws (10 percent, 15 percent, 20 percent, 28 percent, 33 percent and 35 percent) and created a new one: 39.6 percent on taxable income over thresholds of $400,000 for individual taxpayers, $425,000 for taxpayers who file as heads of households, and $450,000 for married taxpayers who file joint returns (or $225,000 for married spouses filing separate returns). The tax rate on capital gains and dividends rises to 20 percent for the wealthiest taxpayers and remains 15 percent for taxpayers in the middle tax brackets.
In addition, certain tax provisions under EGTRRA that were temporary have become permanent under the American Taxpayer Relief Act. These include generous rules for calculating tax credits for the care of dependents, based on expenses up to $3,000 for one dependent or as much as $6,000 for more than one. The American Taxpayer Relief Act also extended through this year several temporary provisions for individual taxpayers, among them the ability to make tax-free charitable contributions with funds from individual retirement plans and to exclude from gross income the discharge of home-mortgage debt, through a short sale, for example.
The exclusion of assets from estate tax and gift tax remains $5 million plus an adjustment for inflation. It is $5.12 million for 2012 tax purposes. But the top estate tax rate increased, effective January 1, to 40 percent from 35 percent. The new law also made permanent the so-called “portability” election for widows and widowers. It permits an increase in the tax-exempt portion of a surviving spouse’s estate by the amount of the allowable exemption that the deceased spouse never used.
Various tax credits related to energy conservation, research and other expenses are part of the new law, too. Tax credits for energy conservation that expired at the end of 2011 got an extension through 2013 under the American Taxpayer Relief. These include credits for purchases of energy-efficient appliances and homes and for development of facilities to generate energy from wind and other renewable resources. The new law also enhanced and extended through 2013 a tax credit for spending on research and development, which had expired Dec. 31, 2011. The enhancement allows partial inclusion of R&D expenses of an acquired business in calculating the credit.
Over the past 35 years Berkowitz Pollack Brant has built a strong and diverse business valuation practice. Our services are valuable for clients dealing with acquisitions, partnership disputes, government inquiries or other situations in which a representation of assets is required.
You may remember the television series “Dragnet” from the late 1960s and Sgt. Joe Friday using the catchphrase that will forever be attributed to him, “Just the facts, ma’am.” Perhaps this should be the catchphrase for the valuation profession as well. What is the goal in performing a valuation? To produce a defensible, and comprehensible, valuation report based on the facts that will satisfy the needs of the client and pass muster with the courts, IRS or others that will evaluate it.
A valuation should not only contain a thorough analysis and application of valuation methodologies, but also state the material facts. Each engagement clearly and concisely associates the facts with research, studies and analysis presented in the report. In order to give the users a complete and clear picture of the subject of a valuation, it is critical for the information to be understandable and presented with clarity. If the user cannot understand it, why would he or she want to rely on it or submit to the court, the IRS or others?
Users of valuation reports should ask the following questions:
- Did the appraiser present all the facts and circumstances of the engagement that you would want to know if you were the buyer of the interest that is the subject of the report?
- Were the facts sufficiently connected to the research, studies and other evidence to establish their appropriateness?
- Do the facts and the analyses support the conclusion reached by the appraiser?
- Is the report written in a clear and convincing manner?
The consequences of not submitting a defensible report can be grim – heightened scrutiny by the IRS, challenges by experts and a negative outcome for the client. A defensible valuation can avoid these pitfalls and aid in securing a positive result and ensure a happier client.
We have a department that solves problems for clients every day. How do you determine what services you need? Whether you are contemplating a sale, involved in the planning of your estate or to attempting to secure financing, our consultants can assist you. Call us today to learn more.
Article written by Sharon F. Foote, ASA, CFE.
Sharon is a supervisor in the Forensic and Business Valuation department and has been a valuable asset to the firm for over 10 years. She focuses her practice on family limited partnerships and real estate services. Sharon also assists in providing litigation services in marital dissolution, accounting investigations and product liability claims.
By Richard A. Berkowitz, JD, CPA; Managing Director, Berkowitz Pollack Brant; Chairman, Provenance Wealth Advisors
Paradigm shifts in the delivery of financial services and products has opened up enormous opportunities for CPAs to take their rightful place as principal financial advisors to their clients. The remaining large brokerage houses continue to require large production minimums of their retail advisors. Clients want to understand why they are buying financial products and they want to be properly advised instead of simply being sold “investments du jour.”
An estimated 40 percent of all public accounting firms are now offering some form of financial or wealth management services. CPA firms have been utilizing the traditional model of delivering financial services and products leading to moderate success. Provenance Wealth Advisors (PWA) has achieved enormous success. This article is about how Berkowitz Pollack Brant (BPB) and PWA achieved a successful and sustainable financial planning practice and developed clients who are raving fans in a relatively short time frame.
Most firms have established their CPA financial service models in the same way that they established their other successful niche practices. A partner was designated as the champion and that partner who had an appropriate financial planning background was designated to lead the practice. The problem with this approach is that CPAs have not been trained to be successful financial planners.
Financial planners are trained in the art of selling financial services. They know how to sell financial products, including life insurance and how to deal with objections and rejections. Although there is similar training in the fields of estate planning, income tax planning, deferred compensation and related financial planning fields, CPAs simply do not have the sales and financial product background and knowledge that financial planners develop as they come up through the ranks. Successful financial planning firms employ successful financial planners.
CPAs may be trusted advisors to their clients in the financial planning field, but they are not trained in the techniques that are required to motivate clients to complete their plans and purchase the products that will help them fund those plans. Good financial planners and CPA’s are ethical, have integrity and are motivated to help clients achieve their financial objectives while maintaining objectivity and making a living. However, the integrated effort of the two approaches is more powerful than their independent efforts.
In 1999, Florida amended its accountancy statute to allow CPAs to earn commissions and contingent fees. Our firm was working with a financial planning group in South Florida and invited them to form a joint venture called Provenance Wealth Advisors. PWA was formally established in February 2000. Since this time, PWA has since grown from $100 million in assets to more than $1.5 billion of assets under management. Our success has been based on referrals from satisfied clients and minimal external marketing. Today Berkowitz Pollack Brant is ranked in the top ten CPA firms with assets under management in the country.
This success is based on a symbiotic culture and a process focused on complete CPA/planner integration. Our collaborative joint culture focuses on comprehensive financial planning for each client. CPAs and planners are involved in every step of the plan and their work and client contact is integrated in the process that is undertaken with each client. A key aspect of the culture is that the CPA/client relationship is protected and enhanced by the planners, and they are trained to make certain that the CPA’s role is primary. The planner’s role is to assist the client and the CPA in finding appropriate solutions.
Our Process to Engage the Client
Once we identify a prospective client, we offer a free Present Condition Analysis (PCA) A PCA is a snapshot of the client’s current financial situation, including their estate and financial plan, insurance plan, investment portfolio and succession plan. We find that the majority of clients have never looked at all of these subjects in tandem.
Obtaining the information necessary to prepare a PCA is a key aspect of taking a prospect to the next level of becoming a client. Whether it is an existing or new client of the CPA firm or a prospect identified by the financial planning firm, the key is obtaining the necessary financial information to analyze to get a complete and accurate snapshot of the prospect’s financial life. Analyzing the information that is provided by a prospect and preparing the PCA truly represents the marketing cost for our firm. Preparing a PCA for a prospect with a seven-figure estate will run about $5,000-$10,000 in time. This substantial commitment is a good investment because a completed PCA will result in the prospect becoming a client in excess of 90 percent of the time.
Once the PCA has been completed and the planner and the CPA have met with the client to review the PCA, we usually see a paradigm shift in understanding the existing financial plan. The CPA and the financial planner are able to communicate with the client on an entirely enhanced level of understanding. Most of the time the client will understand that his or her estate plan has not been implemented properly, that it is not what they thought it was or that it has not accomplished his or her specific goals.
Prospective clients become clear on what they want to accomplish and are grateful that the issues that have been raised have been brought to their attention. A fee is proposed for an engagement to complete whatever tax and financial planning is required to mitigate the issues that have been identified as problems with the present estate, financial and business succession plan.
The Planning Process
Once engaged, the financial planner and the CPA conduct additional fact finding and gathering of data. They work together to formulate a revised plan that meets the client’s objectives and they allocate the responsibilities that each of them will have in executing the case. At the next meeting, the client receives a written comprehensive financial plan which is presented to them in detail with the planner and CPA who each have pre-determined roles in presenting the plan. The joint presentation is again intended to enhance the central role of the CPA while allowing the planner time to establish a strong supporting role with the client.
The process of formulating and finalizing the financial plan for the client may take multiple meetings. However, the planner is responsible for making certain that the process stays on course and there is a continuous effort to finalize the plan. The plan is documented with a drafting checklist that has been developed by BPB and PWA. Over time, BPB and PWA have worked with several law firms to create consistent forms that do not change every time allowing rapid review of documents and a shorter time from initiating the case through execution.
Completing the Plan
Following execution of the various legal documents, an integrated effort by the CPA and the planner is undertaken to complete all aspects of the client’s plan. We follow a checklist to ensure that all of the assets are re-titled and transferred to appropriate entities and all necessary documents are executed by all parties. The CPA and Planner make sure that the appropriate compliance is prepared by the CPA firm and that changes in the client’s structure are understood. This is facilitated by year-end tax and planning meeting with each joint client of the CPA firm and the planning firm.
The coordination, integration and collaboration between the CPA and planner have been choreographed to ensure that the client’s objectives have been carefully addressed and, more importantly, implemented. Our process is fully documented and our people are trained to execute each case the same way. While the upfront investment is great, the resulting consistent success has created raving fans of our clients and a growing financial planning business.
As CPA firms across the country look to deepen relationships and develop new revenue streams, a collaborative approach to helping clients meet their long-term financial plans in difficult and complex economic times is a powerful tool. As with every element of our business, a well-thought out model and superior execution is key to our success.
About the Author:
Richard A. Berkowitz is the founder and managing director of Berkowitz Pollack Brant, an advisory and accounting firm with offices in Miami, Ft. Lauderdale and Boca Raton. He also serves as chairman of the board of Provenance Wealth Advisors. The professionals of BPB and PWA offer a comprehensive approach to income, estate, financial and investment planning. For more information, call (305) 379-7000 or e-mail firstname.lastname@example.org.