Often CPA’s assist clients with the implementation of basic estate planning tools such as trusts. Higher net worth clients tend to need to services of an estate planning attorney. Too often the CPA is not included in the client’s estate planning process when an attorney is used. Often the CPA’s absence in estate planning is a result of the failure on the part of the estate planning attorney and the CPA to educate the client as to the value added by the CPA. This article aims to illustrate why involving your CPA in your estate plan is so important.
Reasons for Including Your CPA:
There are a plethora of reasons for the client and his estate planning attorney to seek the ongoing insight and supervision of the CPA as part of this process.
Individuals see attorneys infrequently during their lifetimes, mostly one time projects; accountants, on the other hand, tend to see their clients at least once a years and often quarterly. CPA’s also maintain on ongoing dialogue with their clients about changes in their life which may trigger the need for important changes to any estate plan. When a client visits an estate planning attorney, the attorney must uncover facts about the client to assist in targeting the best estate planning techniques. These facts are usually related to net worth, concentration of assets in certain categories (such as privately owned company stock), and cash flow needs for life events. Most clients turn to their CPA to fill these requests from their estate planner as they are the only one keeping complete records as they are needed for tax filings.
While engaging their client the CPA, when aware of the estate plan, can alert both the client and the attorney to any noticed activity that may adversely affect the estate plan.
In many states, probate proceedings may be avoided upon death by means of a revocable living trust, but only if the trustors (sometimes also called “grantors” and “settlors”) creating the trust transfer formal title to their wealth from their individual names to themselves as trustees of their trust prior to death. Since the CPA regularly sees a client’s property tax statements for newly-acquired real property and Forms 1099 for securities and bank accounts, he may be able to ascertain, on an on-going basis, (from the title listed on such forms) whether the client, who has a current revocable living trust, has taken title to recently acquired property and/or accounts in the trust or, instead, in his or her individual name. Most clients do not continuously consult with their estate planning attorneys to ensure such vigilance.
Practice Development and Continuity
It goes without saying that gift and estate planning considerations are a relatively untapped area for a CPA’s practice development, and virtually every current client can be helped by the introduction to such planning. In addition, it makes good practice sense for the CPA to understand a client’s basic estate plan, since after the client’s death, the CPA’s participation in the estate administration and allocation/distribution of assets could provide a smooth transition to representation of a surviving spouse and, later, the next generation. This phenomenon is very prominent in the case of the passage of ownership in a family business down to the children of the original owners; the level of the CPA’s participation in the ownership and management transition may dictate whether he or she is asked to continue in representing the enterprise.
AREAS FOR CPA INVOLVEMENT
Here are some of the more common areas of gift and estate planning where the CPA can provide substantial service to the client, aside from traditional auditing and income tax planning and report preparation services:
Gift Giving Program
The accountant can determine the estate and gift tax savings, and the drainage of assets otherwise available for the client’s future needs, which can result from gifting options. In addition, the accountant is best qualified to evaluate income tax basis and income shifting considerations in selecting the assets for a gift program.
Many estate planning techniques utilize irrevocable trusts. These vehicles require a constant vigil, since too often clients neglect to respect the formalistic requirements of such a separate legal, taxable entity. Segregation of assets and records, protecting trust assets from the client/trustor’s access, notifying beneficiaries of trust assets are just some of these requirements often neglected by an incompetent Trustee. The accountant, who often prepares accountings and tax returns for the trust, has the long-term relationship with the client and his or her family, as well as a strong business and quantitative background, and is often the logical choice to serve as Trustee of such a trust.
Revocable living trusts may not require the accountant as initial Trustee (the accountant may, however, be an appropriate successor Trustee, especially under circumstances where the client is living but has become incapable of handling the totality of his or her wealth) but, as stated above, the accountant can continue to monitor whether this effective probate-avoidance technique is being administered correctly by the client. Even though while the client lives and serves as Trustee no separate tax return is required for the trust under current Treasury Regulations, the accountant is the only party with data sufficient to determine whether the client is keeping his or her assets in the name of the trust, so as to avoid probate.
Life Insurance Needs
The accountant is aware of the lifestyle and savings practices of the client, and may be uniquely suited to understand the life insurance needs of the client, considering (1) the cash flow drop which a death will bring as a result of lost income of a deceased spouse and (2) the liquidity needs to pay estate tax. Often a business can only survive the death of a major shareholder/employee with careful advance planning. The accountant, who regularly observes and advises the principals of a family business, can evaluate the client’s needs for buy-sell or redemption arrangements (another place where life insurance may be appropriate) and participate in the creation of business continuation contingency plans.
After the client’s death, the involvement of the CPA can be extremely important to the effectiveness of the estate plan. The estate tax returns of a decedent require significant information about the decedent’s assets, and it is most likely that the decedent’s CPA has the majority of this information in his files. That being said, if someone other than the family’s CPA is engaged to prepare the decedent’s estate tax return, much of the time spent on that return will be contacting the CPA for that information (which is why CPA’s should entertain adding the preparation of estate tax returns to his services). Estate tax returns require the reporting of fair market value information for all of the decedent’s assets, and often the accountant is the best source of information which an independent appraiser will require to make his evaluations. Further, many estate plans require allocation of assets among several trusts which have different distribution schemes and different future estate tax characteristics, and the CPA’s understanding of the client’s asset mix, as well as the appreciation potential of particular assets, can be invaluable in this allocation/selection process. In many states, the probate process, if unavoidable, may be an involved proceeding, often requiring court-approved accountings for estates, and sometimes trusts, and the obvious choice for the preparation of such accountings is the family CPA.
SUGGESTED ACTION TO INCREASE ESTATE PLANNING INVOLVEMENT
In most areas, the estate planning community is comprised mainly of attorneys, life insurance agents and financial planners. Perhaps at the next meeting with each of your clients, it may be appropriate to inquire as to the current status of their estate planning and the identity of the estate planning professionals working with them, so as to make contact with these individuals in order to offer your participation. Finally, many professionals have found that regularly meeting discussion groups of various estate planning professionals (accountants, attorneys, life insurance agents, financial planners and trust officers) provide important “war stories” and practical guidance which can increase a CPA’s familiarity with various estate planning concepts and techniques.
The CPA is uniquely suited to participate in the estate planning and administration of his or her clients, and can be extremely valuable in minimizing the wealth transfer tax burden and wealth administration tasks of future generations. Further, a CPA’s practice can be greatly enhanced by the added services which such participation entails.