Technology and CPA Estate and Longevity Planning

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanEstate planning is a vital service for clients. While historically estate planning may have focused on estate tax minimization planning, for most clients estate taxes are much less of a concern, if any at all. The focus for all but the wealthiest clients is shifting to longevity planning and other non-tax aspects of estate planning. Practitioners can capitalize on this dynamic by modifying practice procedures, implementing new processes and capitalizing on some of the advances technology can offer. In some instances, how estate planning matters should be handled might differ from how other practice areas are handled. Many of the practical points below are simple “off-label” applications of existing software to address some of the unique aspects of the CPA firm’s estate planning clients.

Engagement Letters

Practitioners should periodically review estate planning engagement letters to update them to reflect new ethics rules, changing practices, integration of new technology into their practice, and other factors. For example, if the firm changes its policy on email retention or general document retention, that might be communicated to clients in the estate planning engagement letter. While some practices may destroy documents after a certain number of years, many estate planning documents should be retained indefinitely. From a tax perspective, an estate tax return Form 706 should be retained indefinitely because it can provide vital tax basis data in future years when an asset is sold. But there is another perspective to document retention for estate planning. Practitioner’s meeting notes may be invaluable to demonstrate a client’s state of mind or what the client wished to achieve in terms of his or her dispositive scheme, business succession plan, etc. CPAs will often engage in these discussions and document them. Saving those documents for when they might be needed could be a priceless benefit to the client and his or her family. These considerations may be unique to the estate planning department and it may need different approaches than the firm in general. With technology having effectively reduced the cost of document retention to near zero, this longer duration policy should be evaluated.

Practice Characteristics

A practice that predominantly focuses on a large volume of compliance work for lower wealth clients will have a different emphasis than a boutique firm serving a more limited number of ultra-high net worth clients seeking a different level of service and relationship. The communications, engagement letters and other aspects of administering the estate planning practice must be modified accordingly.

While this is certainly obvious it is common to see practitioners implementing forms they obtain without adequately tailoring them to the characteristics of their client base which may differ significantly from the clients of the person who created the procedure or form.

Communications Generally

As the focus of estate planning shifts from estate tax minimization to longevity planning, client needs and goals are evolving. A client who had been consumed with complex tax minimization strategies may have been more transactional in orientation. Complete the note sale or GRATs and thereafter, a much lower level of service may have been viewed as necessary to maintain that plan: e.g., a grantor Form 1041 for the purchasing trust and an annual note payment. These clients may not have required much communication other than a reminder to submit tax compliance information for the trust and a tickler to remind the client to meet or GRAT payments. In contrast, the later-life planning client will require more hands-on regular work from inception of the engagement and throughout their lives. This might include regular write-up of financial and other transactions, which may evolve into bill paying and more as the client’s health declines. These clients may welcome ongoing communication of ideas and planning thoughts.

For this work to be profitable, many aspects will have to be automated and handled in as routine a manner as possible. It will also be important to educate the clients that the services involved are not merely bookkeeping, but monitoring and higher level value added services that justify the billing rates of a partner overseeing the matter. Different forms of communication may be warranted.

Communications Incorporated into Monthly Billing

Your practice is likely sending out monthly client bills. The cost to process the bills and mail them is a fixed cost. You can use regular monthly billing as a means of communication, not only as a means of billing. For example, footers can easily be added to each month’s bills so that they appear on all client bills or bills of selected clients. These footers can include practice information that will protect the practitioner, as well as planning tips. This can provide a no cost means of communication with clients. Many firms rely on monthly electronic newsletters to communicate with clients. While this is a low cost means of communicating with many clients, is it really effective for the typical estate planning client? Many estate planning clients are much older than other clients of the firm, and many simply do not use email or even if they do are not so facile with it that they will really click through all the links to read a relevant article in an e-newsletter. What is the open rate on your firm’s newsletter? Is that really high enough to rely on as a means of client communication? Adding informative footers to a bill will have a 100% visibility rate (if not you have a receivables issue!). This might include information about new tax developments, suggestions as to steps many clients should consider, a new firm document retention policy or a change in how Social Security is calculated that might affect the client. For example, the following are illustrations of footers to add to the billing program and which could be updated every month so that over the course of any time period every client will receive a range of cautions and planning ideas. Just as important, these will be saved as a permanent record of a communication with the client that might prove protective to the practitioner if a problem later arises. These can be very protective of the practitioner if a client later claims they were not informed of certain planning opportunities or changes in the law.

• Aging: As we age cognitive abilities can decline. Studies have shown that from age 60 onward the skills to make financial decisions decline, but our perception of our financial decision making ability does not. That creates a widening gap that those committing elder financial abuse exploit. A CPA firm can write-up your personal financial records and monitor them with periodic reports. This interim step may identify and prevent elder abuse or other costly mistakes. It can also lay the for that firm to take over bill paying if that should become advisable at a later date.

• Trust Administration: The cost of creating an informal accounting each year for a trust when the tax return is prepared may be modest. If a formal accounting is not being prepared, at least consider this lesser step. It will provide better and more understandable information to communicate to beneficiaries who are required to receive notice of trust information and it will preserve records that will make it much more economical to create a formal or court mandated accounting should that be necessary in the future.

• Federal Tax Law Changes: President Trump proposed the repeal of the estate tax. With the Republicans controlling the House and Senate this might in fact be a possibility but there is no certainty what will be done or the impact. If the estate tax is repealed will the gift tax be retained? Will a Canadian style capital gains tax on death be enacted to replace the estate tax if repealed?

• New Jersey Estate Tax Repeal: New Jersey’s estate tax exemption will increase from $675,000 to $2 million in 2017 and be repealed effective January 1, 2018. Articles in the media which suggest taxpayers need to do nothing are dangerously incorrect. While it is possible no action might suffice, the only way to understand the consequences to clients and their loved ones and heirs is to review the plan. Before canceling life insurance or changing the title to assets, talk to advisers. Wills, revocable trusts, insurance trusts, ownership of assets and much more could be effective. For those with smaller estates planning may well be less costly and simpler, but that does not suggest no planning will suffice. [use a state planning specific planning idea appropriate for your client base].

• New Fees and Billing Arrangements: All work and matters are subject to our new 2017 “Billing Arrangements,” and “Additional Engagement and Billing Terms.” This can inform clients of new billing rates, services, etc.

• Text Messages: It is not possible for the firm to maintain a record of text messages. You should assume any text message directed to personnel of this firm will not be received and will not be read. Some practitioners respond to text messages, many find it difficult. In particular, it may not be feasible to secure or save text messages so they will be part of the firms’ permanent document management system. Thus, you might wish to discourage these.

• Annual Review: Every client, entity, and trust requires an annual review to monitor changes in the law, changes in circumstances, annual consents and actions, operations, etc. Failure to participate in an annual meeting, and coordinate all advisers (estate planning attorney, corporate attorney, wealth manager, estate planner, insurance consultant, CPA, etc.), will undermine the planning objectives. Without regular review and maintenance few estate plans will succeed. Use a footer on a regular monthly bill to remind clients of the need to schedule an appointment.

Articles Enclosed with Monthly Billing

Your practice is likely sending out monthly client bills. Consider enclosing with each month’s bill a copy of an article a staff member has published, or if none are available, provide a short planning letter or checklist. This is another almost no-cost means of communicating valuable information. If you can earmark estate planning clients, or better yet, existing clients who could also prospectively become estate planning clients, enclose a short planning piece with each bill. This tactic is low tech, low cost, but effective. This is important since, as noted above, many older clients who are the target of estate planning and later life services are not as comfortable with email communications as other clients. Moreover, few prospective estate and later life planning clients understand the scope of valuable services an independent CPA firm can provide as they age. These regular “tidbits” can help demonstrate that.

Example: Most client powers of attorney include boilerplate gift provisions. Most were done when the estate tax exemption was much lower. Now that the exemption is so high, is there really any tax benefit to a gift provision? Might that gift provision serve as an opportunity for elder financial abuse? While CPAs are not going to prepare a new power of attorney, is anyone advising clients of this issue. There are many simple, practical but important issues that can lend themselves to this type of planning. It can be quite beneficial from a practice development perspective.

Calendar System

CPAs have robust calendaring capability to monitor compliance requirements. Those same abilities can be tweaked to provide valuable help to estate planning clients and to protect the practitioner from claims in the estate planning realm. Save covering emails into the client file to corroborate communications. Use the calendaring system to remind clients of the need for an annual estate planning meeting. Periodic meetings, even if done by a simple web conference to minimize costs (see below) are critical to keep any sophisticated estate plan on track. If a client has complex trusts, regular monitoring is necessary. Merely assuring that a periodic note or annuity payment is made is not sufficient. For other clients an annual or every other year meeting is necessary to assure the planning team is coordinated and to observe changes in the client’s circumstances or abilities. For aging clients regular meetings are vital to the client’s future security. If too many years pass between meetings the opportunities for the practitioner to observe a decline in physical and/or cognitive abilities and provide help may be lost. Those lost opportunities could mean the difference between the client becoming a victim of elder financial abuse or being saved from that tragedy. Periodic meetings may identify new services the client can benefit from. Has the time come for the CPA firm to take over bill paying? Use the calendar system to document efforts to communicate with clients and set up these periodic review meetings. For example, if a client cancels a meeting, do not delete that meeting entry from the calendar. Rather, mark it as “Cancelled by Client.” Perhaps minimize the calendar entry. Consider excluding historical calendar data from document destruction policies. Save calendar data indefinitely.

Example: Searching the client name in a case management system, or even Outlook, can provide a history of meetings and attempted meetings. Mark all client follow-up in the billing system even if as a no charge notation entry to create a history of efforts to communicate with the client.

Example: Administrative staff calling a client to schedule an update meeting should note the call in the billing system “No charge” there is a record of efforts to reach the client. These efforts can all serve as inexpensive practice development tools to garner more work from existing aging clients and help transform a mere 1040 client into a more robust later life planning client. If a child later challenges the CPA for not having helped his or her elderly parent take precautions, these records will demonstrate the efforts made.

Create Schematics of Client Plans

CPAs as a generalization are more adept at using Excel and other programs to create schematics. Few clients really understand the flow of their estate plan. As the sophistication of the plan grows, the likelihood of understanding declines. If the client’s estate planning attorney has not created simplified schematics showing the interrelationship of the many trusts, LLCs and other components of the plan, recommend the client permit the CPA firm to map out the plan. Not only might this demystify the plan, but it will help all the professionals the client works with do a better and more efficient job. Does the investment adviser really understand the nuances of asset location decisions if he or she is not clear on the various trust buckets, which are included in the estate and which are not, which are grantor trusts for income tax purposes, and which are complex trusts?

Use Inexpensive Technology to Boost Communications

While this might sound contradictory to the recommendations above, it is not. Practitioners should use the full array of technology that makes it easy and inexpensive to communicate information to clients and to corroborate that you have done so. An essential piece of information for any estate planning client is a family tree reflecting relationships. Practitioners should also gather email addresses for children, siblings, trustees and other key persons and have the client authorize them to be included in blast email communications. There is no cost to this effort, but informing family and other important people of later life and aging services the CPA firm can provide may well empower that person to be the catalyst to have the elderly client proceed with those services. Frequently, the adult child of an aging parent is the one who encourages the parent to undertake planning. Educating that adult child about the firm’s services may be more effective for practice development than all the direct communications to the client.

Email and Document Retention Policies

CPAs email retention and other policies should be reviewed in the context of estate planning needs, not just as part of an overall firm policy. Bear in mind that, whatever ethical rules or tech company recommendations may be, a challenge to a client’s dispositive scheme may not occur until decades later. The CPA, as the trusted adviser, may well have been intimately involved in the client’s decisions. Often, a long-time CPA has more involvement with these matters over a longer period of time, than the attorney who drafted the documents. Saving emails and file notes that might reflect on or corroborate the client’s wishes might be a vital service to provide the family. Practitioners should be sure these potentially vital communications are not deleted as part of a general document retention policy.

As part of such a policy, what happens to emails or work done at home or on a weekend? This might be a particular challenge for solo practitioners. One firm’s document retention policy includes the following statement: “For efficient identification, retrieval, and deletion of email and other electronic documents pursuant to this policy, attorneys and staff are required to organize and store all business record email and other electronic documents in separate folders designated for each client matter in the firm’s electronic document management system. No firm partner or staff member is permitted to store electronic business records anywhere other than the firm’s electronic document management system.” The key is to be certain all records are in fact saved into the firm system so they can be properly retained (or destroyed). This concern is one of the reasons for cautioning clients not to use text messaging to staff cell phones as a means of communication. It does not lend itself readily to being saved to the firm document management system. That point may warrant inclusion in the form engagement letter. As noted above, it can be added periodically to billing footers as a further reminder. Simply because a practice can legally destroy a file after some set number of years, e.g. six years for a tax filing statute of limitations, does not mean that it should be destroyed, especially in the estate planning context. One firm’s retention/destruction policy: “Unless otherwise specified by the Billing Partner, a destruction date equal to ten years from the date the matter is designated closed will be assigned to all files, with the following exceptions…estate plan, estate administration, files will be permanently retained."

Email Encryption

Confidentiality of client information is vital and many, perhaps most firms, now use portals that provide for encrypted emails, e.g. ShareFile, to transmit documentation with TINs, etc. This can be challenging, especially when practitioners collaborate with the client’s other advisers. Many financial institutions have firewalls that prevent access to the encrypted email portals CPAs use. What can be done in those instances? That does not mean firms should neglect the obvious. Take precautions to protect the physical office facilities, alarm systems, etc.


Collaboration might have been merely a footnote not too many years ago. Today it warrants prominent consideration and is an integral part of many estate planning practices. Estate planning is more complex and intricate considering changing demographics and what seems to be a permanent state of uncertainty as to the tax laws. A client intake form might include an authorization to be certain clients understand the importance of collaborative disclosures and provide the relevant contact at the outset of the engagement. The mere fact that the CPA estate planner has authorization to collaborate does not mean other advisers will do so. Other advisers may refuse to collaborate until they have authorization from the client. CPAs could prepare a letter from the client to all advisers authorizing and directing collaboration that the client can sign and distribute. For the aging client, CPAs may find themselves more routinely collaborating with more than just the client’s attorney and insurance consultant. Care managers, charitable giving officers and other experts might be involved to address the wide range of needs the aging client might have.

Collaborating with the Client’s Estate Planning Attorney

CPAs will often require input and information from the client’s estate planning attorney. Ideally, if collaboration occurs early in the process, while there is no issue of the client’s capacity, the client can authorize this communication. If this is not done, then facilitating the interactions will be more complex as the CPA may be constrained by the various ethical rules that might constrain the client’s attorney (this is all a good reason for regular review meetings as noted above). The attorney’s duty to represent does not end merely because of the client’s disability. See Model Rules of Professional Conduct 1.14(a). An attorney, as far as reasonably possible, is to maintain a normal client-lawyer relationship. An attorney can take protective actions depending on the circumstances. Model Rule 1.14(b). An attorney may reveal confidential information about the client when doing so to the extent reasonably necessary. Model Rule 1.14(c). This is generally limited to situations where the client is at risk for substantial physical, financial or other harm. Therefore, it may be advisable to authorize greater latitude in order for the attorney to take steps you might wish taken in less onerous circumstances.


Practitioners may balk at later life planning services viewing it as unprofitable bookkeeping work. That is a misunderstanding. While bookkeeping and bill paying may be involved, there is much more. The most valuable component of the services is not the routine or lower level bookkeeping or bill paying, most of which can be automated, but rather the monitoring and judgment of the experienced practitioner to “sniff out” potential elder abuse and other gaps that could lead to worse problems. The challenge is educating clients as to the importance and value of this work. Some tasks that had been billed on an hourly basis might now be billed on a flat fee or hybrid basis in order to be fair to the practitioner and reflect the value added. When rates or fee structures are changed, a footer could be incorporated on the bill explaining that an increase or other change has been put into effect. Many billing systems easily accommodate the addition of standard footers to some or all bills to facilitate such communication.

Technology Changes Client Vetting

Practitioners should take steps in advance of being retained. Some refer to these preliminary steps as “pre-engagement.” Turning away a bad case or client is important to the security, success and atmosphere of every firm. This is especially important in the estate planning space. Example, if the prospect has significant assets overseas what issues might this suggest with respect to reporting? Has the prospect complied with all the requisite reporting requirements? If the engagement involves the potential creation of Domestic Asset Protection Trusts (DAPTs) could providing assistance place the CPA at risk of being an aider and abettor to the client’s overly aggressive asset protection planning? It may be advisable to perform some due diligence on a prospective client before the prospect becomes an actual client. The internet has made it easy and, other than staff time, cost free. Have staff search the client’s names, and business names, prior to accepting the engagement. If issues are identified, address them before accepting the prospect as a client. If a prospective client searches raise worries, e.g. a physician prospect who has scores of negative complaints that sound substantive, perhaps the firm should consider whether that reputation risk is something it is willing to take on in the context of estate planning that typically will entail transferring assets into entities and irrevocable trusts. If the firm is willing to accept the client, it might choose to discuss these concerns up front as well as steps and costs of addressing them.


Technology is evolving and has and continues to change how CPA firms providing later life/aging and estate planning services should manage this component of their practices.

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

Checklist: Elder Financial Abuse

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanAging clients are growing in number and practitioners should address their needs.

Consider the Six Following Facts:

1 By 2050 the population aged 65 is projected to be 83.7 million. This represents significant growth, almost double the figure from 2012. The population 85 years and over will double by 2036 and then triple by 2049. The numbers are significant and the impact on CPA practices should be as well.

2 The 85-and-over United States population, the fastest-growing cohort in the country, is projected to rise from 5.8 million in 2010 to 19 million in 20501. The needs of these very elderly clients will be more pronounced, especially in terms of protection from elder financial abuse.

3 The biggest health concern is Alzheimer’s, which strikes at a 47 percent rate among the over 85 population2.

4 Mental illness and cognitive deterioration increase with age. So an aging population will result in an increase of these challenges as well. The average age of an Alzheimer’s diagnosis is 73. Almost half of those over the age of 85 have some cognitive impairment. Chronic illness also increases with age. 90 percent of seniors have at least one chronic disease, and three quarters have two or more chronic diseases. The challenges of chronic illness are broader than merely the cognitive issues associated with aging. Practitioners must recognize that mere physical frailty may make client targets for financial abuse.

5 The age for peak financial decision making is age 50. Financial decision making ability begins to decline by age 60 and is significantly impacted by age 80. Even more worrisome is the same studies indicated people’s perceptions of their abilities do not decline. At what age are most estate plans crafted? Likely much older3. The fact is that many clients wait too long to create an estate plan that addresses the challenges of aging. This delay exposes these clients to greater risks of elder abuse. Creating estate plans and signing documents at a time when the client is frailer and his or her cognitive abilities more limited may itself be the opening that perpetrators exploit. This growing gap between financial ability, and the aging client’s perception of his or her financial ability, is one of the gaps that perpetrators of elder financial abuse seek to exploit. It is also very telling of why preventing elder financial abuse is so difficult. Those who are vulnerable often perceive themselves as fully capable of making financial decisions. They will often simply not see any frailties to address in further planning. Practitioners that are truly acting in the long term role as “trusted adviser” may be the optimal professional to encourage planning.

6 Half of all people age 65 and older live alone4. This makes comprehensive planning, not merely the preparation of documents, essential for the protection of these clients. Many of these clients are not only vulnerable as a result of health challenges, but isolated in terms of having few if any family or friends to safely rely on to name in fiduciary capacities. Too often estate planners, and others, assume everyone has appropriate family members to name to serve as an agent under a power of attorney (or successor trustee under a revocable trust). The result is that these clients may be ill served by an estate planning process that presumes family or other trusted persons to serve in these vital capacities. That too could prove the unraveling of any safety the plan might have afforded. Different steps are needed.

Questions CPAs Should Ask

Planning for aging clients requires a different focus than other engagements. CPAs can clarify their role and delineate how they can protect aging clients by asking questions. Consider:

1. How can CPAs educate clients about the growing risks of elder financial abuse (identity theft, etc.)? Unless clients, and often their loved ones, are informed of the magnitude of the problems they are unlikely to pursue optimal planning.

2. What role can CPAs play to minimize the risks of elder financial abuse?

3. What practical steps can the CPA recommend to most aging clients to lessen the risks of financial abuse?

4. a) What roles can or should a CPA serve in under a client’s financial plan?

b) What liability does the practitioner face serving in those capacities?

c) What liabilities do the firm that the practitioner is affiliated with face?

d) Who should earn the fees involved, the practitioner, the firm, or some combination?

5. What steps can CPAs take to step fully into their role as the “trusted adviser” to protect aging clients? 6 What additional services can practitioners offer aging clients to minimize the risks of elder financial abuse, identify when abuse has occurred, and otherwise help protect aging clients?

7 How will the dynamics of the estate planning team change as a client ages? b) What new persons may serve on that team?

8 What role can CPAs serve when an agent under an aging client’s power of attorney acts? b) Similarly, what role can CPAs serve when a successor trustee under an aging client’s revocable trust serves?

9 Who should the practitioner deal with: agent under power of attorney, successor trustee under a revocable trust, guardian, care giver, who?

10 What steps should CPAs encourage clients to take with their estate planning attorneys to implement documents and safeguards to minimize the risks of elder financial abuse?

11 a) What signs of cognitive impairment should practitioners be alert for?

b) What corroborating evidence is advisable to obtain?

c) Who should a CPA consult with to determine a client’s capacity to take various actions?

d) Does the CPA have authority to speak to the persons who can provide the necessary input? If not, what approvals are necessary?

12 As the CPAs role widens, are additional services covered under existing malpractice coverage or is additional coverage advisable?

Checklist: Elder Abuse Planning Considerations

1 What is Elder Financial Abuse?: The crime must be defined to be identified. Elder financial abuse can be defined as the illegal or improper use of an older person's funds, property, or resources.5 That definition, as the crime itself is broad and wide ranging.

2 Reporting is Rare: Studies suggest that only one in 44 cases of elder financial abuse is ever reported. Whatever the actual figure may be, and that is likely impossible to discern, low reporting occurs for a variety of reasons. These reasons help better understand the crime of elder financial abuse and why advance planning to prevent, or at least identify it, is so important:

a) The frailty that creates the opportunity for elder financial abuse progresses to the point where the victim/client is not able to pursue the crime.

b) The duration and cost of legal remedies are both significant. The elder financial abuse victim may not have the strength, time, or financial resources to pursue the perpetrator. Even if family members or others discover the abuse they too may lack the willingness or ability to commit the requisite financial resources to pursue the victim’s legal rights.

c) Many of the elder financial abuse crimes are committed by family, close friends or others and the victim is embarrassed to discuss the matter.

3 Signs of Elder Financial Abuse: Understanding some of the common signs of elder financial abuse may assist practitioners in identifying problems. Consider:

a) Large payments, transfers, investments or other transactions occur and there is a dearth of supporting documentation about those arrangements. For example, the client’s bank account may reflect wire transfers of large sums to a title company or other third party to fund a purported investment but there is no documentation of the underlying contracts or details of what the wire was for (e.g., no operating agreement corroborating the investment, nor subscription documents signed that reflect the investment, etc.). Similar to this is new and unusual transactions. Sometimes even small unusual transactions may be an indicator of larger underlying problems.

b) When queries are made of the elderly client, agent under the client’s power of attorney, care giver or other persons involved about financial matters, the explanations provided are implausible, or worse. For example, the elderly client used to withdraw $100/week for incidental cash expenses (tips to delivery people, lawn care in the summer and snow shoveling in the winter, etc.). The amount has increased to $500-$1,000/month and the explanations are that “inflation has had an impact.” That is not sufficient to justify such a large increase. The poor explanation itself leads to further suspicion. Common explanations from family fiduciaries and caregivers might be similar to: “It’s none of your business,” “It’s for food,” or other comments that represent more of a deflection of the inquiry than an answer.

c) While it may be common for an agent under the client’s power of attorney to route mail, especially financial mail, to the agent’s address rather than to the client, often a better approach and one that is less worrisome, might be for the agent to receive duplicate statements and the client to continue to receive the originals. If an agent receives all statements it undermines any planning for checks and balances. Also, while it may be common for some seniors to shift mail to Post Office Boxes to minimize the risk of mail being stolen and confidential data compromised, who has access to that post office box? Who picks up the mail in the box?

d) While many clients have a favorite child, niece, grandchild, etc. most people seem to still bequeath assets in equal shares among a class of beneficiaries. When a dispositive scheme departs from this norm, especially if there is another suspicious connection to that beneficiary, this is a cause for concern and practitioners should, along with the assistance of counsel, investigate. A common example is a client whose will and beneficiary designations for decades benefited a list of beneficiaries equally. Then suddenly that historic division was modified in a new will or beneficiary designation to favor one family member who is spending increased time with the aging client, or has other unusual relationships.

e) While many clients intentionally have different dispositive patterns under beneficiary designations and legal documents, if there are not logical explanations as to why, that may indicate a financial abuse. For example, a client might name a new spouse as beneficiary of assets under her will and her children from a prior marriage as beneficiaries of a life insurance policy. That avoids fights over personal property or a home that might be used and funded by both. It might also be possible that the insurance or other asset that is not included in the taxable estate is given to a non-spouse beneficiary. On the other hand, if the client’s beneficiary designations were signed many years ago, and as the client’s health has deteriorated the client signed a new will that has a new and unusual dispositive scheme favoring one particular beneficiary that might be a sign of elder abuse. The favored beneficiary may have orchestrated the execution of the new will but not had the foresight or ability to identify and change the other beneficiary designations.

f) The care the elderly client is not receiving is inconsistent with the income or wealth she has. This might be a sign of heirs unreasonably manipulating the situation to minimize care costs and maximize their inheritances.

g) Household belongings have disappeared. This might be obvious from merely visiting the elderly client’s home. For example, marks on the wall where paintings once hung, or different shades on wood floors indicating where oriental carpets once lay, may be obvious. Another way to identify missing personal property is to compare the listed property on the homeowners’ policy to the actual property on the premises.

h) If the elderly client does not understand financial and other arrangements that have been made for him, are there fiduciaries who do understand it and sufficient checks and balances to protect the client?

i) If the client recently has reconnected with long lost relatives or has just made new "best friends" that could be a wonderful sign of socialization, or an indication of a perpetrator seeking to capitalize on the elderly client’s wealth and declining capabilities. Has the new found family member suddenly been added to a will or named agent under a power of attorney or been listed as a co-owner of a bank account?

4 Perpetrators: Understanding who might perpetrate elder financial abuse is important to protecting against it, and identifying it when it occurs. A key point is that there are a myriad of possible perpetrators, not just the fiduciaries or home health aides as many people assume.

a) Financial abuse can be committed by a caregiver. In simple forms the caregiver simply steals valuable jewelry or art from the patient. In other circumstances the caregiver might walk the patient past an ATM several times a week pocketing withdrawals the patient may not even remember making. It is sadly not uncommon to see caregivers manipulate their patients to sign new legal documents resulting in the caregiver inheriting, or obtaining through other means, significant sums and sometimes the entirety of the patient’s estate to the detriment of the natural heirs the patient may have otherwise intended.

b) Anyone from the client’s family members might be involved. While many are shocked by family members abusing an elderly parent or relative, this is all too common. In many cases the perpetrator does not view what is tantamount to abuse and theft as a wrong. Rather, they view it as an entitlement. “I gave my life taking care of mom, I deserve what I am taking and so much more.” The rationalizations, however, don’t change the result of what was done.

c) Organized crime has grown in its involvement in elder abuse cases in light of the amount of money at stake. Criminals can abuse the elderly in a range of ways including not merely theft of the elderly person’s assets but also laundering money through the elderly client’s accounts. Theft of the client’s identity, abuse of credit card information obtained under false pretenses, and other complex techniques are all common.

d) Relationships are often created for the express purpose of foisting an elder financial abuse scheme to abscond with assets. Elderly widows and widowers are often preyed upon but others who seize on their new vulnerability following the loss of a long time spouse or partner to create a new relationship for the express purpose of marriage followed by divorce, or perhaps just being named as an agent under a financial power or co-signer on an account. By the time the grieving widow or widower realizes what has occurred the culprit has often taken significant funds and moved away.

5 Educate Clients: Practitioners should make a concerted effort to educate clients, and their loved ones about the risks of elder financial abuse and protective measures that should be taken. Too often these conversations never occur. CPAs might focus meetings on tax compliance or investment allocations (if the CPA is handling the client’s investments). Estate planning attorneys have traditionally focused on documents and tax minimization. Financial advisers have traditionally focused on investment planning and while that has broadened to more comprehensive financial planning it often does not appear to address the elder financial abuse risks adequately. As noted above, one of the key reasons clients do not seek this information is that they are of the attitude: “Elder financial abuse cannot happen to me…I have a good family, I am wealthy…I am educated…etc.” Whatever the rationalization it is simply not true. Elder financial abusers show no bounds in who they will victimize. Many clients, and even advisers, believe wrongly that their wealth, education or supposedly close knit family precludes this from affecting them. It is not so.

6 Family Realities Should Change Planning: Many plans presume that every client has an array of trusted family members to name to serve in various fiduciary capacities, e.g. an agent under a durable power of attorney to handle finances when the client is incapacitated, a health care agent to make medical decisions, etc. The reality is often quite different. Only 20% of American families are intact families with a husband, wife and children. And even of that small percentage not all have good relationships with children, or children who are financially sound. Practitioners should have open discussions with clients as to who they have named in these capacities and whether the people they have named are really appropriate. Too often a client meets with a new attorney for an hour or two and races through these decisions. A lawyer who has no prior background with a client or the client’s family is at a severe disadvantage to a CPA who may have a decade’s long relationship with the client to observe or identify issues in who is named. It is advisable to broaden the discussion to include other advisers. It is important that the attorney or other adviser making the inquiries ask much more than “Who would you like to name as agent under your power of attorney?” Questions should include: “How long have you known this person?” “What is your relationship with this person?” “How and why do you feel confident this person would not abuse this role?”

Checklist: Financial Planning Considerations

1 Longevity Considerations: With clients potentially living for two or three decades past retirement age, planning to assure adequate financial resources for that duration is vital. Financial modeling can provide a more realistic assessment of the range of financial results a client may experience. This planning, which should be at the foundation of determining an asset allocation and other major financial decisions can provide an invaluable touchstone to compare actual expenditures when endeavoring to monitor for financial abuse. Without a baseline financial analysis it may be difficult to ascertain whether payments actually made are questionable.

2 Minimize Financial Risk: Practitioners should guide clients to minimize the risks of elder financial abuse. Guide clients to simplify financial matters including consolidating accounts into a single institution where feasible, automating banking, and having electronic bank statements go to more than one person. Simplification, consolidation, and checks and balances, makes it easier for designated persons to monitor and safeguard finances. Simplification makes it easier for a client with declining capabilities to monitor his or her own finances. This can also minimize the number of paper bills and statements a client receives. While this may sound simplistic, the reality is that most clients have too many accounts, disorganized financial records and worse. These lapses can provide weaknesses for perpetrators to exploit. Too many financial accounts likely means more paper documents in a mailbox to steal, more records to keep track of which an aging client may not be able to, more opportunities to confuse the client with sham investment recommendations.

Checklist: Estate Planning Considerations

1 Minimize Estate Planning Risk: Be certain the client has met recently with his or her estate planning to update his or her estate planning documents. Too many clients, and even practitioners view the fact that a client “has a will” as sufficient. It is not so. First, client circumstances change. If a home health aide has a client change a deed or account to transfer on death to the aide, the family will lose out. Having existing documents may prove irrelevant if an attorney, or other adviser, is not periodically reviewing account ownership, beneficiary designations and more. When was the last time the documents and planning were reviewed? Did the planning specifically focus on longevity planning issues or was it simply tax and dispositive planning (e.g., who gets what).

2 Gift Provisions in Powers and Revocable Trusts: Rethink the gift provision included in powers of attorney and revocable trusts. The default provision for many clients might appropriately be a restriction prohibiting gifts. This is in sharp contrast to the historic practice of using annual gift exclusions as a default. Gift provisions have been notorious for their abuse by those perpetrating elder financial abuse. For the vast majority of clients the use of annual gifts is simply a tax anachronism.

3 Make Powers Safer: Consider the use of joint fiduciaries and/or a formal monitor position to integrate some protective checks and balances into a financial power of attorney. While nothing may prevent co-agents from colluding to financially abuse the principal, the likelihood has to be lower than a single agent unilaterally taking that action. Having someone monitoring the actions of the agent, especially if that is a CPA with financial training and expertise, is even a better precaution. Few people take this latter step.

4 Domicile Issues: Planning for aging clients should consider the possibility of needing to change a client’s domicile even if the client may lack capacity to do so. Domicile has traditionally been addressed by estate planners as a means of avoiding state estate tax in a decoupled state. With the increased importance of longevity planning, a broader and earlier consideration of domicile planning might be important. Whatever the reason that domicile may be changed, those charged with monitoring the client’s finances for potential elder abuse should be especially vigilant. Changing domicile may result in a change to a new lawyer who can practice in the new jurisdiction. Who selected that new lawyer? The client or a child attempting to convince the parents to change the dispositive provisions? Will laws in the new jurisdiction be harmful to the client’s financial security? Might they expose the client to a more robust spousal right of election for a recent spouse? Does the client even understand the ramifications?

5 Collaboration: Planning to minimize elder financial abuse should be a collaborative team of all advisers: the clients’ attorneys, insurance consultant, CPA, wealth adviser, care manager, charitable gift officer, and other professional advisors. Communicating with the client’s attorney and other advisers will enable every adviser to provide better quality service. Not only is planning for aging a multi-disciplinary task, but clients often tell different parts of their “story” to different advisers. Collaboration can help put the disparate pieces of the client’s “puzzle” together. Has the client named a reputable financial institution as a successor trustee instead of family? That might bring valuable safeguards, but the other members should not assume that the financial institution is beyond question and that the institution will actually fulfil its fiduciary duties to monitor a client’s assets for which it serves as trustee. There is never a guarantee. But adhering to a team process can provide vital checks and balances.

6 Make Revocable Trusts Safer: A banking institution or trust company can serve as a trustee or co-trustee to bring with it professionalism and independence (but see caution in the preceding paragraph). Consider integrating an independent care manager provision into the trust to perform a quarterly assessment and issue a written report to the corporate trustee, as well as to a key friend or family member (or perhaps the trust protector). As a CPA, you can have yourself named as a monitor charged with compiling periodic statements and perhaps more.

1. Old Age in America, by the Numbers, Dale Russakoff, July 21, 2010 .

2. Mark Miller, “Why Cutting-Edge Healthcare Will Help The Rich Live Longer,” May 8, 2015, Reuters.

3. Serena Elavia, “50 is Peak Age for Financial Decision Making,” Sept. 18, 2015, The article cites a Texas Tech University study.

4. Bonnie D. Kupperman, “Alone and Lonely in an Aging Population,”

5. The National Committee for the Prevention of Elder Abuse.

CPAs' Role Grows After Estate Tax Repeal

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanDonald Trump won the Presidency and the Republicans control both the House and Senate. Republicans have long wanted to abolish the estate tax, or as they have labeled it the “death tax.” President Trump included in his pre-election platform abolishing the estate tax. Regardless of the outcome of this proposal practitioners need to consider how a repeal of the estate tax, and other possible outcomes, might affect their clients. The practical reality is that the federal estate tax has not affected many clients for years since the exemption was raised to a $5 million inflation adjusted level. However, regardless of the outcome of the efforts to repeal the estate tax, estate planning will affect all clients. Regardless of the tax implications to any client, the role CPAs play in the estate planning process should continue to grow, not decline. Following are points to consider about the possibility of repeal and the continued role CPAs can serve.

Repeal of Estate Tax

If the estate tax is repealed practitioners should guide clients to review the entirety of their estate plans. This includes title (ownership) of assets, wills, trusts, insurance coverage and more. Most estate plans, even for smaller estates, may be based on tax oriented planning and clauses. Many clients (perhaps most) have not updated their wills and estate plans in many years and those plans may be based on the assumption of a federal estate tax, and in fact a much lower exemption that exists now. So repeal could only serve to exacerbate how disjointed their plan might be. For example, many wills (or revocable trusts if that is the primary document) mandate funding a credit shelter (bypass) trust to avoid estate tax. That entire planning construct might become irrelevant. If CPAs don’t proactively engage clients many will assume “Gee there is no estate tax I don’t have to do anything.” For many clients the specific manner in which their will is worded could result in that assumption being correct, or devastatingly wrong.


Example 1
A husband and wife are in a second marriage and both have children
from prior marriages. The husband’s will provides that the largest amount that
won’t create an estate tax should pass to a credit shelter trust that benefits his
current spouse and former children. When the husband’s will was signed the
estate tax exemption was $1 million so that amount would have passed to this
family trust and the balance to a martial trust (or outright marital disposition).
If the estate tax is repealed the entire estate would pass to this family trust
likely creating more contention between the current wife and children.



Example 2
Given the same facts as above, except the husband’s will provides
that the amount up to the estate tax exemption should pass to a credit shelter
trust that will benefit his current spouse and former children. When the husband’s
will was signed the estate tax exemption was $1 million so that amount
would have passed to this family trust and the balance to a martial trust (or
outright marital disposition). If the estate tax is repealed the exemption is zero
and the entire estate would pass to the marital trust cutting out his children.
The reality is that the practitioner and/or the client’s attorney must review the
exact language in the client’s current will or revocable trust, and the title to
assets. If the CPA practitioner is not comfortable evaluating these nuances (in
many cases only the paragraph in the will setting forth the funding allocation
between trusts) the client can and should be encouraged to consult with his or
her estate planning attorney.


Repeal of Gift Tax - Forms 709

If the estate tax is repealed that does not necessarily mean that the gift tax will be repealed. Historically, the gift tax has served as a backstop to both the gift and estate tax. If the estate tax is repealed, the gift tax’s role as a backstop to the estate tax is obviated. However, the gift tax may still serve an important purpose to backstop the income tax. Without a gift tax a taxpayer could transfer highly appreciated assets to anyone with net operating loss, a non-resident alien not subject to US income tax, heirs in lower brackets, etc. and have them consummate a sale. So the gift tax may remain. However, retaining the gift tax will retain significant complexity of the transfer tax system and will affect very few taxpayers. So it is possible that the gift tax will be eliminated or retained. If the gift tax is retained then anytime a client makes a transfer that does not meet the present interest requirements, or which exceeds the annual exclusion ($14,000 in 2017), a gift tax return will be required as under current law. Without any estate tax, and such a high gift tax exemption, that filing requirement will be absurd for most clients.


Example 3
Jane and Tom Smith have an estate worth $4 million. Their daughter
Cindy was recently married and is buying a house. They gift her $75,000
for the down payment. Since the gift exceeds the $14,000 gift tax exemption
(or $28,000 if the gifts are split between Jane and Tom and Cindy) a gift
tax must be filed. The aggregate estate is so far below the estate tax exemption
for one taxpayer ($5,490,000 in 2017) that the likelihood of a federal
estate tax might be insignificant. Does the CPA prepare a gift tax return as
required? The law requires it. Would any client in Jane and Tom’s situation
be willing to pay a CPA to file a gift tax return? It is highly unlikely. Perhaps
the practical answer is for practitioners to add a paragraph on gift tax filing
requirements to the general 1040 questionnaire or other communications
explaining these requirements and leaving it in the client’s hands to make
the decision. It would not be surprising to find that the gift tax is retained
and the outdated filing requirements illustrated above to remain.



If the estate tax is repealed practitioners should make an effort to educate clients that existing life insurance and insurance plans (e.g., a life insurance trust) should not automatically be terminated. Life insurance for many clients will retain valuable investment benefits (tax deferred, additional diversification, etc.). For many clients life insurance may prove a valuable planning tool for aging. Clients may have purchased life insurance to pay an estate tax. But with increasing longevity the clients may well live into their 90s or beyond and end up spending down most of their estate for living expenses, health care, nursing homes, etc. What the client initially anticipated, a large inheritance to their children and insurance to cover the estate tax, may now more realistically be longevity, not estate tax, reducing their estate. The life insurance may prove to be essential to their initial plan, but for a very different reason. Even if life insurance is determined no longer to be relevant, practitioners should educate clients to not merely cancel the policy for its cash value (in the case of a permanent policy) but rather to have an insurance expert evaluate the policy and recommend options. A policy may be sold into the secondary market for much more than cash value. It may be possible to convert the policy into a different type of policy or annuity to thereby repurpose it into something more appropriate to fit the current environment. Too often clients simply react instead of plan.

Forms 1041

Before completing any Form 1041 practitioners should evaluate the trust with the client to determine if it still serves its intended purpose without an estate tax. Even without an estate tax many, perhaps most, trusts will remain viable to protect assets from claimants, divorce, and more. However, the clients may no longer understand the relevance of that trust. If a trust in its present form is no longer optimal, it may be possible to decant (merge) the trust into a new trust that better serves current purposes. It may also be possible, depending on the terms of state law and the trust instrument, to have the beneficiaries and grantor agree by contract to a non-judicial modification of the trust. While it might be costly, if the other options are not viable, in some instances seeking court reformation of a trust might be worthwhile. In some instances the application of a trust might be modified by changing the nature of the assets or distributions to better conform to the new environment.

Non-Tax Planning

Estate planning never should have been entirely about tax issues. The repeal of the estate tax does not in any manner affect the importance of non-tax planning. Practitioners should guide clients to refocus planning to a range of vital issues, further discussion of which is beyond the scope of this article: planning for aging, asset protection planning, divorce planning and much more.


Whatever happens with estate tax repeal, the role of the practitioner will remain vital to planning. Clients will likely not understand the many nuances of planning and presume that if the estate tax is repealed they need to do nothing. That may be a dangerous mistake in terms of their family and planning.

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

16 Ways to Turn 1040s into Planning Clients

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD and Joy Maytak, J.D., LL.M.

mug martin shenkmanAn individual income tax return can be a treasure trove of planning opportunities and practice development opportunities for practitioners. Many practitioners are concerned about cost issues. Clients will negotiate prices, or complain about a modest increase in tax prep fees every few years, so it seems incongruous that the same client would be willing to spend much more for consultative services, but a meaningful percentage will. Consider some of the planning ideas and suggestions following.

____ 1. Filing Status

A taxpayer’s filing status is the first window into planning possibilities. Some taxpayers filing as single may be divorced and subject to a Property Settlement Agreement with a former spouse, which might dictate certain planning. A would-be planner should check lines 21 and 31a of the first page of the 1040 to determine whether the taxpayer is receiving or paying alimony. A planner should consider the effect of any alimony arrangement on the taxpayer’s present and future income stream and incorporate it into the planning. If you communicate with this particular client, or a group of clients via a templated letter, some of the questions to ask about the post-divorce situation might include:

a. Have you updated your beneficiary designation? The divorce may not preempt that and if you don’t change the beneficiary designation (unless the settlement restricts that) your ex may well inherit. Lots of people forget this as evidenced by the cases fighting over this each year that make it to court.

b. When is the last time you have reviewed the agreement to be certain you and your ex are complying? While CPAs are not likely to review legal issues there are often plenty of tax and economic issues they can address.

c. Was life insurance required under the agreement? Is it in force? How do you know? Might it be handled better?

____ 2. Head of Household Status

Taxpayers who file as head of household may also be subject to a Property Settlement Agreement with a former spouse and may also have the same concerns as a single taxpayer. Since this client has a child, other issues arise.

a. Has the client updated his or her will to name a guardian?

b. Who is the account owner on any 529 college savings plans? Many clients don’t realize that an ex-spouse (if named account owner) can pull out all the funds.

____ 3. Married Filing Separate Liability Considerations

If the taxpayer and spouse are filing separately might this be because one of them is in the midst of a substantial lawsuit? If so there may be a host of things that can be done (and that should not be done). Discuss asset protection issues, and if advisable recommend the client consult with an estate planning or bankruptcy attorney. The litigator may have little expertise with these matters and while handling the litigation may not be focused on broader issues. The most important advice, which many clients do not understand or imagine, is that if subject to suit, that spouse may not be permitted to change the title to assets (e.g., deed the house from joint to solely the spouse not being sued). Inappropriate transfers might subject the spouse being sued to worse results. Perhaps any parent or other benefactor can revise their wills to assure any assets bequeathed to the client being sued are to be held in appropriately protective trusts.

____ 4. Married Filing Separate Medical Considerations

Where the taxpayer and spouse have chosen to file separately in order to take advantage of one spouse’s large medical deductions and lower AGI, a planner should recommend that the taxpayers meet with their estate planning and review existing, or execute new, durable powers of attorney and health proxies. Review planning for medical expense deductions.

a. Is the client able to qualify for a full or partial payment under a disability policy?

____ 5. Married Filing Separate Matrimonial Considerations

A preparer should determine why a taxpayer is filing as married filing separately. If the taxpayer is separated, the preparer should coordinate with matrimonial counsel to provide such assistance as may be required for the taxpayer’s benefit.

a. Some taxpayers file separately because they were advised long ago before they entered the marriage to do so to keep assets separate.

b. Does that still make sense?

c. What is the penalty in terms of tax cost from this decision? Are there other options?

____ 6. Married Taxpayers Matrimonial Considerations

In the case where the taxpayer is married but subject to a prenuptial or postnuptial agreement governing their financial arrangements, a preparer should obtain a copy of the agreement. The preparer should review the agreement to determine the following:

a. What financial obligations does the agreement create?

b. Are there specific insurance requirements?

c. Is there a better tax method to achieve the goals of the prenuptial or postnuptial agreement?

If the taxpayer intends to keep certain assets separate, then, instead of filing separately and potentially having a greater tax liability, proper recordkeeping may be a solution. By way of example, assume that a prenuptial agreement provides that certain investment assets are separate property but the income earned is applicable to marital expenses. Arranging for automatic transfer of the income from the separate accounts to a joint checking account keeps the assets separate while making the income available.

All taxpayers regardless of filing status should also consider asset protection planning in order to protect assets from future creditors and predators. There may be simple changes, e.g., owning the marital home jointly to provide a measure of protection. Many states provide that a residence owned by husband and wife receives some measure of protection from either spouse’s claimants. The house may have been held as tenants in common to fund a bypass trust. That decision may have been made before the advent of portability (or repeal of the estate tax) and may never have been revisited.

____ 7. Exemptions – Dependents

Many taxpayers have the additional concern of providing for their dependents. A planner should determine whether the taxpayer ought to consider one or more of the following:

a. Has the taxpayer established 529 plans?

b. Should the taxpayer consider this?

c. If a section 529 plan is established, have successor account owners designated?

d. Has anyone reviewed the selection of the 529 plan and its investment performance?

e. Consider trusts for minor beneficiaries. Does the client’s will provide for trusts for heirs?

f. When do those trusts end?

g. Most trusts are drafted very simplistically and distribute all assets to the child/beneficiary at some age, e.g. 30. Is that really advisable?

h. What if the child divorces at age 31? There are better approaches.

i. Do the parents have significant funds in custodial accounts for the children? It might be feasible to invest in a family partnership. The parent may also be able to spend custodial money down in order to reduce risk and use funds freed up in the process to fund a new trust that is more secure.

j. If the dependents are 18 or older, they should complete powers of attorney and living wills to protect themselves. Children heading off to college should sign these documents to permit their parents to help them as a routine prerequisite to heading off to college.

____ 8. Employer-Provided Benefits

a. Wage information often lends insight into other issues that may be relevant to planning for a client.

b. The planner should determine whether life insurance, long- or short-term disability benefits are being provided by the employer and discuss with the client whether the client should obtain additional insurance. The planner should help the client determine whether the disability insurance is adequate.

c. A key issue to consider is whether the waiting period before benefits may be paid is reasonable relative to the client’s and the client’s family’s needs and liquidity.

d. Too often clients assume that if they have coverage at work they are “fine.” But what if they change employment? What if after they change employment they have a health issue and cannot then obtain new coverage?

e. If they have both personal and work coverage are they coordinated?

f. If the client is contributing towards a qualified retirement savings plan, such as a 401K, the planner should obtain copies of the beneficiary designation forms and confirm that the beneficiaries have been properly designated.

g. If the client is not contributing to a qualified plan, the planner should determine why not. If the client is eligible for a pension upon retirement, the planner should help the client to confirm that resources generated by the pension will be sufficient to address the client’s needs.

h. In the event that the client has received or is expected to receive stock options, the planner should discuss whether and when the client should consider exercising the options in order to maximize the benefit. Perhaps it would be advantageous for the client to wait to exercise the stock options until after retiring to a lower cost state, e.g., Florida in order to reduce state tax liability. The planner and client should weigh the tax implications against the Company’s growth potential, possibly in consultation with a certified financial planner.


____ 9. Special Considerations for Principals of Closely Held Businesses

For planners servicing clients who are principals of closely held businesses, a planner should evaluate whether the compensation paid by the business is reasonable.

a. The IRS has become increasingly proactive in challenging arbitrary allocations between salary and distributions for owner-employees. Examiners are scrutinizing C corporation deductions to determine whether part of the deduction for salaries paid to shareholder-employees should be recast as a disguised dividend. IRS auditors have become keenly aware that some S corporation shareholders take artificially lower salaries in order to avoid employment taxes. If any of these payments are modified on audit, the taxpayer could be subject to interest and penalties on the underreporting. A planner should make clients aware of these issues and seek to insulate them from such challenges by the Service.

b. Be mindful that the tax changes proposed by President Trump may change the dynamic of how planning for business structures (e.g., form of entity) and owners (e.g., salary) may change. Too often clients retain whatever structure was in place without changing to adapt to new tax developments.

c. Whatever form of entity when was the last time the client/business owner met with his or her attorney to create minutes or other entity documents? Failure to observe entity formalities could lead to a piercing of the entity veil in the case of a suit and thereby reach the client’s personal assets.

____ 10. Interest and Dividend Income

Planners should confirm that clients are appropriately diversified and have sufficient liquidity to meet their needs.

a. A client who has moved recently may need to restructure their bond holdings to a new state. Further, while municipal bonds typically provide a degree of safety, excessive concentration of bonds from a particular state or issuer could pose unintended risk of inflation. Home equity lines of credit, margin accounts and other mechanisms may be considered to provide a client with sufficient liquidity to meet unanticipated costs.

b. Some clients may have fallen into the trap of diversifying investment advisors instead of their investments. A CPA/planner should be able to identify such a client just by reviewing the sources of interest and dividend income as reported on the Schedule B to the Form 1040. Upon discovery of this issue, a planner should advise the client to consolidate accounts with one investment advisor in order to ensure that the client’s investments are meeting the client’s financial goals.

c. Too often clients have not reconsidered their investment approach in decades and their circumstances and needs may be quite different now. The objectivity and independence a CPA practitioner can bring to this discussion, even if not well versed in investment details, can be invaluable to the client.

____ 11. Business, Rental, and Royalty Income

a. A client with business income reported on a Schedule C may need to consider restructuring the business as a limited liability company.

b. To the extent that the client is reporting business income on Schedule E, a planner should review the choice of entity and assess with the client whether the current choice is still optimal by evaluating the liability risk for business claims to reach personal assets.

c. The CPA/planner should also evaluate with the client whether the client ought to consider obtaining additional business insurance or riders to an existing homeowners’ insurance policy.

d. To the extent that the client owns S corporation stock, the planner should review trusts established by the client to confirm that they contain the appropriate language necessary to permit the trusts to hold S corporation interests. With the high estate tax exemption and even more so the possibility of repeal, more wills are being prepared by general practice attorneys that may have no tax sensitivity. It is more important than it ever has been for CPAs to identify these issues.

____ 12. Capital Gain or Loss

A planner should evaluate whether and to what extent a client may be able to maximize tax benefits by harvesting gains or losses. To the extent that the client has only one investment advisor, it could be helpful for a planner to reach out to that professional in order to determine the opportunities available. A planner may be able to help the reluctant client to consolidate accounts under one or two investment advisors by pointing out that an advisor can create more tax-effective strategies if s/he has all of the information about the client’s investments at her/his disposal.

____ 13. IRA Distributions

Whether or not a taxpayer is actually receiving IRA distributions, a planner should have a discussion with a client about the designated beneficiary of the retirement plan. It would be best for the planner to obtain a copy of the actual designated beneficiary clause and confirm that it is properly completed and identifies the appropriate beneficiaries. Clients often have various accounts from which to withdraw funds to cover living expenses. These might include a by-pass trust from a late spouse, an inheritor’s trust that may be Generation Skipping Trust (GST) exempt, a pension or IRA and other regular non-trust taxable accounts. Often, helping the client prioritize which accounts to access, to what extent, and with which priority, can provide substantial income tax, estate and GST tax and asset protection benefits.

____ 14. Age and Disability

a. Clients over age 65 may have a need for a revocable living trust for the proper management of assets.

b. A planner should ensure that both a durable power of attorney and a health care proxy are adequate and in place.

c. For the disabled client, a planner should explore whether necessary home improvements may qualify as a medical expense deduction. Specifically, a client may be able to deduct the cost of special equipment and home improvements if the main purpose is medical care. These can include: adding an accessible entrance ramp, installing a lift, widening doorways, building handrails, modifying cabinets, etc. While the opportunity exists, the planner must exercise great care to help the client corroborate the medical need and ensure that the expenses are not deducted to the extent they increase the value of the home.

d. For clients who report large medical expenses on their tax returns, the planner should evaluate whether the client has adequate insurance and whether the client is maximizing health savings accounts or other tax-favorable plans to pay deductibles and non-covered costs.

____ 15. Real Estate Taxes

a. A planner should consider the location of all of the client’s real property and the effect of state estate tax laws when putting together an estate plan. The client may wish to consider changing domicile to a state without an estate tax, such as Florida. Only about 18 states still have an estate tax. If the federal government repeals the federal estate tax more states may eliminate their taxes as well.

b. To the extent that a client is paying substantial real estate taxes, a Qualified Personal Residence Trust may be an advantageous, if an estate tax issue remains (but consider the loss of basis step up).

____ 16. Charitable Gifts

Large donations may indicate the client is charitably inclined so that charitable estate and gift tax planning may be appropriate. With the recent drop in interest rates, a client may be able to maximize estate planning goals with the Charitable Lead Trust and a private foundation may enable the client to create a legacy of giving that will extend beyond their natural lives.

Change the Conversation

Few clients understand the scope of assistance a CPA can provide beyond tax compliance. They need to be educated and that will take a proactive effort and investment by the practitioner or firm. Here are a few thoughts:

• Identify 20-50 better clients and call them during less busy times and discuss a few planning ideas from an “eyeball” of their return. Don’t make a sales pitch but rather share some thoughts. Clients will well understand you can do more for them if you only whet their appetite. All will appreciate the input. By self-selecting clients you believe are the most likely candidates for more work (and see the ideas below before you limit your perspective on what more work can entail) you’ll enhance the potential for further work, whether from that client or referrals from them. We call these “A” clients.

• Develop simple templates of emails or letters to categories of clients, e.g. trust clients. Have a simple but tailorable list of points that can quickly be tailored to the particular client or return mostly by deleting points that are not applicable so that you have a succinct list of planning points. For example, every trustee should keep trust records to minimize the risk of violating fiduciary duty, enhance the benefits of the trust (e.g. coordination of distributions with beneficiary income tax status), assure that the trust is current (is it an old bypass/credit shelter trust set up when the estate tax exemption was $1 million that is now useless)? Clients rarely note boilerplate emails since they have proliferated to the point of becoming a nuisance. However, a real letter or email addressed to them noting something relevant to their situation may well command real attention and stand out from the “static” of pre-packaged email newsletters.

• Enclose a short tailored planning letter or memo with each return package. We enclose an article of new planning ideas with each month’s billing. Clients appreciate getting more than just a bill. Every practitioner knows their client base. Invest some time and tailor a memo or letter to that. A practitioner in New York City likely does not have too many clients with farm or ranch interests. A practitioner in Missouri may have a lot of clients with those concerns. Some practitioners have a lot of physicians in their client base, some don’t. Prepare something relevant and just enclose it in mailings you are doing anyhow. Here’s a simple and really practical idea that should not be difficult for any practitioner to create: “5 Planning Mistakes We’ve Seen Clients Make in the Past Year.” Tailor it to your client base. Write short actionable steps clients can get their hands around. Skip the usual ending “Please call our office to make an appointment to discuss these and other issues that might concern your file.” If clients are smart enough to hire you they don’t need trite sales pitches. Just offer good information that works for the majority of your clients.

If you can start the conversation, and the points below will give you more ideas, you can generate new work. It’s really easy for a client to ask her golf buddies how much they paid for their 1040 and then give you a hard time if your fee is $100 greater. But if you are working in more of an advisory capacity that comparison and cost sensitivity follows a different litmus test. It becomes “Was that advice worth the cost.” In many cases it will be worth more.

Maximizing the potentials of tax planning requires more regular conversations between adviser and client. Start the conversation.


This article is intended to provide a useful roadmap that highlights the planning opportunities apparent in typical federal income tax returns. We hope that we have offered helpful insight that will guide your conversations with your clients and help you to transform from tax preparer to overall adviser and planning strategist.

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.


Joy Matak, JD, LLM is the CohnReznick Trusts and Estates National Practice Co-Leader and provides wealth transfer strategies to assist high net-worth families accomplish asset protection, tax planning and business succession goals. 


Documentation to Transfer Closely Held LLC Interests by Gift or Sale

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanFunding Irrevocable Trust with Family or Closely Held LLC Interests

LLCs are the default entity for most family or closely held business and real estate ventures. Practitioners are therefore commonly involved in assisting clients with these transfers. The role of the CPA will vary depending on the involvement of the client’s lawyer, an outside appraiser and others. The following is a broad checklist listing much of the information that should be organized for each family or closely held LLCs interest and suggested steps to be taken with respect to the transfer of your interests to an irrevocable trust. Many of the examples use real estate as an example, but if the LLC owned different assets or business interests these would simply have to be changed to be relevant to the particular circumstances. Even though a number of the documents should be prepared by others, e.g., a real estate appraiser (assuming the practitioner does not perform real estate appraisals) or legal documents, the practitioner still needs these steps on his or her radar screen.

  1. Coordination of Legal, Appraisal and other Work. The more of these steps that can be handled internally by legal counsel for the real estate business/entities, the more efficient and cost effective. This will especially be true if other family members are undertaking similar planning.
  1. 2704 Regulations May Eliminate Valuation Discounts.
    1. The Treasury (IRS) recently issued Proposed Regulations that may eliminate valuation discounts. These Regulations could be effective as early as December 31, 2016. The loss of discounts could have a substantial adverse impact on leveraging these real estate LLC interests out of your clients’ estates. This might result in a flurry of gift and sale transactions before these Regulations become effective.
    2. This same issue should affect all other owners and thus many if not all owners should be undertaking similar planning by year-end. If this is the case then all owners can share the costs of the appraisals, preparation of transfer documents and other steps. This will greatly simplify the process and lower the cost of all the transfers involved for any particular owner (e.g., your client).
    3. This checklist might prove useful to coordinate that effort. If other owners will not become involved or will not proceed in this matter it is important that you guide your client to the appropriate steps and realistic cost estimates.
  1. LLC Owner Details.
    1. Information as to the owners and their relationships for each entity should be obtained.
    2. This may be essential to the interpretation of the operating agreement and what must be done to approve the particular transfers your client wishes to make.
    3. In the future this may be essential to determine the applicability of the 2704 valuation discount restriction rules (i.e., is it a family controlled entity in technical not common usage terms).
  1. Appraisal.
    1. Appraisals must be completed by “qualified appraisers” as defined in applicable Regulations. The qualified appraiser must complete a “qualified appraisal” which also must comply with a checklist of requirements contained in applicable tax laws.
    2. The appraisal must be a two-tiered process.
      1.                                                i.     First the fair market value of underlying real estate must be determined. An MAI appraisal of the fair market value of each real estate property owned by each LLC is necessary. The appraiser will require all the applicable information to complete this type of appraisal: rent rolls, historical operating expenses and rents, survey, leases, and so forth.  Whatever data you have used to make these estimates might be useful for an appraiser and might defray appraisal costs but formal appraisals should be collected (e.g. prior appraisals for estate planning purposes, bank appraisals, etc.).
      2.                                              ii.     An appraisal of the ownership entity and, in particular, the LLC membership interests of the member which will be transferred as part of the estate planning. This will require that the appraiser be provided with the governing legal documents for the entity, several years of tax returns, and other data. Some of this is discussed elsewhere in this checklist.
  1. Real Estate Documents to Collect.
    1. Narrative.
      1.                                                i.     A narrative for each property/entity that describes the relationship of the owners, who manages the property/entity, the type of property, any plans or anticipated future for the property (e.g., hold for long term, potential sale in a specified time frame, planned rehab, etc.).
      2. Accounting data.
        1.                                                i.     Rent roll.
        2.                                              ii.     Financial statements for a number of prior years.
        3.                                             iii.     Distributions, salaries and other economic benefits the family receives from the property, and any other important facts.
      3. Deed.
        1.                                                i.     For any entities that are closely held it is recommended that the deeds to the underling properties also be part of the documentation organized to be certain that they are held in the correct entity name.
        2.                                              ii.     While this might seem unnecessary, I have seen errors in deeds and entities for clients with similarly significant holdings. It is imperative that before any entity interests are transferred it be certain that the properties are properly titled in those entities. If such an error were discovered on an IRS audit following transfers it could be costly and could undermine significant components of a plan.
      4. Mortgage.
        1.                                                i.     Current balance will be necessary for the appraiser.
        2.                                              ii.     Mortgage documentation will be necessary for real estate counsel to review to ascertain what prerequisites if any may affect your intended transfers.
      5. Leases or other contractual agreements.
        1.                                                i.     These may affect valuations or assist your real estate counsel in identifying restrictions, notice or other requirements for transfer.
  1. Entity Documents to Collect.
    1. Formation Certificate.
      1.                                                i.     Documents filed on the formation of the entity.
      2.                                              ii.     Any amendments.
      3. Certificate of good standing for the entity.
        1.                                                i.     This is inexpensive but, surprisingly even for well-organized clients, some issues are identified. It is preferable that any issues as to the validity of the entity be addressed by the CPA or attorney before estate planning transactions are consummated.
      4. Confirmation of the tax status of each entity.
        1.                                                i.     While most LLCs are taxed as partnerships some elect to be taxed as S or C corporations. Confirmation of the tax status is vital because of the importance of achieving a basis step up on death.
        2.                                              ii.     If the ownership entity is a partnership or LLC taxed as a partnership the ability to step up the inside basis of the partnership in the asset, referred to as a IRC Sec. 754 basis adjustment, will be crucial whether this has been addressed for entities involved. This should all be reviewed now and if amendments are advisable, negotiating (if necessary) with other owners, an amendment and restatement of the entity documents to give members/partners the right to demand that the entity make a 754 basis adjustment.
      5. Operating Agreement.
        1.                                                i.     Copies of the governing documents for each entity. This is generally an “operating agreement” for an LLC but sometimes other records are involved.
        2.                                              ii.     Copies of all amendments. The most current agreement should reflect all current owners and their correct owners and should be consistent with applicable income tax returns (e.g., Forms K-1 of Form 1065 if the LLC entity is taxed as a partnership).
        3.                                             iii.     Please be certain all copies provided are of fully executed documents. If these do not exist, have the client follow up with counsel.
        4.                                             iv.     This should be reviewed by your corporate/real estate counsel to ascertain whether transfers of your interests as between each of you and then trusts is permitted.
        5.                                              v.     As noted below an amended and restated operating agreement should be prepared reflecting all transfers. Many lawyers simply prepare an assignment of LLC membership interests. On a tax audit it is preferable to have an operating agreement reflecting ownership interests before the transfer and one reflecting the revised ownership percentages after the transfer.
      6. Other key legal documents.
        1.                                                i.     This could include minutes or consents or other documents.
      7. Recent federal income tax returns for the entity.
        1.                                                i.     If the LLCs have all chosen to be taxed as partnership for income tax purposes then this would be Form 1065.
      8. Tax Basis.
        1.                                                i.     An estimate of the tax basis for the properties held by each entity. This is important to consider the pros and cons of shifting any of these interests outside of your estates (e.g. via direct gifts, gifts through GRATs, or sales to a grantor trust, etc.).
        2.                                              ii.     Depending on the anticipated holding period for a particular property or entity, the magnitude of appreciation, and other factors, it may prove more advantageous to retain a particular asset inside your client’s estate rather than shifting it out. Real estate, in particular, is a somewhat unique asset for purposes of this type of analysis in that if a property is a quality property that you intend to hold for the long term, or for which a tax deferred Code Section 1031 is feasible (but beware that proposals have been made to severely restrict this tax benefit), then removing that asset from your client’s estate may be more beneficial than retaining it to realize a basis step up. In all events consider putting the client on notice of basis considerations.
  1. Transfer restrictions.
    1. Confirmation by real estate counsel that any contractual restrictions on transfer have been met or that none exist.
    2. This could include lender requirements (e.g., due on transfer clauses).
    3. Depending on the nature of the properties involved, anchor tenants, or others may have negotiating contractual restrictions or perhaps only notification requirements before transfers.
  1. For LLC interests gifted to an irrevocable trust.
    1. Gift letter. A letter signed by the donor member transferring by gift LLC interests to the irrevocable trust.
    2. Assignment of LLC interests.
      1.                                                i.     An assignment document transferring LLC interests from you as owner to the irrevocable trust.
      2.                                              ii.     This should be signed by the trustee confirming acceptance of the gift.
      3. If the LLC certificates its membership interests, a new membership certificate indicate the interests or units owned by the trust. If not all interests or units are being given a second certificate reflecting the interests or units retained by the transferor member after the gift should also be provided.
      4. Amended and restated operating agreements reflecting membership interests and owners after the gift.
  1. For LLC interests sold to the irrevocable trust.
    1. All the same documents listed above for gifts but instead of a gift letter the following documents might be included.
    2. A sale of interests will be necessary if you wish to transfer more value of interests then a mere gift will permit. This will depend on the size of the member’s estate, the value of the interests involved, how much exemption the member still has remaining (the total in 2016 is $5,450,000), and other factors.
    3. LLC membership interest purchase and sale agreement.
    4. Note given by irrevocable trust for purchase of LLC membership interests.
    5. Security agreements with respect to sale if trust buys interests for a note.
  1. Gift tax returns.
    1. Be certain the client is aware of the requirements to file a gift tax return reporting the transactions.
    2. Sales may be reported as “non-gift” transactions on the gift tax return.
  1. Consolidation.
    1. It might be useful to consolidate smaller holdings into a single family real estate holding entity to simplify the legal work and formalities of gifts and/or sales to various trusts.
    2. If, for example, no other members wish to make transfers, it may be simpler for you to transfer all your family real estate LLC interests to a new personal LLC holding company and then use membership interests in that new holding company to transfer interests to your irrevocable trust.