Business owners and high net worth individuals who have been coasting on an outdated wealth management plan should make 2022 a year of review and change, according to a local financial planner.

Ron Knipping, a certified financial planner (CFP) and principal in Rehmann’s wealth management division, spoke to the Business Journal this month about tax and economic changes happening now that will make 2022 a good year for reevaluating one’s charitable giving, retirement and estate plan, life insurance and investment strategy.

Most company owners by now already will have their financial ducks in a row for the end of 2021, but Knipping said just in case, they should make sure they have maxed out their tax-deferred retirement account contributions and allocated 401(k) profit-sharing amounts, and if they are looking for even more potential tax savings, consider putting money into a cash balance plan for each employee. An overview of cash balance plans is available at bit.ly/smartassetCBPexplainer.

Charitable giving

High net worth individuals can use their time off during the holidays to map out their charitable giving for the next couple of years, Knipping said.

“People who are successful typically realize that their community was a large part of that, and they want to give back, whether it’s to the greater community, a school, a church or any other philanthropic group, and the end of year is a really good time reflect and review on all of those things, whether it’s for yourself, your family or your community,” he said.

Knipping recommended those who experienced a liquidity event in 2021 (or who are expecting one in 2022) — including an inheritance, the sale of a business, being bought out of a partnership or accruing stock bonuses — should consider setting up a donor-advised fund to channel their giving in a way that maximizes their tax benefit. 

“When people go through a liquidity event, like when they sell a business or they get bought out of their partnership, that is going to be their highest income level for the rest of their life, and it’s also going to be their highest tax year of the rest of their life,” he said. “A donor-advised fund acts similar to a private family foundation,” letting individuals place up to a certain percentage of their adjusted gross income into the fund without the added cost of operating a private foundation.

The individual then can invest the fund in stocks or bonds and see it grow while also getting a tax write-off. Along with placing cash in the donor-advised fund, people can transfer stocks they hold, or even sometimes real estate, into the fund without incurring taxes, he said.

Knipping said setting up donor-advised funds would make sense for individuals who expect to donate to charity more than the standard deduction of $24,000 in their high-income year, as well as for people who were already planning a certain dollar amount of charitable giving, say, over the next 10 years, and their liquidity event allowed them to place that entire sum for 10 years into the fund at once.

“It’s one of those (scenarios where it’s) doing well by doing good,” Knipping said.

Estate planning

Those who are age 70-and-a-half or older should make sure they have drawn out their required minimum distributions (RMDs) from their individual retirement accounts (IRAs) by the end of 2021, Knipping said. One planning tool in the arsenal related to that is allocating a qualified charitable contribution as part of their RMD, which reduces tax liability on the distribution.

Knipping said engaging a CFP or CPA to do a general review of a retiree’s estate planning strategy would be wise — both for the retiree and his or her beneficiaries.

“Looking forward to 2022 and beyond, for people that have retirement accounts, IRAs or 401(k)s, typically greater than $5 million, you really want to take a look at your distribution strategy,” he said. “… The rules for retirement distributions changed last year, and the first year it’s going to be coming into effect is 2021, but really, 2022 will see more people affected.”

He said when people start being required to take RMDs at 70-and-a-half, “the first couple of years aren’t bad.”

“But if you’re just taking the minimum, your account is probably going to be growing and growing, and by the time you’re in your 80s, you’re taking out significant amounts, like, 10% a year. Not only are you getting taxed on that larger dollar amount, but that also is impacting the rest of your ordinary income, as well,” he said.

A rule that changed that impacts estate planning is when non-spouse beneficiaries inherit their parent’s or relative’s IRA after they die, they must empty out the IRA within 10 years.

“Say you’re 45 or 55, and you’re in your peak earning years, and you inherit a $1 million IRA from your Mom and Dad, which is a good thing, but you have to take it out over a 10-year period. So, you’re in your highest earning period … and then you’re going to have to take out IRA dollars, which are ordinary income (for tax purposes),” he said. 

“So, what’s important now more than ever, in 2022 and going (forward), is the distribution strategy from IRAs. It could include just taking the money out of the IRA, it could include Roth conversions, but it should be a plan, because million-dollar IRAs are a good thing, but they can also be considered a ‘tax bomb,’ and you typically don’t want to be around a bomb when it explodes.”

Another upcoming change is the fact the estate tax exclusion threshold will in 2025 revert from $11.7 million per person, as it was under President Donald Trump’s administration, back to $6 million, like it was before Trump’s time.

“It’s one of those things that people really need to look at again, because people have gotten numb to the idea of estate taxes — a lot of people have — because they go, ‘Oh, me and my wife, we have a $23 million exemption, and our estate’s only worth $15 million.’ Well, come the end of 2025, it’s going to be exposed to taxes again,” Knipping said.

“They should really work with their CPA or their wealth manager to look at how the potential estate tax changes that will happen at the end of 2025 affect them, then work through how much they want to benefit their family members, what they want to do for contributing to the community and how much taxes they are willing to expose their estate to.”

People whose parents already are in retirement — especially if a family business is on the line — should urge them to set up certain types of trusts and/or do a Roth conversion so that the next generation experiences wealth benefits and not tax penalties from their inheritance, Knipping said.

Life insurance

Another wealth management item business owners and individuals alike should review in 2022 is life insurance, Knipping said.

“Life insurance is a financial instrument,” he said. “Most people with a mortgage, another common financial instrument, look at refinancing and look at if that mortgage is appropriate at least every three to five years. You should do the same with life insurance. It shouldn’t just be bought and put in the drawer and never looked at again.”

One consequence of not having sufficient life insurance is it could impact the ownership transfer of a business in the event of the death of one family member.

“Say two brothers own a company. They have a buy/sell agreement, so if one brother dies, the other brother takes over,” Knipping said. “A lot of times, that’s at least partially funded with life insurance, so when my brother dies, there is some liquidity to pay off his family so they can keep living, and I’ll pay the rest out over time. Life insurance and buy/sell agreements typically are never looked at, but they should be.”

Many times, a person will set up a life insurance trust to help pay for estate taxes after they die, but if the premiums aren’t paid up before they die, the policy could be invalidated, Knipping said.

“Life insurance policies are fairly complicated and should be looked at every five years,” he said. “There are bad things that could happen, both in buy/sells and especially in life insurance trusts or estate planning, that can really make a big difference in a family’s financial success moving forward.”

Investment portfolios

People who haven’t rebalanced their investment portfolio in a while should plan to do so in 2022, Knipping said.

“The past five years have been pretty good for the stock market and pretty bad for bonds, so a lot of people have more stocks in their portfolio now than they did five years ago, so they’re exposed to more volatility and downside because of that allocation,” he said. “By re-looking-at their allocation on an annual basis, at least, that’s where you have a chance to keep the stocks and bonds in your portfolio in your original risk tolerance, so you’re not exposing yourself to greater and greater amounts of risk.”

He said one way to manage risk could be to sell off some growth stocks, like Apple or Google, and buy less-risky dividend stocks, or invest in real estate instead of bonds.

“If you reassess your investments each year, you have a chance to make a positive decision on how you want your portfolio to act, as opposed to just letting it run,” he said. “The answer might be just let it run, but if you don’t (reevaluate) your investments each year, you’re just rolling the dice to see what happens.”

Knipping said with today’s economy, individuals and business owners also should consider asking for help with hedging their portfolio against inflation.

“There are certain types of investments … (that) are pretty good if there is no inflation, and that are really good if there is inflation,” he said.

Knipping said those who think ahead will find the most success.

“If you don’t have a financial plan, work with someone to build one. If you have a financial plan and you haven’t looked at it in a couple years, work with someone to review it. … If you don’t have a plan, you have a greater chance of failing.”