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Keep a Clear Head at Year-End

Don’t let frantic clients guilt you into helping them make reckless last-minute tax planning decisions.

If it seems you’re getting more last-minute tax planning requests than usual, you’re not alone.

There’s always pressure at year end. But in 2021, there are so many other forces at play. Despite rising inflation and another COVID-19 wave, stocks are at all-time highs, home prices are at record levels and business valuations are extremely frothy. Many successful people are thinking about taking some chips off the table when tax rates could be going up across the board—and estate exemptions lowered. That’s only adding to the sense of urgency to get planning done before year end.

Right now, I’m working with two doctors, aged 45 and 62, who are selling separate medical practices on a go-forward basis. They’re each selling to large physician groups so they can spend more time seeing patients and less time dealing with the administrative hassles of running a busy medical practice. Each doctor is looking at a $7 million to $8 million payout, which is great. But they’re also looking at gigantic tax hits if they don’t do something ASAP.

Why did they wait until just before Thanksgiving to ask me if I could help them with some tax planning before year-end? I know it’s human nature to procrastinate about making big decisions. But doctors are supposed to be smart people. Both started their negotiations months and months ago. Unfortunately, they waited until very recently to ask for help. Now they’re in a pickle.

The group practices (that is, the buyers) are under pressure to put their acquisition capital to work as quickly as possible, so they’re highly motivated to close both transactions in calendar year 2021. Unfortunately, that doesn’t give the doctors much time to maneuver. For the doctors to do any tax planning, they’d need to move around a significant amount of non-business-related assets to mitigate their tax hit. But they don’t have the time to make an educated decision before year end.

Too Little, Too Late

Like most business owners, the doctors I’m working with think they want the highest possible sales price for their practice. Unfortunately, they don’t think about the tax consequences until it’s too late. I can understand the psychological motivation to rack up a large number as a reward for their life’s work. But as the old saying goes: “It’s not about how much you make; it’s about how much you get to keep.”

Their only alternative for the harried doctors is to push back their transactions until calendar year 2022. By doing so, they’ll have time to do the right planning, which could put a lot more money in their pocket after taxes are netted out. But by delaying, they may lose their buyers and/or have to settle for a lower sales price and other contingencies.

Last-Minute Tax-Planning Options

If you have clients under the gun to complete a major transaction before year end, there’s not much sand left in the hourglass. The only possible option is to allocate some of their other accumulated assets to a pooled income fund (PIF) or a charitable lead trust (CLT). Or they should just make a big gift to charity to help them offset some of the income tax hit they’re facing.

For instance, in 2021, the charitable deduction for outright gifts of cash to a public charity is 100% of adjusted gross income. A PIF allows donors to give money to a special type of charitable trust that will provide them with a partial charitable deduction (based on the age of the donor) and to receive income for the remainder of their lives.

A CLT allows the donor to receive a large income tax deduction upfront. They give money to charity for a number of years and then have the balance of the trust returned to them at the end of the term. These alternatives may take some time to understand, but they can be designed and implemented late in the game if a client is dead set on closing before year end.

Clients’ Own Funds

For clients that have year-end transactions closing—we’re dealing with several right now—the only other option for reducing taxes is to take funds from their savings or other investments and fund the appropriate trust with those funds in advance of the closing. This is often a difficult proposition as a delayed closing may cause the taxable transaction to slide into the following year and cause a tax mismatch. The good news is that unused charitable deductions may be carried forward for five additional years.

I realize this is a lot for sellers to ponder when they’re facing strong pressure from buyers to close by year end. But they don’t have a lot of alternatives at this late date.

At this time of year, you may also be getting calls from highly compensated executives who expect to receive big bonuses or to exercise stock options that will give them seven-figure incomes. Naturally they’re looking to you for last-minute tax relief.

While no advisor likes to turn away business, you’re often doing a disservice to anxious clients by helping them with last-minute tax planning. No one should be forced to make life-altering financial decisions under duress. Plus, at this time of year, it’s just harder to get things done. The Internal Revenue Service typically shuts down for the last two weeks of the year, and it can be challenging to get employer identification numbers. Long story short, it can be nearly impossible to open an account for a new trust, much less implement it.

Clients don’t make good decisions when they’re rushing. Sure, you can throw something at them, crunch the numbers and hope it comes out OK. But it’s hard to do a thorough analysis when you don’t have all the inputs you need.

Last-minute planning reminds me of those people who end up buying a timeshare on vacation after attending one of those sunny poolside presentations at the resort. It seems like a great idea at the time, but then buyer’s remorse sets in when those maintenance fees, “special assessments” and other bills start rolling in for a condo they rarely visit. And then there are those sky-high airfares just to get there. Guess that didn’t come up at the poolside presentation. And now you have angry spouses pointing fingers at each other.

Just Say No

Don’t let clients or prospects guilt you into trying to “work your magic” with a last-minute miracle solution to their tax hits. There’s too much at stake here to make a hasty recommendation. Impress on them the wisdom of taking their time to do the planning right in the next calendar year. If they won’t wake up and smell the coffee, then Just Say No!

Randy A. Fox,CFP, AEP is the founder ofTwo Hawks Consulting LLC.He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker. 

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