8 Wealth Management Issues #2: Cash Flow & Debt Management

The 1040 Can Help You Evaluate Potential Opportunities to Improve Your Clients’ Cash Flow and Debt Management.

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In the April issue we introduced the 8 Wealth Management Issues^SM, which we believe will help enhance your role as your clients’ tax adviser. We will show you in the monthly e-newsletters through September 2009 how each of the 8 Wealth Management issues - Investment Management, Cash Flow & Debt Management, Family Risk Management, Retirement Planning, Education Planning, Legacy Planning, Business Planning and Special Situations Planning are interrelated. With these 8 Wealth Management Issues, you can help your clients identify the issues they have already adequately covered and those issues that need more attention. You can help your clients create an action plan that addresses these issues as they see fit. In May, we addressed Investment Management. This month’s issue will focus on Cash Flow & Debt Management.

Cash flow is the cornerstone of your clients’ wealth management plan. Without a clear picture of what money is flowing in and out each month, it is impossible for clients to make informed decisions with respect to the other wealth management issues that affect them. In addition to cash flow, the client’s debt level and credit history are also important barometers of financial health. Good debt management ensures clients have credit when they need it, make wise borrowing decisions, and avoid disaster if they become overextended.

By working with your client, you can identify where their cash is going each month and evaluate potential opportunities to improve their cash flow through tax strategies and proper debt management. As your client’s Advisor, you can help determine whether certain strategies such as refinancing, debt consolidation, or changing your clients’ tax withholding could be advantageous to their situation. You may discover that your clients have more resources than they might have thought to help them pursue their other wealth management goals.

Using the Form 1040 to examine financial planning opportunities may be new to some individuals. However, understanding a client’s tax return and the information contained in it is critical to the overall financial planning. The tax return can shed light on financial mysteries and uncover financial obstacles that keep clients from reaching their goals. Most clients want someone to tell them what to do. Taxes and investments are confusing. Your clients will respect you for helping them identify a need and working to solve it.

Lines 8a, 8b, 9a and 9b: Interest and Dividends
Talk to your clients who are receiving interest and dividends from their investments. You should ask them if this income is needed for living expenses. Once you know whether or not it is needed, you can help the client evaluate how it is invested to determine if it is maximizing income to the client, how it fits into their overall portfolio and the tax efficiency of the investment. Once you have evaluated these areas you can determine if there are better options for the client to pursue.

Lines 10 and 67: Taxable Refunds of State and Local Taxes and Federal Income Tax Refund
Encourage your clients to use their tax refunds toward reducing their debt. Clients can also consider increasing the number of exemptions claimed so less tax is taken out of their paychecks and their money is not sitting in the IRS coffers. The additional funds received with each paycheck can be allocated towards determining your clients’ monthly cash flow and paying down their debts.

Line 40: Itemized Deductions
One of the most common itemized deductions clients have is mortgage interest. When reviewing your clients’ returns take a minute to look at Line 40 and then Line 10 of their Schedule A.  If they have mortgage interest that they are paying, ask the client what their mortgage rate is and the type of mortgage. Ask the client if they have inquired about refinancing the mortgage to a lower rate. This could free up extra cash flow to fund other financial needs. If the mortgage is an ARM, you should inquire as to the terms to determine if the client is prepared to face the possibility of an increase in payments. With the current low mortgage rates available, refinancing may be a great way for clients to lower their payments and generate extra cash flow.

Next month’s feature will address Risk Management and Retirement Planning.

The current economic and market environment reinforces the importance of using a comprehensive and repeatable process to address the wealth management challenges your tax clients face, not only for their retirement plans, but their entire portfolios. Whether their wealth is valued at $10,000 or $10,000,000, it is critical in times like these that a client has an Advisor who is knowledgeable about their complete financial picture, including their tax situation, so they can be given appropriate advice and recommendations. Our 8 Wealth Management Issues strategy can help you help your clients.