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What Does the CPA Firm of the Future Look Like?

Man-JugglingIn the manufacturing and consumer world, product innovation is a given – the Apple iPad was introduced in 2010 – today we’re on the 4th Generation version, not to mention the iPad Mini and the iPad Air. Manufacturing and consumer business models have changed significantly and Henry Ford’s famous quote “any color so long as it’s black” doesn’t fly any more. Customers want options – and lots of them.

In the professional world, however, we tend to forget that innovation in the services  we provide should also be considered critical if we wish to remain competitive and relevant, and just as every retail consumer wants options, so do our clients – and especially our best clients.

So what does that mean for a CPA professional?

If CPAs want to survive, thrive and remain relevant they must address the increasingly complex needs faced by their best clients and act as a catalyst, problem solver, and trusted adviser rather than a referral source to other professional problem solvers, like the pension go-to guy! The CPA firm of the future should no longer aspire to be just the first step in the problem solving process, but rather, become the complete process; essentially the “go-to guy” for any problem your best clients need solving. How can CPAs do this? By building a vibrant back office of problem solvers.

Why are you different?

Tax and audit work is increasingly becoming a commodity offering, with price being the distinguishing factor – and in a commodity situation, the lowest price usually wins. So the CPA firm of the 21st century needs to distinguish itself by offering greater value and this is done in two ways; first, by building deeper relationships with their their best clients. Second, by building a vibrant back office of renown problem solvers. The innovative CPA firm needs to offer not only a full array of essential best client services but equally important, the firm needs to adopt a different type of client acceptance policy. Having standards on who becomes your client is one of the most important differentiating points of the firm of the future.

Building deeper relationships is key.

Simply put, the new CPA firm moves from being a referral source to becoming a trusted advisor who can deal with every facet of best client services.  Relationships between the client and the firm become a long term trusted partnership. In other words, the CPA must move up the value ladder: no longer providing a commodity product, but becoming a trusted adviser and partner. The diagrams below illustrate the subtle differences in approach.





This approach was echoed by Lyle Benson, CPA and Board Member of the AICPA Financial Planning Committee in an interview with Dan Wolfe of Accounting Today. In the interview he states:

  1.  Tax returns are now a commodity. CPAs need to offer much more value to their best clients if you do not want to lose them.
  2. CPAs need to redefine their relationships with their best clients.

 Imagine for a moment

Imagine being the center of the planning team without having to find referral sources because your back office team members are some of the best planners in the country. On the 19th hole when your best clients are mingling, they are now talking about you as a valuable resource, not some referral source specialist.

The question becomes, do you want to remain a CPA firm of today with the risk of declining into commodity irrelevancy or do you wish to break with your traditional role become a vibrant CPA firm of tomorrow?



About the Author:  Barry Goldwater is Principal at Goldwater Financial Group. He works with CPAs to help them offer easy-to-implement, tax planning and wealth management solutions to their best clients. He can be reached at barry@frg-creative.com or at  617-527-9736.

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If You Don’t Know Where You’re Going, You’ll Never Get There….

BubbleWhenever I consult with my clients on their retirement plans, I ask what I believe to be the two most important questions:

1. How much income would you like during your retirement?

2.What do you see as the biggest threat to realizing that income?

Sadly, too few people today ask themselves these questions.  We automatically put money into pre-determined 401(k) plans or IRAs or invest in stocks and bonds because someone told us that was what we were supposed to do, but without truly establishing final goals or expectations. As leaders and managers in the work place, if we ever tried to implement a program without establishing goals and expectations, anticipating potential pitfalls, and  ensuring that our goals were met, we can pretty much expect to kiss that next promotion goodbye.


Of all potential clients that I have met with in the last few months only one clearly stated that they would like to maintain their current salary during retirement.  No others had ever thought about asking that question. Yet how can you save towards a retirement goal when you do not know how to articulate what your goals are and what could possibly stand in the way of reaching those goals? How can you save for your retirement goals when you are not aware of the impact of taxes and inflation? How can you maximize your retirement income when you do not know how to use existing tax deductions from your 401(K) contribution to further your retirement goals?

Are we as planners doing a good job teaching our clients about retirement planning if savers cannot articulate what they are saving for? I posit to you that a critical function of a good retirement planner is the ability to educate his/her clients, and the public, on how to not just save and accumulate, but also to have tax awareness and to know how to effectively use the tax deductions derived from their contributions to a retirement plan.

Proper retirement planning is not only how much you can accumulate in savings but also being aware of taxes and how to mitigate them through a variety of options available.  When you can identify your tax deductions and understand how money not paid in taxes on earned income can be used to offset future taxes, you are effectively paying your taxes at a discount. This is how we attack the tax!

In other words, when you use your tax deduction to invest in your future, you give purpose to your tax deduction, which means you will use it towards a goal. All of a sudden, your retirement planning has gone from a monthly donation to a 401(k) plan without the knowledge of whether you would meet your retirement goals, to a thought out, goal-oriented strategy. You now attack the tax at the contribution point and the distribution stage and lay a foundation for higher income due to lower taxes.


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Solving IRA Tax Hurdles

ProtectionWealthy people save money in retirement accounts not because they are counting on these assets to fund a comfortable retirement, but  because of the valuable tax deductions they offer.  However, after years of aggressive investing these very same IRAs have accumulated significant funds which will pose significant tax challenges without careful and creative attention.

According to some estate attorneys and CPAs, an IRA can lose as much as 80% of its value as it passes from one generation to the next because of multiple layers of income and estate taxes, especially if the beneficiaries elect a lump sum payout.  Clients can stretch their IRAs and/or put them in a trust to delay the taxes, but unless they donate the entire IRA to charity, they will pay taxes.


A powerful solution for reducing the multiple layers of taxes on an IRA involves the proper use of an indexed annuity. A skillful adviser will integrate this income producing asset into estate, insurance, and even charitable planning. Some indexed annuities (speak with your adviser for individual product details) offer three compelling features which create the opportunity for this extraordinary solution to the IRA tax problem:

  1. Money deposited in the first year gets a bonus the day the indexed annuity is issued.
  2. A guaranteed income rider feature:

 (a) locks in growth of principal, at a certain percentage rate, for a defined period of time, but only for income purposes.

(b) assures that the annuity’s starting balance will grow to a known value by the time the investor wants to trigger an income payout

(c) allows the investor to trigger income any time during the contract.

3.  A high income payout rate offers an attractive and predictable income stream which in turn can be used to cover both life insurance and long term care insurance premiums.

 This particular strategy gives the client the ability to create a tax-free legacy using taxable IRA dollars – a much smarter use of money. 

While the client will pay an annual income tax on the IRA distribution – perhaps about one half of the annuity’s annual payout – he or she will significantly leverage this relatively small out-of-pocket expense to create tax-free life insurance for their heirs as well as tax-free long term care benefits for themselves. And if the client lives a long life, the IRA’s cash value may dwindle to zero, and future income and estate taxes on this asset would disappear altogether. And that is the ideal situation.  In the intervening years  however, the client has leveraged a predictable and guaranteed life income stream into two significant insurance assets while nullifying the tax on the principal.



Attacking the Tax – Not Just for Big Business – Part 1

6194As small business owners, we are usually so focused on growing our business and gaining new customers that it rarely surprises me when I see business owners pay less attention to how they can use business tax deductions to leverage money back to their family.

And that is understandable – with the day-to-day problems of running a business today, and putting out fires on a daily basis, people don’t stop to take the time and think about what their tax deductions are and what they can actually do with them.

In reality, business tax brackets can be substantial, with some states spilling over the 551450% tax mark. What does that mean?  In a state with a 50% tax mark, a $1 million tax deduction results in a total of $500,000 in taxes not paid on $1 million of earnings.  In many cases, tax deductible planning is not recommended because it produces a bigger tax down the road, when it is time to pay back the tax deduction – and many planners choose to avoid this option.

However, by being proactive in attacking the tax you can actually CONTROL how much you actually pay in taxes and when.  You can effectively optimize your tax planning by maximizing your tax deduction with either a Captive or Defined Benefit Pension.  Indeed, if you fall into any one of these categories, as listed by Robert Bertucelli, CPA , Captive Benefits could be an ideal solution to attack your tax:

  • Profitable business entities seeking substantial annual adjustable tax deductions;
  • Business with multiple entities or those that can create multiple operating subsidiaries or affiliates;
  • Businesses with $500,000 or more in sustainable operating profits;
  • Businesses with requisite risk currently uninsured or underinsured;
  • Business owner(s) interested in personal wealth accumulation and/or family wealth transfer strategies;
  • Businesses where owner(s) are looking for asset protection

In the example below, we show how we apply the deduction to discount the estate tax. Next week, we show you how we apply the deduction to offset the income tax.

Case Study:  Plumbing Business owned by husband and wife, S-Corp, with 8 employees and $10 million in revenue.

While the business had their liability umbrella coverage, an actuarial study uncovered substantial risks that were not covered by this insurance and were being essentially self-insured after tax dollars. By forming a Captive Insurance Company, we were able to achieve a number of results:

  • The business could now protect themselves against these once self-insured risks, and also deduct the cost via their Captive Insurance Company. The tax deductible amount:  $1.2 million.  This represents the Captive Insurance premium determined as a result of the study made by actuaries experienced in Captive risk management.
  • Since the company is an S-Corp, the tax deduction was passed to the owners. They used the tax savings (>$500,000) as follows:
    • $250,000 was gifted to an irrevocable life trust;
    • The trust purchased a $25 million second to die insurance policy on the husband and wife owners for the benefit of their children;
    • $250,000 was net profit

 Summary:  the result of forming a Captive Insurance Company for this business saved them more than $500,000 in taxes not paid.  The owners used half of this amount to purchase a $25 million life insurance policy, owned by a trust so that the asset is out of their estate, for the benefit of their children. The remaining $250,000 was effectively net profit in cash from taxes not paid.

Next week, we continue our “Attack the Tax” theme by showing you how we can help you pay the income tax on created family wealth at a steep discount.

 Disclaimer: Only tax advisors can properly advise on  tax related issues. Competent attorneys and CPAs should always be consulted when considering a Captive Insurance Company. Estate attorneys should always be engaged when creating insurance trusts and competent insurance brokers should be consulted for policy considerations.