Managing Tax Drag Year-Round: A Strategic Edge for Financial Advisors

Taryn Huget [0:02] Well, hello everybody. Welcome to another episode of If You Could with Matt and Taryn. I am Taryn Huget and he is Matt Enyedi.

Matt Enyedi [0:12] Well, hello, Taryn Huget. You are in a particularly bright and sunny mood today. I didn't even get a chance to introduce myself.

Taryn Huget [0:20] You know, I am. Spring is finally here. The sun is out. We're headed to the beach. The snow that was covering the Northeast is finally melting.

Matt Enyedi [0:29] Do you know that to be true?

Taryn Huget [0:30] Actually, I don't know. Do you know how the Northeast works, cause I don't.

Matt Enyedi [0:34] Yeah, I don't either, but hey, regardless of the Northeast or the snow that is either there or not there any longer, it is spring. Baseball is here and I am excited to see my Padres play and more than likely break my heart for a fifty-third consecutive year.

Taryn Huget [0:49] Well, I love the Padres too, so I'm rooting for them, but as much as we like springtime, it can also be one of the more challenging times for our industry. In fact, Some people might say that the exact day we drop this episode is the worst day of the year.

Matt Enyedi [1:05] Wait, hold on, my mother-in-law's coming to town?

Taryn Huget [1:07] No, Matt, I'm talking about April 15th, tax day.

Matt Enyedi [1:11] I knew what you were talking about. I was just giving my mother-in-law a hard time. You know I love you, Barb, and yeah, look, a lot of people do dread April 15th because taxes are just taxing. And while they can be a challenge, they're exactly the kind of challenge our advisors solve for. Every day. But look, tax management, it's an underrated ingredient in delivering holistic planning. I'd kind of analogize it to a great catcher on a baseball team. You don't realize what an enormous impact a catcher can have until you've got a really good one. And then, my friends, you've got a game-changer. And we see tax planning as that same kind of game-changer for our advisor's businesses. Look, most of this industry was built around investment management, but true holistic wealth management, it lives in after-tax returns because tax drag is the biggest pull on a portfolio's ability to outperform, not markets, not investment selection, tax drag. Look, Taryn, there's this advisor I used to work with all the time up in Glendale, and he used to say to me, Hey, Matt, markets are hard to beat, but the tax man, he can be had.

Taryn Huget [2:09] Taxes can in fact be had, and we have Tara Popernik here to tell us how to do just that. As the EVP of wealth planning, she is responsible for enhancing the overall wealth planning experience. For advisors, helping them incorporate planning in their practice and really providing actionable advice to their clients. She's joining us today to walk through and yes, even challenge some of the conventional thinking around tax planning as a core component of wealth planning. From there, we're going to dig into practical strategies advisors can easily adopt to differentiate themselves. And let me tell you, I'm excited for this discussion. So am I. Let's do it.

Matt Enyedi [2:49] Let's do it. Welcome to the pod, Tara. We're so excited to have you.

Tara Popernik [2:58] So excited to be here.

Taryn Huget [2:59] So Tara, you're still relatively new to LPL and I know I'm just getting to know you as are our clients, but we really got to see you in action at Masters with some of our very best clients, and I'll say people were definitely lining up to talk to you. So it's clear that you seem to have the answers to what they're looking for.

Tara Popernik [3:21] Yes, it was a great week in the desert. Lots of traffic, you know, lots of questions on how to use wealth management as a solution for different client issues, whether it's practice management questions ranging from types of software to how they should segment their books and how we can help them further how they work with their clients.

Matt Enyedi [3:40] You talk to them on the phone all the time, of course, but this is the first time you engaged with our clients en masse. What were some of the things that jumped out from those conversations?

Tara Popernik [3:48] You know, lots of questions just around how do I take my practice to the next. Level, and how do I work with a client in this specific situation? What resources does LPL have that can really help me grow?

Taryn Huget [3:59] I know we're going to get to all of that in the course of this discussion today, but I want to take a step back. I would love if you could tell us about your experience and what brought you here and sort of your mandate at LPL so that our listeners can better get to know you.

Tara Popernik [4:15] Sure, so I started in this industry as a client service associate. and in practice with 3 advisors.

Matt Enyedi [4:21] I felt like CSA is the path to like everything good in this industry.

Taryn Huget [4:24] I think so too. I started there too.

Tara Popernik [4:27] So one of my first assignments was literally started in September and I had to call all of the clients who were due to take an RMD to make sure that they had a plan to take that RMD. And some of those conversations really led to other discussions around asset allocation, cash flow management, but also taxes. And that was one thing that really Interested me, you know, how can we help these clients plan for taxes and how does that fit into the rest of their financial picture and what we're doing for them on the investment management side?

Matt Enyedi [4:56] Is that when you knew for a fact that you were a nerd, or what is that something you knew earlier?

Tara Popernik [5:01] Oh no, I've known I'm a nerd for a very long time.

Matt Enyedi [5:04] That wasn't the opening day. That was just a continuation, and this just fit right in the middle of it.

Tara Popernik [5:09] I have 3 words for you Saturday morning physics. Oh.

Matt Enyedi [5:13] Whoa, those three words go together.

Tara Popernik [5:15] I do. If you're a junior in high school, you love particles and you live near Batavia, Illinois, where there's a particle accelerator.

Matt Enyedi [5:21] I am so excited that you're here on the podcast. I am, we've had a lot of nerds on this, on this podcast. You might be right there in the kind of like Mount Rushmore of if you could nerds.

Tara Popernik [5:34] You know, I feel like some of my colleagues might give me a run for my money on that one.

Matt Enyedi [5:37] But yes, we like to surround ourselves with them.

Taryn Huget [5:40] I was impressed by you before, but now I'm even more impressed.

Matt Enyedi [5:43] You know, we started this podcast talking about tax day and how that can be a challenging time in people's lives. It can be a frustrating time in investors' lives. It can be a really busy time in an advisors' lives as they're working with tax professionals, they're working with their clients, and they're trying to make sure they get everything done by the deadline. But I think there's an opportunity to reframe taxes in general and certainly tax day because this is one of those really great places where advisors can shine. So how would you think about talking to our clients and thinking About the mindset shift that can occur to turn what feels like a doomsday into the best part of their day.

Tara Popernik [6:19] So look, the first thing I'd say is that tax day is not really a concept anymore, right? There's really two days. The payment may be due April 15th, but for many clients, especially those higher net worth clients, they tend to file even later before October 15th. So tax day kind of stretches out through the entire year. But if you're doing tax management and doing it well, That is a 365 day a year job for the adviser.

Taryn Huget [6:46] So let's talk about the one big beautiful bill. This legislation made the previous tax changes permanent. So what does that permanence really mean and what should our clients be thinking about right now?

Tara Popernik [7:00] Yeah, so all the tax changes were at the federal level, but the big headline is that many things may not feel that different since most of the bill was an extension of everything that already been passed in 2018. So the good news is your taxes did not go up for a lot of clients. There's a couple of new things around the edges that some are temporary, and they really depend on who you are and how you make your money. Things like an extra deduction for seniors, and there are also some specific short-term provisions around the state and local tax deduction that will expire in a few years if Congress doesn't take action.

Matt Enyedi [7:37] So is there really much to how an adviser's thinking about post TCJA, are they doing something different?

Tara Popernik [7:45] So for most advisers, at least on the income tax side, it's kind of status quo. Now. On the estate tax side, there had been a lot of noise about the cliff and the expiration of the expanded exclusion, but that all went away with the TCJA.

Matt Enyedi [8:01] What exactly did go on with the estate tax?

Tara Popernik [8:04] The applicable exclusion amount was scheduled to go back to half of what it had been post 2018. It is now permanently $15 million per person. So if you think of a couple, you now can exclude $30 million or more, depending on inflation in the future, from estate tax when you die. So what that means is fewer and fewer families are going to fall into that estate tax category. So a lot of the focus for our clients are going to be on income taxes and how they can save more and really optimize.

Matt Enyedi [8:37] Just curious, for those who had built pretty comprehensive estate tax planning outcomes into their planning, and now they look back and maybe they're not necessary any longer. Are we seeing people unwind some of the things that they did.

Tara Popernik [8:48] On occasion, if you've given away the gifts and you can afford to give away the gifts, it was a great decision to begin with, right? Everyone needs to have an estate plan. Oftentimes families want to get money into the hands of the next generation before they die so that they can see them enjoy it. There is that opportunity and a lot of those structures may stay in place, but what this may change is some. Future structures or additional things that families will need to do over time to continue to kind of bend the estate tax curve.

Matt Enyedi [9:15] I know Congress is in a bit of an impasse right now, but are there any other legislative changes that we see coming down the road?

Tara Popernik [9:23] Not on the horizon. What we do know is that with the law being permanent, Congress would have to act to change the estate tax, the income tax rates in the future. The things that we will probably see coming forward are some of those. Expiring provisions like the state and local tax deduction, which, you know, affects any state that has income tax, and more and more of those are coming up. So for example, the changes I think advisers need to pay more attention to are on the state income tax side because Washington State just passed their millionaires' tax, goes into effect in 2028. Other states are looking at revamping either their income tax or estate tax, and it's, it's something to keep an eye on for advisers.

Taryn Huget [10:08] What are the best ways for our clients to stay connected to the changes?

Tara Popernik [10:13] For advisors, it's, it's really about taking a look at what's in the news, understanding what provisions are happening for them locally for their clients, but also we will continue to put stuff out as things change on our blog on a state by state basis. We'll take a look and can continue to inform them as these changes happen.

Taryn Huget [10:31] And one of the things I really enjoyed when preparing for this conversation was reading the white paper that you your team just released on tax strategies for high net worth clients, and one of the things that really stood out for me was this idea that even within the high net worth space, no two clients look the same. You're not solving for the same thing for each client. So, when advisors look across their client base, how should they think about applying these strategies in a more targeted way based on the different profiles and goals and life stages that their clients are in?

Tara Popernik [11:06] So it really comes down to different client personas, and we can classify those high net worth clients in a few different categories, some depending on how is it that they came into their money, and then some of it is really who they are from a generational perspective. So, you know, one of them would be a corporate exec, probably earned their money through a variety of stock compensation, earnings they've saved over time into retirement accounts. They may have stock options, restricted stock units, and just stock in a concentrated portfolio. Those folks may need diversification strategies. They may have highly appreciated stock. They may have goals ranging from lifestyle spending to wealth transfer to philanthropy, and we can line up and layer in some of these strategies to help them meet those goals, but also minimize their tax bills while doing so with someone who's maybe a business owner, small mid-size business owner who's been earning and working and reinvesting into their business over the course of time, that's their biggest asset. And when it comes time to retire or to otherwise monetize, there may be different strategies for that person to mitigate their overall tax bill and also shift their mindset from running a P&L to living off a portfolio.

Matt Enyedi [12:20] Well, and to me, the business owner and the exit strategy is such a complex process. It's an emotional process. It is certainly a financial process. How do we help people through that particular transaction?

Tara Popernik [12:33] So our high net worth team. an excellent business exit solutions team who can help stand alongside the adviser, understand a little bit more about the business, potentially connect them to the right investment banking team to help them go to market if that's what they're ready for, or simply do some of the financial planning around succession and how they're going to transition the business to the next generation if that's their ultimate goal.

Taryn Huget [12:59] You know, we've been talking about the great wealth transfer. We focus a lot of the conversation. On our next gen, what about the inheritors?

Tara Popernik [13:07] Sure, I'd say there's really two categories of inheritors. The first is the surviving spouse, and the second is that next generation. And just starting with that surviving spouse, the things that we have to do there are to make sure they're taking advantage of that hoarded exclusion that they might be carrying over from the deceased spouse, and that they're really set up as an individual to continue to live the rest of their life, but also be ready to then transition assets to that next generation. For the next generation receiving those assets, there's sometimes an interplay between their own financial plan and what's coming from the deceased parents. There may be times that they will simply try to disclaim assets so that they can carry on further down a generation. There may be other times that those inherited assets become an integral part of a retirement plan or to accomplish other goals with philanthropy.

Matt Enyedi [14:01] How do you see advisers addressing the spouse, say, prior to someone's passing or to the next generation, because I imagine those are emotionally charged conversations if you haven't begun to have them until the time of death.

Tara Popernik [14:14] No, Matt, you're totally right. Building that relationship well before that time of death is critical for advisors to really be able to empathize with the family and help them when everything in their own worlds is kind of falling apart, to be able to let that family focus on grieving and being Together rather than on the finances, the adviser needs to know all those folks. So that I'd say is the first step is really get to know the spouse, get to know their kids, maybe even do a walkthrough of this is how this estate plan is going to work. That's what I was thinking. It's almost a preview or a play by play, and those conversations can be emotionally fraught. So the adviser needs to lead with empathy and just say, look, we want to do this here while mom and dad are still around so that you understand what their intention. is in having set this plan up and what they mean for you as as kids or inheritors to do with this wealth.

Taryn Huget [15:09] So I'm going to shift us a little bit. I know that your team is doing a lot to support our LPL advisors as the landscape continues to evolve and to help them take advantage of the opportunities that come with that change. I'd love if you could walk us through some of the key services you offer and the best way our clients can engage with you and your team.

Tara Popernik [15:31] Sure, so I think there's lots of opportunities to work with LPL's wealth planning team as part of a practice. First and foremost, we have a financial planning success coaching team that works on how to incorporate planning into your practice if it's not a part of it today. We also have a case consulting team that can simply be a second set of eyes on a situation as you build that financial plan. It's a group of CFPs. They're happy to bounce ideas off of you or with you. In order to get to the right solution. We have a service called Planning 360, which is a dedicated paraplanner. Again, most of them are CFPs, and they work with you in your practice to take on multiple activities of financial planning, from the data gathering to building the plan to delivering the plan to doing plan updates, and they can really help an advisor leverage their time really efficiently because they know our software and they're willing to work in with whatever software you're using. And then finally, our high net worth team can build a client-ready advanced tax or estate plan and help you deliver it.

Matt Enyedi [16:36] So as we look forward, we got midterms coming up in a few months. I know most of the tax changes are permanent, but I'd, I'd love to just kind of look forward to 2026, 2028. Do we see things that are on the horizon that our advisors should start preparing for, given the quote unquote permanence of 03BA, but knowing that nothing truly is permanent?

Tara Popernik [16:57] Well, I Broke my crystal ball many times over my two decades in this business. So, so I'm not making any predictions, but look, we are at a very low point in income taxes overall. There is a sense in the future at which these may go up. And so I think advisers need to be prepared for that and be ready to jump in with some of those strategies to try to best manage on a go forward basis.

Matt Enyedi [17:20] It's interesting, and I don't want to play prediction markets here, but I know some advisers have a different theory. Their theory is that income taxes tend to go down over time and so therefore, maximize ordinary income later as taxes might go down versus now when they are what they are and like we can never know, you know, the taxes in this country got as high as 90+% at one point in time and as low as 25% at one point in time. So, to your point, we're probably in the lower range of those taxes, and so maybe it's more about, they're gonna change and you need to be agile and ready for them to change.

Tara Popernik [17:54] Yes, agility is paramount when it comes to tax planning.

Taryn Huget [17:59] So you talked about a lot of the ways in which your team is helping support our clients, but I also know you're experimenting and innovating behind the scenes. What are some of the ideas or initiatives coming down the pike that our clients should be excited about?

Tara Popernik [18:13] We're running a very narrow pilot right now, but within ultra high net worth, we've created a partnership model where our experts show up alongside advisors as The team is prospecting, winning, transitioning, and retaining that ultra high net worth business. And so it's on the horizon, but we're also actively looking for opportunities to incorporate AI into how we're doing planning. There are things that we have to get right in order to make sure that your client's information is secure, but when we solve those issues, you'll you'll start to see some of those tools become available.

Matt Enyedi [18:46] I know in talking to Aneri, we've done a few cases already. They seem to have gone very. Well, what have we learned?

Tara Popernik [18:53] So what we've learned so far is that, you know, our advisers are really willing to engage, and they're happy to have the help when they need the expertise. We've also learned that the clients love to have the advice and have that team show up to where they can get that specific subject matter expertise on estate and taxes and lending and stock options and whatever it is that's in their particular mix that that we need to solve for.

Matt Enyedi [19:17] Yeah, what I like about it too is our approach is always focused on the independent. Advisor and the client being theirs. I know some of our competitors, they tend to say, hey, thanks for the referral. We'll take it from here. And I think what we say is we're going to show up just like we always do at your side, lifting you up, and we're going to be a partner in this.

Tara Popernik [19:33] Exactly. We, we really just want to partner with our advisors and provide them with the expertise and the team around them that they need to win that business because ultimately it's their relationship with their client that's going to win it for them.

Taryn Huget [19:45] Love it. So we like to end every episode with If you could question. So we talked about a lot of the opportunities that exist for our advisors, the value proposition that could exist by talking about tax planning. So if you could remove the single biggest obstacle that keeps our clients from being true after-tax advisors, what would you say it is?

Tara Popernik [20:08] I'm going to give you two. The first one is really take the broad and long view. Taxes aren't just a year to year to year thing. It's really about the Holistic strategy that's going to minimize your client's' income tax and ultimately estate tax bills over time. The second thing I'd say is don't go it alone. You don't have to be the absolute expert in every single strategy. We have a team here at LPL that can help you, and this is best done as an interdisciplinary exercise, not as a soloist activity.

Taryn Huget [20:40] Well, I think we covered a lot today. That was an exciting conversation. Also learned a little bit more about you, Tara. And your Saturday fun. Yeah.

Matt Enyedi [20:49] Do you still do Saturday physics?

Tara Popernik [20:50] No, I actually, well, I mean, physics is a manner of speaking. Both my kids ski, so there's a lot of physics involved in, in getting down the mountain.

Matt Enyedi [20:57] That's for sure. Well, hey, I love your approach to the long view. I love your approach to going it together because that is how we go far, and we are so excited that you decided to join LPL, so excited that you decided to join the pod, because now we can go far together.

Tara Popernik [21:12] Thanks for having me, Matt. Thanks for having me, Taryn.

Taryn Huget [21:15] Thanks Tara.