Advisers Beware and Be Cautious When Talking Taxes in 2018

During a webinar called to discuss the advisory industry impacts of the Tax Cuts and Jobs Act, experts warned advisers to be ready to decline to offer tax advice during 2018—over and over again.

Speaking to a mixed audience of retirement plan and wealth management advisers, Joe Elsasser, president of Covisum, shared a strong warning for those listening in regarding the crucial difference between tax advice and financial advice.

As Elsasser laid out, the passage in late 2017 of the Tax Cuts and Jobs Act represented the most significant change to the U.S. personal and business tax codes seen in a generation. As such, it is only natural that advisory clients are looking for specific guidance and general education about how their tax picture will change under the new rates and rules.

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“As an adviser you undoubtedly will be put in the position this year of having to know exactly what tax advice is and exactly what financial advice is,” Elsasser said. “I am sure that those people listening in on this presentation all have a disclosure that says they don’t give tax advice. I am less sure that advisers listening in would be able to clearly and concisely explain to a client the difference between what they offer, financial advice, and what clients will be seeking more and more in 2018, which is tax advice.”  

Most advisers, Elsasser suggested, have never gotten any real or formal training on where the line between financial advice and tax advice stands—or how to explain this to a client. He urged that “advisers need to be front and center about the fact that they cannot offer tax advice, and as such they need to be building relationships with folks who are able to give tax advice, so that they can provide a sense of security for clients.”

While there is widespread agreement that the line between financial advice and tax advice is critically important, there is actually very little sense that the line is perfectly well defined, experts agreed. They also agreed that advisers should not be afraid to tell clients of their limitations in this respect, and that being able to provide for clients a shortlist of trusted partners that do offer tax advice can be a huge value-add. 

“The only thing like a clear direct definition we can probably give here is that advisers in general are not authorized to represent clients in front of the Internal Revenue Service (IRS), which means by definition, the advice they give must not be tax advice,” Elsasser said. “So unlike a CPA, for example, an adviser could not represent their client during an audit, or even as they prepare their normal return, and so their financial advice must not venture into that sort of territory.”

Of course, this does not at all mean advisers should ignore the impact that anticipated taxes or potential changes in various tax rates will have on client investing decisions moving forward. In fact, as Elsasser noted, routine financial planning work generally must consider a broad set of tax issues and how these relate to the advice that is being give.

“There are tax-related competencies that are at the heart of what advisers do,” Elsasser said. “But that does not mean that we can provide advice that will serve as the basis for clients’ specific tax-related decisions.” 

Supreme Court Asked If Two Complaints Can Be Filed Regarding Claim for Benefits

In the case, the high court is asked whether an Employee Retirement Income Security Act (ERISA) claimant is barred from alleging a claim for breach of fiduciary duty under ERISA section 502(a)(3) whenever that claimant also has the opportunity to allege a claim for benefits under ERISA section 502(a)(1)(B).

The U.S. Supreme Court has been asked to review a case in which a retirement plan beneficiary filed both a violation of fiduciary duty claim and a claim for benefits, which an appellate court said could not both be considered.

In the case of Jennifer Strang v. Ford Motor Company General Retirement Plan, et al., Strang says the 6th U.S. Circuit Court of Appeals held that an Employee Retirement Income Security Act (ERISA) claimant is barred from alleging a claim for breach of fiduciary duty under ERISA section 502(a)(3) whenever that claimant also has the opportunity to allege a claim for benefits under ERISA section 502(a)(1)(B).

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However, Ford attorneys argue that rather than concluding that a plaintiff can never bring a fiduciary-breach claim under Section 502(a)(3) when a claim for benefits is available under Section 502(a)(1)(B), the 6th Circuit simply applied its well-established rule that a fiduciary-breach claim under Section 502(a)(3) must be “based on an injury separate and distinct from the denial of benefits.” The appellate court determined that the surcharge claim based on “Ford’s withholding of the election forms” constituted the “same injury” as the ensuing denial of benefits because “the remedy sought is the same: the $463,254.78 difference between what Strang received and what she would have received had John Strang’s distribution election been effective.”

But, in her argument in support of petition for writ of certiorari, Strang says she did allege distinct wrongdoing by the plan. “A fiduciary breaches its duty when it deliberately prevents an ERISA plan participant from making a proper claim for benefits,” the argument for the petition says. Strang alleges that John Strang repeatedly asked for the correct forms for electing a lump-sum distribution of his pension benefits, but Ford never provided them. It is because of this fiduciary breach by Ford that John Strang was denied benefits for not using the proper forms. Strang claimed that Ford’s refusal to provide John Strang with proper election forms upon request was the injury giving rise to the breach of fiduciary duty claim, distinct from the subsequent denial of benefits.

Strang says the 6th Circuit regarded her claims as the same injury strictly because they would result in granting the same relief—recovery of lost plan benefits. “It does not matter that Ms. Strang posited a different theory based on Ford’s deliberate effort to prevent John Strang from making a proper election, because ‘the nature of the defendant’s wrongdoing’ is deemed irrelevant in the Sixth Circuit,” the argument says.

Citing cases in other circuits, Strang’s attorneys represent there is a split between the 6th Circuit and other circuits regarding this issue. They also suggest, citing case law, that while it would be appropriate to reject additional equitable relief after awarding a claim for benefits, it is inappropriate to dismiss the claim for breach of fiduciary duty at the pleading stage simply because it seeks the same relief as the benefit claim.

What makes it seem the Supreme Court may take up this matter is that it has asked the Solicitor General to file a brief in this case expressing the views of the United States.

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