The Value Of Assessing Clients' "Tax Risk Tolerance" Amidst IRS Scrutiny Of Tax-Aware Investment ...

What This Video Is About

The Financial Advisor Technician podcast explores tax-aware investment strategies and recent IRS scrutiny, focusing on Section 351 exchanges and the importance of assessing client tax risk tolerance.

Major Ideas Discussed

• Tax-aware investment strategies aim to minimize tax liabilities and create better after-tax returns, with strategies like Section 351 exchanges allowing clients to contribute appreciated securities to a newly formed ETF.
• The IRS has expressed concerns about practices related to Section 351 exchanges, including attempts to artificially meet diversification requirements, and has issued a revenue ruling to address these concerns.
• A recent IRS notice (Notice 2026-62) flags certain transactions for scrutiny, including atypical usage of Section 852(b)(6) and box spread ETFs that create interest-like income with a deferred capital gain component.
• Advisors need to understand their clients' tax risk tolerance and capacity to determine the suitability of certain tax-aware investment strategies, considering factors like willingness to take on risk, potential tax benefits and downsides, and the client's financial situation and goals.
• Key factors to consider when assessing client tax risk tolerance include the client's willingness to take on risk, potential tax benefits and downsides, financial situation, and goals, as well as the potential for penalties and other consequences if the IRS challenges the strategy.

What to Watch Next

Advisors should stay up-to-date on IRS guidance and notices, conduct due diligence on potential strategies and products, collaborate with tax professionals to ensure compliance and suitability, and consider the client's overall financial situation and goals when recommending tax-aware investment strategies.