While all buyers look for a degree of figurative goodwill from advisory practice sellers, some financial advisors could reap tax savings by offering up that literal type of asset in the deal. 

The personal goodwill assets of advisors seeking a succession transaction before retirement or making a breakaway move to a registered investment advisory firm aggregator from the wirehouses generates a long-term capital gain that is taxed at a rate up to 17 percentage points lower than ordinary income at the top bracket, two experts told Financial Planning. The possible tax strategy comes with caveats. But more prospective buyers and sellers are inquiring about the potential benefits, according to Corey Kupfer, who advises RIAs and other wealth management firms on M&A and succession as the founder of law firm Kupfer.

Sales of personal goodwill may help solve a problem that pops up for the founders of practices with one or more younger advisors who have built a base of clients without amassing any equity. Such sales may also eliminate the need for a traditional “12 months and a day” waiting period to complete a deal in order to ensure sellers get the long-term rate, Kupfer said.

“There’s some friction because you’re saying to an advisor that you have to wait over a year,” he said in an interview. “My sense is that it’s really only within the last two or three years that this has taken off, and the reason is that there’s a lot of competition for deals out there.”

READ MORE: 25 tax tips for RIA M&A deals and other small business sales

Sellers should consult a tax expert early and often to consider every possible rule or implication from this form of asset transaction, according to Kupfer and Thomas Phelan, a partner with the Troutman Pepper Hamilton Sanders law firm who advises clients on M&A, reorganizations and cross-border deals.

Goodwill represents the difference between the total purchase price for a company in a deal and the market value of the firm’s assets minus liabilities. Within that umbrella, personal goodwill adds up to an especially important part of the purchase-price allocation for advisory practices that are “closely held corporations” with their value “very much targeted on the personal relationships of Jim Smith and his technical expertise,” Phelan noted in an interview.

In a personal transaction that distinguishes those assets from the goodwill of the corporation, the buyer “ends up in the same position” with “a deal that allows them to get a step up and a depreciable asset,” he said. The sellers, however, steer clear of paying taxes at both the corporate and individual levels in the personal goodwill transaction.

“If they’re operating out of a C-corporation, then I think the personal goodwill transaction seems potentially more appealing,” Phelan said. “The seller benefit is they get the capital gain and they don’t have to pay double tax. … You can strip a lot of value potentially out of the corporation, thus avoiding the double tax.”

The transactions require careful planning for a process that won’t be a fit for every possible seller out there, according to a guide compiled two years ago by attorneys Robert Greising and Travis Lovett of the Krieg DeVault law firm.

“A personal goodwill allocation approach should be raised early in the negotiation process,” they wrote. “This will safeguard against a challenge that allocation of personal goodwill was an afterthought, with the value negotiated by the parties assuming the goodwill was part of the business. The seller should obtain a third-party appraisal to establish the existence and the value of the personal goodwill. A separate agreement or, at a minimum, separate provisions of a purchase agreement should be used to evidence the sale of the personal goodwill separately from the corporate goodwill of the business. Could a personal goodwill allocation be right for your sale? Ultimately, answering this fact-sensitive question will benefit from the help of experienced professionals.”

READ MORE: Business entities affect taxes and M&A — how RIAs weigh the choice

Kupfer has worked on the buy or sell side of eight to 10 personal goodwill transactions over the past couple of years — an amount that is “not the majority, certainly” but a decent number considering that “people are still learning about it,” he said. Buyers interested in drawing wirehouse teams into the RIA channel in particular are reaching out to Kupfer to discuss them, with “one or two that haven’t been able to get comfortable,” others that are vetting the idea and “some of them I know are planning on using it,” he said.      

In addition, he advised on one sale of an independent advisory practice with the personal goodwill structure on behalf of the sole owner of a firm who managed roughly 70% of the client base. Two other advisors respectively served another 10% and 20% of the customers, but they didn’t own any of the firm’s equity. 

That dynamic created a “potential problem” from the fact that the firm would turn less valuable if those advisors left before the succession deal, or if the owner decided to share some of the deal proceeds with them in the form of ordinary income, Kupfer noted. So the owner sold 70% of the firm’s equity, then negotiated a personal goodwill transaction with the same buyer for the other 30% on behalf of the two other advisors.

“The only reason you need this is, when somebody doesn’t have an asset to sell because they don’t own the client list,” Kupfer said. “We were able to get them capital gains treatment, so, in the independent space, that’s the applicable scenario for personal goodwill.” 

Breakaway advisors’ success over the past decade in carrying over 85% to 90% of their client bases in many cases when leaving wirehouses — despite their former firms’ nonsolicit agreements and frequent legal wrangling around those moves — has bolstered the appeal of personal goodwill deals. Comparable M&A transactions among captive insurance agents are fueling the stronger momentum for them as well, Kupfer noted.

In the “worst-case scenario,” the seller could wind up with an IRS finding that the deal proceeds were ordinary income and the buyer may wind up with “a failure to withhold claim” based on that compensation, he said. Still, he hasn’t seen the agency challenge any of the deals.

“If we had 10 or 20 years of history we could be more comfortable,” he said. “In the insurance space especially and in other spaces you do have that history of it being successful.”

READ MORE: More RIA buyers are offering equity. Here’s what sellers should know

Such nuances with personal goodwill deals point to the necessity of engaging with experts well in advance about topics like the terms of prior employment contracts, the structure of a deal and the resulting taxes, according to Phelan. He has “often seen it come up” when the owners of a closely held corporation find out about their future bills to Uncle Sam under a deal after signing the letter of intent with a buyer, he said. 

“You want to talk to someone on the tax front early — ideally in the LOI process when it’s initially being negotiated,” Phelan said. “There’s an LOI, they’re buying the business and then they realize, ‘Oh shoot, we’re going to get hit with a double tax on this.'”

From the battle against inflation to the election of a new administration and subsequent speculation about what it could mean for financial policy and regulation moving forward, the 2024 financial landscape has been dominated by uncertainty. And as the calendar flips to 2025, arguably no topic is more at center stage than taxes.

With numerous shifts in policy potentially set to be rung in over the course of the next 12 to 18 months, 2025 is set to become perhaps one of the most significant years in modern history when it comes to shaping the tax and financial planning environments over the short and medium term. Whether it’s the extended child tax credit or changes to the state and local tax deduction, numerous provisions hang in the balance and are set to elapse by the end of 2025. And with that, as we edge closer to this period of uncertainty, individuals are understandably eager to find ways to maximize their financial outlook as much as possible.

With that in mind, here are a few key and often overlooked items that individuals should keep in mind as they look ahead and prepare for the 2025 filing season and beyond.

Anticipate cuts to the estate tax and gift exemption

One of the most notable tax-related items that is “up in the air” as we head into 2025 is what will happen to the existing federal estate and gift tax exemption. Particularly impactful for high-net-worth individuals, this exemption allows individuals to pass on assets upon death or during their lifetime — from stock investments to real estate — to beneficiaries without paying federal estate or gift taxes. What makes this exemption even more appealing is that the threshold is set to jump from an existing all-time high of $13.6 million to $13.9 million on Jan. 1, 2025. However, this historic estate tax and gift exclusion is set to elapse on Jan. 1, 2026, and will fall to approximately $7 million if it isn’t extended by Congress. Moreover, navigating this exemption is notoriously complex, with individuals needing to take into consideration everything from the state they live in to the size of their net worth. Therefore, while there might be quiet optimism that the new administration and Congress will extend the exemption, individuals need to be proactive in taking steps to make the most of this exemption and guard against potentially missing out on millions in savings in the case that it does expire. 

Navigating IRA inheritance

In 2022, more than 40% of American households owned an individual retirement account. In addition, given there is no limit to the number of IRAs an individual can have, many households likely have several. This means not only a huge opportunity for beneficiaries to inherit but also leaves them with numerous stipulations that they need to navigate — namely when it comes to required minimum distributions, or the mandated amount that an individual must withdraw on a yearly basis. Most individuals are familiar with RMDs for their own IRA accounts. However, many do not realize they are also required to meet RMDs for inherited accounts as well, and because RMDs from traditional IRAs count toward the beneficiary’s taxable income, it’s imperative for these contingencies to be planned for in advance. What’s more, beneficiaries themselves are subjected to different criteria for managing their inherited IRAs. For example, many adult children who inherit IRAs must withdraw all funds from the account within 10 years of the account holder’s passing, while other beneficiaries such as spouses face different demands. These nuances result in a slew of potential avenues to maximize future management and tax efficiency opportunities, so individuals need to consult with their advisors as soon as possible to make sure they are optimizing their inherited IRAs.

Harvest your losses, sell losing stocks and reinvest

Loss harvesting — or selling off failing stocks where you have lost money — is one of the most powerful tax-saving tools for individuals, allowing them to use their investment losses to negate any taxable gains from strongly performing investments at a dollar-to-dollar ratio. In addition, if individuals have had a particularly bad investment year and have realized losses that exceed their gains, they can deduct up to $3,000 off their ordinary taxable income as well. Furthermore, individuals who have seen more than $3,000 in losses can roll the remaining losses over from year to year until completely written off to further reduce future tax burdens. From there, beyond just the tax benefits, individuals can parlay any returns from the sales of their losing stocks into investments in other better performing alternatives.

Reducing taxable income

Reducing your taxable income may seem like a “no brainer” when it comes to maximizing taxes; however, with so many different avenues available to filers, it isn’t uncommon for individuals to end up missing out on opportunities. For example, while many filers may be familiar with the tax benefits of 401(k) plans, they should know health savings accounts, 529 plans — which allow for tax-friendly savings for educational expenses — and traditional IRAs all allow filers to reap significant tax savings as well. These opportunities offering incredibly appealing contribution limits that can help individuals significantly reduce their taxable income:

• 401(k) plans: $23,000 ($31,000 if age 50 or older);
• Traditional IRAs: $7,000 ($8,000 if age 50 or older);
• 529 plans: $18,000 per person (or $36,000 for a married couple) per recipient without implicating gift tax (individual states set contribution limits);
• HSAs: $4,150 for self-only coverage and $8,300 for family coverage (those 55 and older can contribute an additional $1,000).

Looking ahead

Navigating tax season can feel like a Herculean effort, especially when so much uncertainty is on the horizon. However, by keeping these key items in mind, individuals can help mitigate headaches as much as possible and optimize their tax opportunities for years to come.

The ascendency of AI has come with it the ascendency of Chief AI Officers, with a number of prominent companies having hired or appointed one in the past few years. But for the companies not yet ready to fully commit to bringing one on full time, Chicago-based Sikich announced the launch of its new virtual Chief AI Officer service. 

The service aims to provide clients with executive-level AI guidance without the overhead of a full-time hire. Such a virtual CAIO would provide custom-tailored AI strategies aligned with business objectives, identifying high-impact AI use cases and creating forward-looking implementation plans. They would also provide recommendations for AI tools, platforms and vendors, including guidance on build-versus-buy scenarios and seamless technology integration, as well as assistance with ensuring AI initiatives meet ethical standards, regulatory requirements and organizational values, with guidance on data privacy and AI model fairness. The service will also serve to facilitate collaboration between IT, data and business teams so as to maximize AI initiative value; and providing assessment and real-time optimization of AI strategies to keep pace with technological advancements and changing business needs. The virtual CAIO service also offers an add-on specifically designed to support customers embarking on the successful deployment of Microsoft 365 Copilot. 

In an email, Ray Beste, principal AI strategist at Sikich and the lead on this service line, said it is comparable to the virtual CFO services provided at many firms. It is, in fact, a strategic extension of the firm’s existing virtual executive services like virtual Chief Information Officer and virtual Chief Information Security Officer. 

Photo: Matt Stout

“What makes the vCAIO unique is its focus on a highly specific and evolving area of business: AI strategy. While a traditional CIO or CISO focuses on broader IT or security concerns, the vCAIO is designed to help organizations navigate the unique challenges and opportunities AI presents,” he said. 

Beste said he will serve as the primary resource, fully dedicated to this role. Depending on client needs, he said, they will scale and resource accordingly, leveraging the firm’s in-house AI experts. This follows the same successful model they use for their vCISO and vCIO services, where they bring in the right specialists to deliver tailored solutions. 

The firm used its own experience implementing AI solutions—combined with insights from client engagements and conversations—to develop this service by identifying the intersection of AI-specific needs and traditional executive roles. Through this process, they further refined their idea of what makes for a quality CAIO. 

“It’s someone who understands both the big picture of where AI is going and the practical realities of applying it to business problems. This person must collaborate seamlessly with CIOs, CDOs, CTOs and CISOs because AI impacts budgets, data and security across all these roles. A great vCAIO combines business acumen, technical knowledge and the ability to work at all levels of an organization,” he said. 

Beste said that this new service is still built on a foundation of AI advisory work they’ve been doing for years, and added that this initiative was born because their clients expressed a need for ongoing partnership in this area. So far, he said, industries like life sciences, insurance and professional services are showing the most interest. These organizations often already have CIOs or CDOs but need someone to cut through the noise and help them prioritize the right AI investments. 

He also said that smaller companies might benefit from the vCAIO service as well. 

“Smaller companies with ambitious growth goals may also find this service valuable. They might not yet be ready to hire a full-time AI executive but recognize that expert guidance can help them scale faster. Ultimately, it’s about mindset and urgency rather than size, industry or geography,” he said. 

Sikich is currently in active discussions with several organizations interested in leveraging this service to accelerate their AI strategies.